The Bank of England has warned that the £30bn of fines and compensation claims imposed on the major banks since the 2008 crisis could pose a risk to financial stability.
In its half-year assessment of the risks to the financial system, the Bank concluded on Wednesday that the £30bn paid out by the industry was the same as the amount that had been raised from private investors during the period to bolster their capital ratios.
It also spelled out that the risks for the banking industry could be more than just financial, with evidence being brought back from its agents around the UK that small businesses did not want to borrow from banks because of their reputation.
The banks still have more than £12bn of unused provisions to cover future fines and compensation claims, the Bank of England said. It intends to assess whether the amount of money set aside is great enough when it conducts its annual stress tests.
Last month, the Bank’s governor, Mark Carney, set out recommendations for extending jail terms for rigging markets to 10 years from seven and also including not just stock markets but also the fixed income and currency markets, where banks have been fined for rigging benchmark rates such as Libor.
“The costs to society of misconduct may be larger than the direct costs to customers and banks, particularly where it had impaired the effectiveness of the financial system,” the Bank said its financial stability report. “Mistrust between market participants or of market benchmarks can also impair the functioning of specific markets.”
It added: “To contribute fully to prosperity, banks and markets require a social licence – the consent of society to operate and innovate. That requires fairness and accountability. An erosion of trust and loss of social licence risk the imposition of rules or restrictions on banks and markets that are detrimental to their contribution to prosperity.”
