Financial regulators global efforts to crack down on rogue practices in the banking sector have brought about some notable victories in recent months, highlighting that the operational risk for banks is arguably at the highest level in years.
Barclays, HSBC and Standard Chartered are among the most recent high-profile examples of big international banks that have been, or are set to be, reprimanded and fined by financial regulators in the US and UK for operational failings, raising the prospect that others might follow.
For bank shareholders and analysts, and indeed some bank chief executives, it has almost become a guessing game as to which bank might be hit hard by regulators next, and where.
"A lot of the legal risks that are coming to bear have always existed in principle, but what has changed is the vigour with which they are being enforced by regulators," says the London-based head of the finance litigation practice at a leading international law firm. "We are busier than we have ever been advising banks on a multitude of contentious multi-jurisdictional issues, and if you talk to any finance litigation partner in the City they will tell you precisely the same thing."
Alastair Ryan, banks analyst at UBS in London, tells Euromoney that, broadly, operational risk for banks is perhaps at its highest level for years, and its increasingly expensive.
"Changes in regulations, changes in what other stakeholders consider to be acceptable, the risk that the behaviours of certain employees become associated with the institution as a whole; those are indeed much more expensive for banks these days than credit [risk]," he says.
He adds: "The cash costs of operational risk crystallizing have come to dominate P&Ls rather than traditional loan losses (except in Spain)."
Barclays is the latest bank to come under renewed scrutiny, weeks after it was fined £290 million ($461 million) by regulators in the US and UK for its involvement in rigging Libor interest rates.
Late last month it emerged that the UKs Serious Fraud Office was investigating Barclays over "payments under certain commercial agreements" between the bank and Qatar Holding LLC, part of the Qatari sovereign wealth fund, the Qatar Investment Authority. The UKs Financial Services Authority is already investigating Barclays and four employees, including finance director Chris Lucas, on whether sufficient disclosures were made about the fees the bank paid to QIA in a 2008 capital raising.
HSBC, which was hit by allegations in July that it broke US anti-money-laundering sanctions, is still locked in negotiations over a settlement with several US regulatory agencies, including the Department of Justice, Federal Reserve and the Office of the Comptroller of the Currency. A settlement could be reached as early as this month.
HSBC has said that it has set aside at least $700 million to meet the cost of any fines.
"Consensus assumes $700 million, in line with the provision taken in H1 2012, whereas we currently forecast $1 billion," said Ian Gordon, a banks analyst at Investec, in a note in August.
He added: "There is no suggestion that the US regulatory system recognizes any notion of proportionality or natural justice, but given recent penalties of $200 million to $600 million imposed on other non-US banks for more narrowly defined breaches, we would regard a settlement of circa $700 million as an optimistic scenario."
Standard Chartereds $340 million settlement in August with the New York State Department of Financial Services over allegations that it flouted US anti-money-laundering sanctions with Iran to the tune of at least $250 billion doubtless provides HSBC with a bottom-of-the-range benchmark for the fine it could expect to pay.
However, Standard Chartered is still under investigation by four other US regulators, including the US Treasury Department and the Federal Reserve, over the Iran transactions, which might mean total settlement costs will be even higher.
One of the central issues in assessing operational risk for shareholders and analysts is the level of disclosure banks provide to the market on current regulatory investigations and potential litigation. Some argue that more disclosure is needed.
The disclosure dilemma
However, Ryan says: "On litigation disclosures, I think the market appreciates it is very difficult to strike a balance as disclosures in themselves can influence the scale of settlements. Unlike disclosures around loan losses, for example, announcing the size of reserves one has taken against a certain legal case may cause a change of behaviours of other parties."
He adds: "Many banks already provide very substantial disclosures on legal issues, but as outcomes are inherently unpredictable and not amenable to statistical analysis it is often the case that the market cant make a useful judgment even when disclosures are comprehensive."
One of the consequences of banks being forced to increase their focus and vigilance on operational risk, or simply fighting a rearguard action, is that planning for future growth is relegated as a priority.
"Clearly, given the large number of regulations and their wide-ranging scope, from the perspective of banks, the scope for operational risk failures has increased," says Kevin Nixon, regulatory affairs analyst at the Institute of International Finance.
"Further, if banks spend all their energies on implementing the regulations, they have less energy and time to open up new markets. In fact, some might say opening new markets is not a priority in this climate."