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March 26, 2014

Banks must prepare for escalating costs of legal problems

“Anyone who thinks the current lull in multibillion-dollar bank settlements means the payouts have peaked should talk to the US Federal Reserve.

“Last year, a protracted and damaging negotiation with the Department of Justice ended with JPMorgan Chase paying $13bn to settle allegations that it mis-sold mortgage-backed securities. Citigroup, Bank of America and Wells Fargo also paid out more than $1bn each.

“So far this year, the penalties have been fewer and more modest.

“But when the Fed’s bank stress tests spat out hundreds of numbers last week, they included a truly enormous one that suggests regulators do not think the problems are over: $151bn.

“That is figure for what the Fed refers to – somewhat euphemistically – as “operational risk”, mortgage bond repurchases and losses from the sale of real estate*. It was the biggest deduction from 30 banks’ income when the Fed calculated how the largest institutions would fare in a new financial crisis.”

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Read full Financial Times article here.

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