Apparently some traders in big banks are manipulating foreign exchange rate markets and making enormous profits. They are communicating in chatrooms with 'codes' and team names for the secret groups of three or more traders. Collectively $4.25 billion in fines have been assigned to the various companies, a relatively small amount when compared to the roughly $5 trillion traded in world currency markets every day. Various regulators are using the chatroom transcripts as evidence in their prosecution which will likely begin next year. Is fining capital-rich industries like big banks enough to keep this type of collusion out of the financial markets? What would you suggest for regulators to do to keep this behavior to a minimum?
http://dealbook.nytimes.com/2014/11/12/british-and-u-s-regulators-fine-big-banks-3-16-billion-in-foreign-exchange-scandal/?ref=us&_r=0
I think using a compliance department that can audit these large banks would be an ideal option. It would require big banks to disclose all conversations with employees of other banks in order to protect exchange rates. Price-fixing needs to be handled in a delicate manner. The audits would keep banks regulated because they would have to constantly hide all their conversations with other banks. They would not be willing to constantly hide all conversations regarding price-fixing just to make a larger profit with the risk of taking big hits.
ReplyDeleteI find the debate on whether fines or jail time are better for stopping financial malfeasance interesting. On the one hand, banks are all about making money, so fines should make them think twice. But are our fines really enough to make a difference? Maybe jail time could have a disincentive effect that no reasonable fine could, actual prison would really affect a financier in a way lower profits wouldn't.
ReplyDeleteThen again, you can imagine banks structuring themselves to get around prison sentences. All of the important people would come out of investigations squeaky clean while some pre-appointed, bottom the totem pole, "fall guys" are set up to get all the jail time.
I think it is very difficult, especially with rapid advances in technology and globalization for regulators to keep up with monitoring and effectively curbing negative behavior of banks and also companies. Therefore I think that the change cannot just be in after-the-fact punishments (which seem to have been fairly ineffective so far), but within banking and business culture.
ReplyDeleteI don't know how to do make this change in a certain-to-be effective way. However, one potential option would be ethics training/workshops for all bank/company employees paid for by the bank/company. Another mechanism that is supposed to be helpful for encouraging ethical behavior within a bank/company is an anonymous whistleblower hotline, so that employees have a safe way to report unethical actions.
Obviously these measures are not perfect, especially when it is often times the people with the most power in the bank/company that are committing crimes. However I do think that a shift in bank/business culture could at least be more helpful than just having banks/companies pay fines that barely make a dent in their annual earnings.
Clearly, there hasn't yet been a definitive answer as to how to regulate these banks more effectively. Moreover, as Beth eludes to, this specific issue is deeply engrained in banking culture making it even more complex of a problem to solve. I think that regulators should work with industry leaders to create more thorough and less punitive regulations, which would make it so money is made in an honest way, rather than through manipulating the market.
ReplyDeleteI agree with T.J about using compliance department that can audit the bank. Bank of America is increasing its legal costs, J.P Morgan put a high emphasis on compliance. Having the opportunity to work in compliance department and to know the amount of money that banks have to pay for any violation, compliance is vital to business.
ReplyDeleteI really feel that fining these companies will not work when trying to prevent collusion. Unless, of course, these fines are equal to the amount of money that the banks are gaining from the collisions. If a bank makes $10 billion using collusion and they are fined $1 billion, why would they stop? The bank is still making an enormous profit. Like Beth and Alex said, I think that these problems need to be attacked inside the industry with ethics.
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