Punish bankers, not banks

We have another mega-settlement for another mega-violation in banking. BNP Paribas has agreed to cough up $8.9 bn for violations of US sanctions against specified countries. An article in FT argues that the fines are disproportionate and that they hurt shareholders rather than bankers. Banks have no choice but to settle when American regulators come after them. This enables regulators to impose enormous fines and it also boosts the political fortunes of those who work for regulators:

These huge and disproportionate sanctions are the result of an unseemly competition between rival US regulatory agencies, each keen to mark its turf and get its teeth into the prey, while promoting the careers of political appointees. They are abetted by a legal system in which criminal indictment carries potentially fatal consequences. An institution that is accused of wrongdoing swiftly finds itself losing the confidence of investors and counterparties, making it impossible to do business. Its life saps away long before a case reaches trial. In these circumstances, banks have little option but to cough up.

The author argues that  regulators in Europe are more reasonable in the fines they impose and that a better way of punishing the banks would be impose higher capital requirements. This would also reduce profitability and hence the incentives for top bankers to misbehave.

The article is right in saying that the sins of bankers should not be borne by shareholders; it is also right about disproportionate fines. But it misses the central point: bankers who violate the law must go to jail. Imposing fines on the legal entities called banks hardly punishes the bankers. Another article in the FT makes this point tellingly:

Indeed, institutions do not break laws – individuals do. Lest there be any doubt on this point Benjamin Lawsky, the superintendent of New York’s Department of Financial Services stated that “BNP employees – with the knowledge of multiple senior executives – engaged in a longstanding scheme that illegally funnelled money to countries involved in terrorism and gdeenocide.”

So there you have it. And the punishment? About a dozen employees have been dismissed and others will be demoted to suffer pay cuts. A number of senior executives are departing. It would be interesting to know on what terms and with what perks. But no individual who was cited for wrongdoing will go to prison.......If no one goes to jail and the fine does no permanent damage, the settlement becomes more a transaction tax than a deterrent. It is unlikely to be seen as justice in the eyes of the public – people who tend to go to prison when they break the law.