Squaring up to regulators may now be a valid ploy for certain lenders, after years of the banking sector wearing its punches. Barclays is battling U.S. Department of Justice claims it participated in mortgage securities fraud, while UBS may be the first corporation to settle in France without admitting criminal wrongdoing via a new U.S.-style legal procedure, according to a report in French newspaper Les Echos.
Not all banks can be so gung-ho. Deutsche Bank has a potentially big outstanding U.S. legal bill for its role in enabling Russians to skip sanctions. That may explain why it chose to pay $3.1 billion in cash to the Justice Department – with a further $4.1 billion of consumer relief – to settle mortgage mis-selling charges.
Barclays, a relatively small player in U.S. mortgages, may have a stronger case than rivals. It is perverse to argue, as the U.S. government’s complaint does, that the UK bank’s role as a buyer of duff loans – rather than a seller – was fraudulent. There’s another oddity. Since the statute of limitations had expired for bringing a case relating to the pre-crisis era, U.S. prosecutors had to resort to a law that requires harm to have been wrought on U.S. federally insured financial institutions. So banks like Merrill Lynch and Citigroup – hardly saints themselves in this context – are painted as Barclays’ prey.
Banks have some success already in calling the bluff of U.S. authorities. Deutsche Bank’s eventual mortgage settlement was half the amount initially demanded. Bank analysts have pointed out that penalties paid by U.S. banks in similar cases were dramatically reduced.
UBS’ experience in France, where it has refused to settle charges it abetted tax evasion, offers further evidence. A new French law passed at the end of last year means that UBS may neither have to plead guilty nor go to court. Barclays may have to wait five years for resolution in the United States – the typical length of time for a judgment, says one lawyer. But the fight could have another benefit for the industry: tying up scarce regulatory resource. Even if incoming U.S. President Donald Trump doesn’t go soft on banks, lenders have much to gain from playing tough.
Request a free trial of Breakingviews here.