Regulatory Fines Dominate Reports of Bank Governance Failings

Regulatory fines are the dominant theme in news reports centred on corporate-governance failings by banks around the world, Fitch Ratings says.

Fitch analysed over 1,500 reports on banks from 2020-2Q22 that were tagged to financial crime, governance, regulatory issues or institutional scandals in a database of news items identified and catalogued as ‘risk events’ by Sigma Ratings, a global risk intelligence provider. More than 600 of the reports indicated meaningful instances of governance failings, with regulatory fines accounting for nearly half of these. We believe this reflects both the prevalence of regulatory fines and the media’s propensity to report on bank fines, often headlining the amounts.

We classified each report that indicated a meaningful governance failing into one of seven categories, based on the main theme of the report. ‘Regulatory fines’ was by far the largest category. Most of the fines were minor, often relating to small fines for gaps in financial reporting or inappropriate charges to clients. However, some fines were much larger, relating to significant regulatory violations, such as major deficiencies in risk management or anti-money-laundering policies.

The next largest category was ‘fraud’, which included cases of tax evasion, bribery and theft. This was followed by ‘allegations against employees or managers’, typically linking individuals to governance failings. ‘Money laundering’ was also significant. We believe this was partly due to increased regulatory focus on money laundering in recent years, which, in turn, has led to increased media coverage.

‘Weak controls’ mostly related to reports on banks failing to spot fraud or other violations by junior staff in branch offices or on trading desks. ‘Reputational issues’ included a wide range of violations, from breaches of Covid-19 rules to misbehaviour by managers and employees, including reports of discrimination and harassment.

Most of the governance issues reported would not have an immediate impact on the banks’ credit ratings. In particular, if a fine or a loss due to fraud or money laundering is not large enough to materially weaken a bank’s financial profile or business profile, it is unlikely to trigger an immediate negative rating action. However, if a governance failing leads to significant reputational damage, or if it is symptomatic of more serious or widespread failings, negative rating actions could follow.

Evaluating corporate governance is essential for ESG considerations and an integral part of Fitch’s rating process. Governance factors are at least minimally relevant to the ratings of all Fitch-rated banks globally, and have a moderate rating impact, in combination with other rating drivers, for 25% of banks in emerging markets and 6% of banks in developed markets. That said, governance is a key rating driver for only 0.3% of Fitch-rated banks globally.

Geographically, banks in the developed markets of Europe, the US and the more mature markets in the Asia-Pacific region accounted for most of the news reports that indicated governance failings. This does not mean that governance is weaker in these markets but rather is a reflection of their larger banking sectors and more intensive regulatory requirements and scrutiny. Greater media interest may also be a factor.


By Dmitri Vasiliev  & David Prowse Fitch Ratings, August 11, 2022