Home The BoardroomCSR Will the US Justice Department Stay the Main Regulator of Banks’ Behaviour?

Will the US Justice Department Stay the Main Regulator of Banks’ Behaviour?

by internationaldirector

Written By: Steven Winter – Corporate Finance


The aftermath of the 2008 crisis does not end.


Many banks are still being sued and fined by the US Department of Justice.

Recently Deutsche Bank agreed to pay a fine of $7.1 billion to the United States to end the prosecution of the US Department of Justice (DOJ). Deutsche Bank is accused, as are other financial institutions, of having sold so-called “toxic” products on the markets, which were backed by mortgage loans—when virtually certain that borrowers would not be able to afford them because of low solvency and the extremely taxing variable rates imposed on them. Deutsche Bank, which is also involved in numerous legal disputes around the world, had already paid nearly $2.3 billion in subprime-related fraud to US authorities between 2010 and 2013.

Royal Bank of Scotland announced at the end of January that in order to deal with a possible fine in a file concerning the sale of toxic property loans converted into financial products (residential mortgage-backed securities, or RMBSs), it had set aside £3.1 billion, bringing the total of its provisions to £6.7 billion. Also recently the agreement between US authorities and Credit Suisse brought the total fine to $5.28 billion to close the investigation into the role of the institution in the subprime crisis.

Banks in the United States have not been spared, either, by their national regulators. Bank of America has been ordered to pay close to $40 billion over a few years for litigation related to the sale of US mortgage products and illegal real-estate seizures. US regulators, market gendarmes and specialized public prosecutor offices seem to want to impose fines proportional to the damage caused by speculators. The subprime crisis has in fact given rise to the biggest fines since 2007, the beginning of the financial crisis.

But the DOJ is not only suing banks for toxic products sold but also for various regulation breaches.

One such example is BNP Paribas’s $8.9 billion fine for violating embargos with Sudan, Iran and Cuba. Deutsche Bank has also settled $258 million for embargo breaks, and it has also just announced an agreement to pay $95 million to settle a US government lawsuit on tax fraud.

The United States is at the forefront in the fight against the drift of financial institutions.

The United States alone has accounted for 97 percent of the total fines required from banks since 2007. In the Libor (London Interbank Offered Rate) scandal, the US Commodity Futures Trading Commission and the US Justice Department were also largely intervening, when the United Kingdom’s Serious Fraud Office was criticized for waiting too long, until 2012, before beginning criminal proceedings.

While US authorities continue to sanction the actions of banks in the subprime issue, Europe is characterized by its inaction. The European Commission, which had distinguished itself in 2013 with an unprecedented attack on the Old Continent in the face of the abuse of the powerful derivatives market—1.49 billion euros in penalties shared between eight banks, did not intervene in the subprime file. The explanation given was that prosecution by European institutions can only happen when European laws are breached. And although financial markets are largely internationalized, “The powers of prudential supervision…belong exclusively to each of the European member states, and for two years only, they have belonged to the European Central Bank for the Euro Area”, explained Michel Barnier, former European Commissioner for Internal Market and Services, who has called for the creation of a European financial prosecutor position.

Will the US go on to be the world’s main policeman? 

After the very recent resignation of Daniel Tarullo, a member of the Board of Governors of the US Federal Reserve, who was regarded with some fear on Wall Street, there is speculation that the US will continue to play the role of international market regulator for a while. On one end, Mr Tarullo stated that “banks have not changed enough despite repeated fines imposed on the banking profession in the United States. Too many banks react only when there is a problem, rather than putting in place comprehensive measures to ensure that their employees understand what is legal and ethical to do”. But, on the other end, the current willingness of Mr Trump to deregulate could lead to the nominations of more accommodating actors in the future.


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