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Banks had to pay more fines in 2014 than ever before

Mark Wilson/Getty Images
  1. Global banks paid $56 billion in fines and legal settlements in 2014 around the world, according to an analysis by the Financial Times.
  2. This is an all-time record for the industry.
  3. Despite the high legal overhead costs, the industry was profitable this year and America's key banks continue to pay out substantial dividends to shareholders.

The fines represent tougher enforcement and long-delayed settlements

The high total of fines reflects the conjunction of two trends. On the one hand, regulators have started demanding more money when banks are caught in misconduct. Regulators in both the United States and United Kingdom (and to a lesser extent in Europe) have extracted record-breaking fees as part of an effort to demonstrate a new attitude of toughness.

On the other hand, 2014 happened to be the year in which several large years-old claims were settled. Bank of America, for example, reached a $17 billion settlement with the Justice Department related to sales of mortgage-backed securities that had taken place during the boom years.

Fines are weak deterrence

Critics say that regardless of the eye-popping numbers behind these settlements, they offer little in the way of real deterrence. That's because there are no consequences for individual traders or executives involved, and the timing and scale of the fines are calibrated to avoid any existential threats to the institutions that pay up.

"Let's say you're a sleazy bond trader and you can't think beyond this year's bonus," James Angel told Danielle Kurtzeleben earlier this year, "and you kind of look the other way at some of the dodgy stuff your department might be selling, and six years from now your employer pays the penalty. Is that going to deter you from doing anything bad?"

At some level, presumably, fines would be sufficiently detrimental to the profitability of an enterprise as to be seriously damaging to the interests of top executives. But regulators shy away from delivering fines so exorbitant as to risk the viability of the bank for fear of prompting the very kind of financial crisis that regulation is supposed to avert. Nor are fines an especially effective way of compensating citizens at large for the vast economic damage incurred during a financial crisis. Unless regulators have a massive change of heart and start filing for stiff civil or criminal penalties against individual executives, the success or failure of bank regulation will hinge much more on forward looking efforts to restrain reckless borrowing and other sources of instability than they will on these kind of fines.

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