US banks have paid out hundreds of billions of dollars in mortgage claims, UK banks have dropped huge sums on PPI claims, but Europe has mostly managed with small fines, and not much dirt so far.
Part of this is cultural and part of it is political. US and UK authorities have been trying to prove they are tough on banks, and willing to root out wrongdoing early and vigorously. They may also have been motivated by cold, hard cash — the BNP Paribas fine poured $2bn into New York City’s general budget and New York State Police received a $500m cheque to purchase new camera and tech equipment.
European banks in many countries, however, have been too weak to be raided to prop up state budgets. Until the bank-sovereign loop, of possible bail-outs, weak government debt markets and big bank sovereign holdings is definitively broken, governments simply can’t force their banks to disgorge multibillion euro fines.
Perhaps, too, there has also been less wrongdoing. Many blamed free current accounts for forcing UK firms into grubby behaviour, and in many European countries, banks are smaller and closer to their communities. This can mean more sweetheart deals and local back-scratching, but this is perhaps expected, or even encouraged.
But now, European authorities will have no option. If a European country wants to spend taxpayer money bailing out investors, it has to find misselling.
The catalyst was Italy. In November, when the government took over four tiny and failing banks, Banca Etruria, Banca Marche, CariFerrara and CariChieti, it wrote down subordinated bondholders, as well as shareholders in the banks, prompting the suicide of an Italian pensioner who had placed his life savings in a Banca Etruria subordinated bond
Italy had no option under European law — Europe’s bank bail-out rules require imposing losses on sub debt before taking over a bank, and now the rules are stricter still. Italy had to let the banks collapse, or rescue them but force bondholders to take the pain.
A full rescue, guaranteeing retail deposits, would have contravened state aid rules — as the European Commission reminded the Italian government.
Happily, though, the Commission was willing to countenance a payoff to retail investors if there had been misselling. The Italian government promptly discovered some after the fact, and reiterated what the Bank of Italy had, apparently, said all along: no bank should be selling subordinated debt to retail customers.
The compensation news came too late for the pensioner who committed suicide, but the political turmoil over the bail-out will have been noted by other European jurisdictions.
Whether or not it was a good idea, plenty of European countries have a strong tradition of punting sub debt to retail, typically as a high margin savings product, and a punchy alternative to deposits. These buyers are politically important, and financially vulnerable.
European law requires equal treatment of investors at equal levels of the bank creditor hierarchy. Senior debt ought to be treated as senior debt, whether it is owned by retail buyers or institutions. But the political facts on the ground still mean governments will always favour retail buyers.
For countries that want to keep this option open, they’ll need to find misselling, and do it, ideally, before any more banks go down. It might not come with fines – after all, that would undermine the solvency objectives of the project – but Europe’s convoluted politics mean authorities need to come up with something.