JPMorgan's $13 billion legal tab, finalised on Tuesday, masks broader challenges faced by the banking industry. Chief Executive Jamie Dimon will be glad to put the much-flagged deal behind him. But big banks' revenue growth remains uninspiring. And, fear of punishment in the future may stifle bankers' traditional enthusiasm for new business.
The settlement of a variety of mortgage-related lawsuits, brought by US state and federal authorities, sets a couple of records - including, at $2 billion, the largest-ever fine doled out under the Financial Institutions Reform, Recovery and Enforcement Act.
But it's also just the latest in a series of cases in which both regulators and private investors have managed to secure multibillion-dollar payouts from banks for poor practices in the run-up to the financial crisis. Legal exposure on this scale is a relatively new risk, and not one limited to JPMorgan, which shareholders need to keep in mind.
Big banks' top lines aren't in the best of health either. In the three months to September JPMorgan's revenue shrank by eight per cent from the same period last year. The comparison looks even worse after stripping out costs, as profit before tax and provisions fell by 11 per cent. Wells Fargo's number slumped by 12 per cent and Citigroup's by five per cent in the equivalent periods.
It's true that America's largest financial institutions look well placed once the economy picks up speed since they have decent capital ratios and a surfeit of money to put to work. JPMorgan's loan-to-deposit ratio, for example, stands at just 57 per cent. But bank earnings are constrained by a combination of slow growth, worries about the end of the Federal Reserve's friendly monetary policy and new regulations covering everything from mortgage lending to trading.
In the end, throwing a few high-profile finance industry executives into the slammer might be the only way to soothe public outrage about their role in the 2008 meltdown. But fear of whopping fines, on the part of both shareholders and managers, might do more to keep Wall Street's behaviour in check. That may be good for the financial system - but it's likely to hold down short-term returns.
