On Wednesday 20 May, four large global banks — Citigroup, JP Morgan Chase, Barclays and Royal Bank of Scotland — pleaded guilty to a series of federal crimes over a scheme to manipulate the value of the world’s currencies. The Justice Department of US government accused the banks of collusion in one of the largest and yet least regulated markets, noting that at one bank one trader remarked “the less competition the better.” A fifth bank, UBS, was also accused of foreign currency manipulation, although it was not criminally charged for that misconduct.
The trading of foreign currencies promised substantial revenues and relatively low risk, therefore banks were supposed to expand these activities after the financial crisis. However, foreign exchange business was vulnerable to manipulation.
As a consequence, recently regulators have pursued criminal accusations and multibillion-dollar penalties — enough to wipe out nearly all the revenue that major investment banks generated from their foreign exchange businesses last year.
That lack of oversight, coupled with the pressure to squeeze profits from a relatively middling business, set the stage for this scandal, one that unfolded nearly every day for five years. The crimes described on Wednesday also painted the portrait of something more systemic: a Wall Street culture that enabled many big banks to break the law even after years of regulatory black marks after the crisis.
For the banks, though, life as a felon is likely to carry more symbolic shame than practical problems. Although they could be barred by American regulators from certain activities, the banks scrambled behind the scenes to persuade those regulators to grant exemptions. That process, which delayed the Justice Department’s announcement by a week, already led to the Securities and Exchange Commission of the US providing a number of waivers that allow the banks to conduct business as usual.
The foreign exchange business may have been particularly susceptible to manipulation, analysts say, because it can be less profitable than other forms of trading. That dynamic may have increased the incentives for the traders to break the rules. Unlike the stock market, where regulators can monitor every trade, Us federal regulators lack a formal mandate to watch the currency market. That regulatory gap has started to narrow. Banking regulators, which have the authority to root out unsafe practices, are increasingly scrutinizing currency trading desks in light of the scandal.
Regulatory measures and unpredictable trading results in currencies, commodities and interest rates have prompted many banks to evaluate whether some of these businesses are more trouble than they are worth. Despite the above, most large banks remain committed to foreign exchange because valuable clients like hedge funds and big companies demand it. For banks desperate to advise big companies on mergers and acquisitions, they see foreign exchange as a “gateway” toward attracting their more profitable business.
For more information, please read the article of New York Times.