Banks' $219 Billion Legal Costs Still Increasing, Moody's Says

  • Lenders including Deutsche Bank still face `high risk' probes
  • Global banks set aside $219 billion in legal costs 2008-2014

The world’s biggest banks, including Deutsche Bank AG, JPMorgan Chase & Co. and Goldman Sachs Group Inc., will probably continue to pay for their past sins, according to Moody’s Investors Service.

The three lenders are among a group of eight global banks facing “high risk” litigation tied to alleged misconduct such as the rigging of currency markets and sales of faulty mortgage-backed securities, Moody’s said in a report on Tuesday. The consequences could include “substantial costs” and criminal proceedings, the ratings company said.

Banks around the globe are still dealing with the consequences of years of misconduct in the run-up to the financial crisis along with probes into wrongdoing that persisted in the wake of the turmoil. A group of 15 global investment banks will probably see higher legal expenses over the next two years after setting aside a total of $219 billion in costs between 2008 and 2014, according to Moody’s.

“Regulatory investigations into the business practices and potential criminal activities of financial institutions have been proceeding rapidly both in the U.S. and abroad,” Moody’s analysts led by Alessandro Roccati wrote in the report. “These probes of legacy conduct issues show no signs of abating and present significant risk for bondholders of large diversified global banks with significant capital markets businesses.”

Currency Fines

Goldman Sachs and JPMorgan, both based in New York, face “high risk” litigation related to the alleged sale of faulty U.S. mortgage-backed securities along with Royal Bank of Scotland Group Plc, Credit Suisse Group AG and UBS Group AG, according to Moody’s. Misconduct in the selling of these assets accounted for just under half of all legal costs so far, it said.

Deutsche Bank, based in Frankfurt, is facing “high risk” litigation tied to the alleged rigging of currency markets, with an estimated $3 billion in fines, according to the report. A group of eight other lenders could share in a further $3 billion of costs from probes into the abuse, Moody’s said.

Regulators are also investigating suspected wrongdoing at Deutsche Bank’s Russian unit, which Moody’s cites as “high risk.” The lender said last month it found violations of internal policies that may have allowed some Russian clients to move funds out of the country without properly alerting authorities.

The world’s biggest banks also face a raft of “medium risk” and “low risk” litigation, which may generate costs without resulting in criminal proceedings, Moody’s said. They include claims of abuse of the market for credit default swaps and rigging of interest rates, the report shows.

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