Past Scandals are Coming Back to Haunt Major Banks
Large U.S. banks are finding the billions of dollars they paid in recent years to settle lawsuits and fix broken businesses are coming back to haunt them in another place, and that place is in their capital investments. Under the new global rules known as “Basel III,” banks like JPMorgan Chase and Citigroup must hold more capital to account for potential losses from trading scandals, regulatory probes, and related issues. This is a major problem, and in the worst case, can be bad enough to make a bank begin to crack.
In recent tests, the Federal Reserve estimated that losses from operational risk and related problems reduced earnings during a period of market turmoil by about a third. These losses have come at most big banks, such as JPMorgan Chase, which lost over $6 billion on bad derivatives trades in 2012. Large mortgage lenders have struggled to foreclose on homes because they could not find critical paperwork. Bank of America Corp has agreed to pay over $50 billion in crisis-related legal judgments. This all can be blamed on the housing market crash and the overindulgent loans that were given out from the mid-1990s to the mid-2000s to those who really could not afford them. However, the backing banks should take responsibility. Although Basel III rules were finalized for U.S. banks last year, they are still coming to grips with the level of capital they need to set aside after U.S. regulators in February said eight big U.S. banks could use their own models to determine the riskiness of their assets and operations. For individual banks, the extra capital can be enormous. Regulators told JPMorgan Chase it needed to hold over $30 billion in capital to offset operational risk exposures, almost four times the level it needed in 2010 and around twice the capital it holds for market risk. Even for a bank as large as JP Morgan Chase, this figure is huge. Smaller banks would go for sure crumble, and this number is large enough to make perhaps JP Morgan Chase shiver. The figure is also around 20% of the bank’s current Basel III capital.
There are many things that these banks can do in the future to help prevent such disasters, from more cautious hiring to more cautious loaning. However, the real problem is not what they have yet to do, it is that large banks seem to take massive risks, and the reward is usually not good. In this economy, it is not wise for any bank, large or small, to take risks. That is why adult entertainment actresses have their bank accounts shut down and why small businesses cannot get loans. The banks are cautious of anything, or anyone, who may cause them damage. The best thing consumers can do is to spend as normal. There is no need to run out and close a bank account, as the banks are not failing. They are just getting a taste of what it is like to be a bank client. They have to be very careful where they put their money, Page Papi.
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