Forget about profits, mortgages, interest rates, housing bubbles, and market crashes for the moment; investors in Australia's 'big four' banks are taking on loads of additional risk that isn't obvious at first blush.
I'm referring to regulatory and/or punishment risk, in which the banks are forced to pay massive fines for wrongdoing.
Commonwealth Bank of Australia (ASX: CBA) seems to be front and centre at most misconduct issues, but there's no denying Australia and New Zealand Banking Group (ASX: ANZ), Westpac Banking Corp (ASX: WBC), and National Australia Bank Ltd. (ASX: NAB) have played their part as well.
In the past, financial misconduct has been met with relatively tiny fines (in terms of annual profits earned) that have basically been treated as the cost of doing business by the big four.
However as my colleague Mike King covered yesterday, Senator Sam Dastyari has issued a warning to the big four banks, informing them that the Australian Securities and Investment Commission (ASIC) has the power to issue fines in the billions if they don't cooperate with ASIC's investigations.
This brings me to the point of today's article:
The greater the number of misconduct issues, the greater the chance of meaningful and significant fines being imposed on a bank and/or sector.
A significant amount of political and public attention has been gathered by repeat wrongdoing and demands to increase the penalties are growing and will likely find some traction.
However, it is unlikely that Australian banks will have to pay billions in fines. The Australian penalties that have been issued in the past don't reflect those on offer internationally, where Barclays, Citigroup, JPMorgan Chase, and The Royal Bank of Scotland were recently fined over $5 billion for fixing currency markets and a further $4.3 billion for manipulating interest rates.
While these penalties are vast, they also reflect the scope of wrongdoing, which could have netted the banks billions in profits over the years the fixes were operating.
Fines in Australia also reflect the size of wrongdoing, and BNP Paribas, UBS, and The Royal Bank of Scotland were recently fined a trifling $3.6 million total for their role in fixing Australia's interest rates. If the big four banks and possibly Macquarie Group Ltd (ASX: MQG) are found guilty, the penalties are likely to be far larger, but will still be based on the profits the banks could have achieved through their wrongdoing.
ASIC chairman Greg Medcraft has called for ASIC to be granted the power to inflict penalties that are multiple times the monetary value of wrongdoing in an effort to deter perpetrators, but until that day is here I expect it to be 'business as usual' at Australia's big banks.
