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By Steve Slater
LONDON, Oct 31 (Reuters) - The cost to banks of cleaning uppast misdeeds has soared over $100 billion and is leavinglenders running scared from areas that put them in potentialdanger of upsetting regulators.
This week alone, Deutsche Bank, UBS andLloyds revealed mounting legal bills and Dutchagricultural specialist Rabobank became the latest lender to befined in a global scandal over interest rate rigging with a $1.1billion penalty.
Bankers fear that paying for the sins of the past andpreventing future misdemeanours could be the biggest headacheyet for an industry still trying to bulk up on capital andliquidity reserves in the wake of the 2007-09 financial crisis.
"This is a new world of regulation that has emerged post thefinancial crisis and I think the whole industry is struggling tocatch up with it," Mike Rees, head of wholesale banking atStandard Chartered told Reuters.
"Everyone has focused on the liquidity standards and thecapital standards, but I think the bigger cost for the industrywill be about meeting the standards being required of us interms of the code of conduct."
JPMorgan - which had emerged from the financialcrisis as the poster child for good risk management - is closeto a record $13 billion settlement with U.S. authorities overthe mis-selling of mortgage-backed bonds.
That could take the cost of credit crisis andmortgage-related settlements by U.S. banks to almost $85 billionin the last four years, according to SNL Financial. Europeanfirms, mostly in Britain, have paid or set aside more than $40billion to compensate customers or pay various fines.
Further penalties are expected to hurt profits for years tocome and are encouraging banks to quit business lines andless-regulated countries to shield themselves from future risk.
"Banks have to stand back and say what's strategicallyimportant, where's the risk, what's the strategic value? Andthey have to make some choices," said a senior bank executive.
In many cases, businesses are not worth the cost of policingtheir potential risks.
HSBC has pulled out of a number of business areasand countries, including Panama and other Latin Americancountries, since being fined a record $1.9 billion by U.S.authorities last year over lax money laundering controls.
The British-headquartered bank, which is spending about $800million more each year on compliance costs across its operationsin 80 countries, retrenched from banking embassies andconsulates this year, sending diplomats into a panic.
"It was almost a nightmare for us. If we hadn't found analternative we were thinking about closing down our embassy,"said John Belavu, deputy high commissioner for Papua New Guineain London.
"We had been banking with them for the last 25 years ... itwas a big shock for us. We were given six months to findalternative banking arrangements."
HSBC said the retrenchment was a commercial decision basedon its review of all businesses since May 2011. Belavu said itdidn't give him any further explanation, and his embassy is nowwith a smaller bank, after other big lenders shunned it.
SHOWER GEL AND MILLIONAIRES
Credit Suisse and Barclays have pulledout of dozens of less regulated private banking markets such asBelarus and Turkmenistan as the risk of fines outweighs thepotential fees from banking rich clients.
With a global clampdown on tax evasion, Barclays has alsoshut down much of a profitable tax advisory business, which haddrawn the ire of British politicians.
After halting the sale of U.S. student loans and exitingphysical commodities trading in the face of increased regulatoryscrutiny and rising compliance costs, JPMorgan is now reviewinga whole host of other business lines, including cutting servicesfor about 500 foreign banks.
JPMorgan - which has increased annual spending on complianceand risk by $1 billion, including adding 4,000 staff in the areasince last year - is also reviewing lending to pawn shops,payday lenders and some car dealers, according to a personfamiliar with the matter.
Britain's banks have warned that tough guidelines onpreventing financial crime could see fewer pensions andinvestment products on offer for retail customers and make itunviable to provide trade finance for smaller firms.
Trade finance has a long list of potential "red flags" asbusiness is screened for sanctions-busting goods or clients, orweapons of mass destruction. A side-effect of that is that allmilitary shipments get bogged down in costly red tape.
Importing any amount of shower gel for soldiers requires oneunnamed bank to get the approval of its reputational riskcommittee, according to a consultation document released byBritain's financial regulator in July.
"THE PEOPLE WILL SUFFER"
While there is a general admission among bankers that theindustry played fast and loose with rules of conduct prior tothe crisis there is also a fear the new zero tolerance regimewill push some people and businesses out of the banking net andinto the arms of criminals looking to make a quick buck.
Money transmissions, long seen as a weak link in the fightagainst money laundering and terror financing, are set to getmore difficult and costly as big banks withdraw.
HSBC pulled back from the industry last year, and Barclayshas this year closed accounts for most of about 100 moneytransmission firms it banked, putting it under fire from Somaliswho had relied on those firms to send money home.
"The people will suffer, the economy will suffer and thesecurity of the country will suffer," said Omar Abdinur, wholeft Somalia in 1989 and wires money from London to his mother,brothers and other relatives there every month. "Charges will goup and less money will go home."
Somalis living overseas send about $1.3 billion home a year,typically for schooling, medicine and food, and about 60 percentof households in the East African country rely on moneytransfers, according to Oxfam.
Bankers regret the impact their withdrawals are having butwith their reputation and potentially huge fines on the line,they say hard choices are inevitable.
"Financial inclusion and de-risking are real challenges,"John Paul Cusack, head of anti-money laundering compliance atUBS, said at a financial crime conference last month.
"Everyone is sympathetic to (the need for) financialinclusion, but we're more sympathetic to not being fined, so ourfirst priority is to manage our risk."
