$5.0 Trillion in Reduced Lending
The recent crackdown on financial misconduct has raised litigation costs at many major banks, and, according to a new report, may be holding back economic growth. (Source: “Bank Legal Costs Cited as Drag on Economic Growth,” The Wall Street Journal, October 20, 2016.)
Policymakers are concerned that rising legal costs at financial institutions are wiping out the institutions’ ability to extend credit, particularly to emerging market nations that are being starved by anti-money laundering prosecutions.
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The International Monetary Fund (IMF) has concluded on several occasions that stringent oversight of banking activities, not to mention persistent litigation, is strangling the traditional channels of money into developing nations. The IMF held a conference about it earlier this month.
Those sentiments were reiterated on Thursday at a conference hosted by the Federal Reserve Bank of New York. During a panel entitled “Reforming Culture and Behavior in the Financial Services Industry,” the Deputy Governor of the Bank of England, Minouche Shafik, explained the reasoning behind this argument.
“The roughly $275 billion in legal costs for global banks since 2008 translates into more than $5 trillion of reduced lending capacity to the real economy,” she said .
While Shafik admitted “the wave of misconduct which has emerged in the aftermath of the financial crisis” was responsible for the legal expenses, she nonetheless worried about the overall costs to the global economy.
The question is: how can regulators effectively curb illegal practices in banking without consequently hurting economic growth?
Shafik and her colleagues at the Bank of England believe it is time for a new regime of “better regulation” that can “improve standards and ethics in financial markets.”
New York Fed President William Dudley agreed with her, saying that “there are public costs” when banks don’t abide by the rules. “To the extent we don’t have trustworthiness in banking…that actually undermines the effectiveness of the financial community,” he said.
It is noteworthy that these arguments are being made as Deutsche Bank is negotiating a massive $14.0-billion fine with the Justice Department, and as the California Department of Justice launches a criminal investigation into the opening of unauthorized accounts at Wells Fargo & Co.
