Fines Are a Cost of Doing Business for Big Banks

The cost of criminality is built into the balance sheets of global financial institutions and accordingly priced into their stocks. Five of the world's biggest banks - JPMorgan Chase, Citigroup Inc., Barclays, UBS, and Royal Bank of Scotland - pleaded guilty to currency rigging in the $5 trillion a day foreign exchange market, and settled for fines totaling roughly $5.7 billion (representing the earnings  of about a day or two for each bank).

They also received, as part of the deal, every assurance from regulators short of "go ahead and do it again if you'd like, just try not to let us catch you". Can there be any doubt that the banks are more than content to consider these kinds of penalties as simply a cost of doing business?

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After Deutsche Bank's record-breaking fines in April, we recommended being wary of the financials because of their ubiquitous exposure to enforcement actions related to rate and currency rigging scandals. But the lack of any significant impact on, or disincentive for, the banks' standard practices, makes it pretty clear that they can absorb, and have already accounted for, this kind of regulatory exposure.

So there hasn't been, nor do we expect there will be, any significant impact on the performance of shares for any of these financial Goliaths. And the only reason you might want to stay away is to avoid the sinking feeling that you are helping fund their legal reserves. And potentially fraudulent behavior.