At the end of August, Permanent tsb paid up €2.5m in fines to the European Central Bank, for breaching liquidity requirements in two separate periods, adding up to around six months. The bank can challenge the decision in the European Court of Justice, but it’s a brave or foolish firm which squares up to its regulator like that.
At the time, it slipped under GlobalCapital’s attention — it is not that we do not get out of bed for less than £100m, but that years of fines in the hundreds of millions have left us jaded. Nonetheless, it does illustrate how strange the sanctions we invoke against banks actually are.
Permanent tsb, to be fair, misunderstood an ECB decision, as far as the notice goes, rather than actively seeking to undermine or evade regulation. The ECB agreed that “this breach did not change the liquidity position of Permanent tsb group holdings”. It was a long-running error in the way the bank treated ECB liquidity for its regulatory ratios, not a cunning way to sidestep its liquidity obligations. But, still, “the bank failed to comply with specific liquidity requirements requested by the ECB”, on two separate occasions.
When the ECB said jump, it didn’t even enquire how, never mind how high.
Now compare this to, say, big bank Libor fines. The European Union fined RBS, for example, €391m in 2013. This was pretty small time by Libor standards, thanks to the UK bank's co-operation. But even so, it came on top of £390m equivalent of US and UK fines for broadly the same offences.
Lots of firms saw fines which were bigger. Deutsche Bank, after trying to conceal its poor behaviour from regulators, and play the UK and German authorities off against each other, got smacked with €2.5bn-equivalent in Libor fines. But RBS was solidly middle of the road, in the relative badness of its behaviour and in the settlement it paid.
In some respects, comparing these fines is unfair. Attempts to manipulate Libor have been defined as fraud — a criminal offence — which went on for years and affected hundreds of transactions.
But the question of whom was defrauded has been largely ignored. Most institutional participants in the pre-2010 money markets treated Libor as a polite fiction rather than a real measure of unsecured bank borrowing.
Cases coming through the courts now — brought by investors and individuals, rather than public bodies — are trying to establish actual loss for the purposes of civil suits, and this is also proving tricky. Demonstrating that the various Libor rates were ever consistently above or below their 'real' rate is not easy, especially when there was no demonstrable ‘real’ rate, and when several institutions were simultaneously trying to push around Libor, possibly in opposite directions.
That doesn’t matter, when you’re trying to prove fraud. Intention to defraud is all that has to be demonstrated, not that somebody lost out, whether they expected a fraud, or how much was lost.
So it is at least possible that Permanent tsb’s transgression and RBS’s fraudulent manipulation were similarly free of consequence. That makes the 100-fold-plus disparity in their respective fines all the harder to explain.
Fines and punishments are not the only way banks are kept in line — a bank's management is usually keen to comply with regulatory requests without formal sanctions — but still, the scale of these punishments sends a strange message about which behaviours are worse.
Failure to comply with regulatory liquidity rules, even in a minor way, touches the very essence of safety and security in banking. Inadequate liquidity is almost always the proximate cause for bank failure, when combined with solvency concerns, and it should be near the top of any bank investor’s list of issues (it is, of course, the L is the “CAMELS” system of bank ratings).
But yet, according to the scale of fines, errors in this area are more than a hundred times less important than a bank using the wrong method to imagine an imaginary number. Fine, if that’s what you want — but try to figure out why.