This week I re-launched a course which is delivered at Cranfield University in the UK and at the Business School's partner campus in Muscat Oman on Financial Markets Regulation & Ethics for MSc Finance and Investment Management students. On the the very first day of the course, students and I discussed a FT article on Den Danske Bank A/S, a safe and storied Copenhagen-based bank established in 1871. The article highlighted the direct economic consequences of mis-conduct.
Most of us know that the bank is now facing charges by Danish authorities related to money laundering up to Euro 200 billion non-resident funds (via its Danish regulated and authorised) Estonian branch from 2007 to 2015. The purpose of this blog is not to recount this sorry episode which includes many interesting global threads, including a British whistle-blower, Danish supervisors, un-named large European and US bank payments partners that filtered these funds into the US markets, French and US government investigators, and a partnership in north London relating to the accounts (see The Guardian's article from November 19th 2018 for more on these alleged links). I am pretty sure there are more interesting global centres and notable characters to emerge over time. Amazingly, the large European and two US banks allegedly ended their relationship with the Estonian branch around 2-years before the end of the scandal, surely a new indicator for trouble for bank directors and the regulator going forward. I guess another indicator must be the flow would represent a significant percent of GDP for Estonia and Denmark - surely this something a RegTech firm will seize upon when designing AML tools.
Let's move the conversation beyond the current allegations which will play out in the coming months. Instead, let's consider the measurable costs of gross mis-conduct in banking that so far we can observe in this sorry case.
The FT article noted above in the FT (January 9th, 2019: Den Danske's Funding Costs to Jump on Bond Market Return). This article moots from sources new funding costs for a 5-year bond issue will jump 120bp per annum, which is 2.5 times higher than it paid in only June of last year, when the basics of the story were already in the market. The bond is senior but is structured so that it can count towards regulatory capital requirements, so investors will be careful before investing in this security given the risks the bank faces. Savvy investors will surely consider the amount of current and excess capital the bank has for unexpected losses and compare the capital required in case US authorities successfully bring charges which result in a large fine for Den Danske (this is so far not certain but a possibility). So non-funding capital charges also may also go higher of any mis-conduct if the bank later needs to complete a further capital call. These are real operating costs that are saddled against the owners of the bank today for any misdeeds taken by the bank from the early 2007-2015 period.
Other consequences emerge from financial institution mis-conduct. Executives including the then-CEO's career will be impacted. Staff morale also may suffer. NEDs and the governance function may find itself distracted today as it seeks to draw a line under this episode. Clients, depositors and others may also lose some faith in the firm's long standing history and typical track-record for prudent Scandinavian banking.
The story is not fully out on this case so let's keep our minds open to any outcome.
However, this note is intended to point out the real costs to the multitude of stakeholders when a conduct-related crisis hits. It is also a good case study to observe what remedies the bank is required or voluntarily under-takes to address any conduct mis-deeds it is found to have taken, related to culture, whistle-blowing and the like.
Photo credit 1: WSJ; Photo credit 2: Financial Tribune