According to the Boston Consulting Group, since 2008, fines for banker misbehavior have cost bank shareholders $312 billion. As a result,
As conduct-based regulations evolve, fines and penalties, along with related legal and litigation expenses, will remain a cost of doing business … Managing those costs will continue to be a major task for banks.
So what is a shareholder to do to make sure banks not only manage these costs, but don’t incur such costs in the future?
Require management to provide transparency.
It is well known that sunlight is the best disinfectant and nothing ends bad behavior by bankers more effectively than transparency.
If we look at the bad behavior the banks have been fined for, virtually all of it required and occurred behind a veil of opacity. Libor provides an excellent example. Rather than set Libor interest rates off of the interest rates paid for actual transactions, bankers used an opaque, easily manipulated pricing mechanism. They then subsequently manipulated this mechanism to benefit their trades.
So how should shareholders require management to provide transparency since management benefits from bankers engaging in misbehavior?
Only invest in banks that earn a label from the Transparency Label Initiative. To earn a label, these banks have shown a willingness to lift the veil of opacity and the determination to make it as hard as possible for their bankers to engage in bad behavior.