This has been an extraordinary year for bank frauds.
JPMorgan Chase in London loses more than $US2 billion in six weeks placing massive, stupid bets on credit default swaps. HSBC accepts more than $15 billion in bulk cash transactions from Mexico, Russia and other high-risk countries, over three years, without conducting the checks required by anti-money-laundering laws. This prestigious bank thereby facilitates money laundering by major drug cartels and possibly by terrorist groups.
The bank has set aside $700 million in anticipation of US fines for this money laundering and a further $1.3 billion to compensate British domestic customers to whom it had wrongly sold loan insurance and interest rate hedging products. Standard Chartered Bank agrees to pay $340 million to the New York bank regulator after agreeing it undertook $250 billion of transactions in breach of US sanctions against Iran. It joins Barclays, Lloyds, Royal Bank of Scotland, Credit Suisse and ING which, since 2009, have paid $2.3 billion in fines for breaching US sanctions against Iran, Cuba, Libya and other countries.
Then we have the mother of all frauds - the Libor scandal. The London Interbank Offered Rate is the rate at which banks offer to lend to each other in the London market. Investigations are continuing, but it seems that since 2007 up to 16 major British, European and US banks were misstating their rates that go into the calculation of Libor.
At times banks, such as Barclays, understated their rates to make themselves seem more creditworthy. At other times banks misquoted their rates to benefit their own investments.
Libor is the benchmark that sets the basis for more than $10 trillion of loans globally and many hundreds of trillions of dollars of other products, mostly derivatives. Libor is at the very heart of the international financial system.
To knowingly falsify it means this industry abroad has completely lost its moral compass. The fines will be many billions of dollars.
But class actions, not fines, will be keeping bank chief executives awake at nights. When one falsifies a rate that is the basis of hundreds of trillions of dollars of transactions - even by only a few hundredths of a percent - the potential damages are massive.
In every Libor-based derivative, one party will have lost because of this fraud and the other will have gained. A class action on behalf of all who have lost should recover their losses but there's probably no way to recoup gains from parties that received them in good faith. This asymmetry lies at the heart of a massive problem for banks and a bonanza for lawyers.
The law suits will be so complex and numerous that governments may have to establish a statutory claims fund, levy the banks to finance it, and limit claimants to their entitlements from the fund. Numerous highly regarded banks in London are knowingly breaking laws. What is going on? And why, as yet, have we not seen the same here? The answer to both questions lies in bank culture.
Most of the business of these international banks is not taking deposits and making loans. It is trading, placing bets in the financial casinos that our capital markets have become. And once this trading mentality takes hold, making profits, not following the rules, become everything.
In this context the fines are laughable. Standard Chartered was fined $340 million - less than 0.0014 per cent of its illegal transactions. Banks don't do business for margins less than a one-hundredth of a percent. So Standard Chartered profited handsomely on these deals even after the fine.
We haven't yet had these abuses because most of our banks' business remains old-fashioned banking. The lack of competition in the Australian market provides massive profits without having to venture extensively into trading. But times are changing here.
Thirty five years ago, the local bank manager was a highly respected member of the community. He dispensed free financial advice to customers, he gave financial references, he (and it was invariably a he) was respected by the community because he was respected by his bank.
Managers had authority, within limits, to grant loans. Banks had to rely on their judgment and discretion.
This has all changed. A manager today often manages a few branches and has little real authority. This has all been centralised in head office. Employees are not hired by banks today primarily for their probity and discretion. They are hired for their ability to make money.
When the cheery teller asks whether you need any life or unemployment insurance, they ask because they are paid extra for selling you such products.
There is enough old-fashioned banking remaining in Australia for the business not to have lost its soul, as has happened in the City of London. Australia's regulators should be asking how they can encourage this state of affairs to continue, and discourage our banks from following the lead of their peers abroad.
The core business of institutions that have to be bailed out by government when they fail, should not be gambling.
Ross Buckley is professor of international finance law at the University of NSW.
This opinion piece first appeared in The Canberra Times.