After the 2008 global economic crisis triggered by the malfeasance of mostly US financial services firms, many sceptics thought the firms would never be held accountable. After all, there is a well-established system of revolving door between banks and the US Treasury and, well, they protect their own. Regulators in the UK have also been found to be sleeping at the switch when it comes to overseeing their banks.

However, the settlement towards the end of last year between banks and regulators, under which the banks paid a fine of $4.3 billion, should be seen as another step in cleansing the rot that has crept into the world of finance.

The manipulators

Although many of these actions are not directly related to the 2008 crisis, they are incremental steps to introduce accountability into the system. The regulators in the US, UK and Switzerland have managed to extract fines from six banks including Citigroup, Bank of America and JP Morgan Chase for manipulating the foreign exchange market. Traders belonging to these banks had colluded to set exchange rates that would boost their profits.

This suggests we are not dealing with complex financial transactions being interpreted differently, but individuals are deliberately conning the system. And most unusual for such settlements, the parties have admitted guilt.

There has been action on the continent too. Tiny Iceland was specially hit at the time of the financial crisis when its banks started collapsing from both having over extended themselves and also due to manipulation of the executives.

Now, three chief executives of failed banks have been convicted of criminal charges, including market manipulation. Such stringent action against individuals heading firms is yet to be seen in the UK or the US.

The UK discovered that seven major banks were manipulating an important financial benchmark, the Libor, an inter-bank offered rate, and they have settled. One banker has pleaded guilty; others are denying charges and their cases will go to trial. Six banks are facing charges of currency manipulation.

Systemic problems

Individual cases of malfeasance in financial services, where persons have tried get around established rules and practices such as insider trading, have been pursued vigorously. The cases of Raj Rajaratnam, Rajat Gupta and M Martoma come readily to mind. Ponzi schemes like that of Madoff come up regularly and invariably get caught.

However, the systemic nature of the problems in financial services goes beyond the fixing of individual cases of violations. Moral hazard here operates at two levels. When banks run a riot and get into trouble, the government bails them out, transferring private costs into public.

At another level, in a particular institution, when individuals are caught in criminal violations, the institution pays the bill and it’s not clear if individuals pay the price. They may lose their job, but there is little information whether the firms are able to recover the costs from them.

Michael Lewis, in Liars Poker described in a rather stark manner the culture of high risks, high rewards and intimidating environment under which his bond trading firm worked. Unless these firms pay attention to the ethical standards and work culture within, we are not going to see the end of financial scandals anytime soon, not withstanding all the billion dollar settlements.

The writer is a professor at Suffolk University, Boston, and Jindal Global University, Delhi NCR

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