Bank of America (BAC) - Get Report, JPMorgan Chase (JPM) - Get Report , and 13 other global banks have spent at least $219 billion to cover legal costs since 2008, a new report from Moody's Investors Service shows, in a tally of the staggering costs to investors of regulatory and criminal probes into market-rigging, money laundering and improper mortgage-bond sales.
Further fines and penalties, including criminal proceedings, could "pose a significant risk to these banks' earnings stability," the Nov. 17 report from Moody's said. While the banks may have enough capital to handle the litigation costs, the cushion might not be big enough to mitigate potential fallout from any criminal charges, Moody's said.
Global banks racked up mortgage-related legal costs in the years following the financial crisis in 2008, but some of them also paid big fines and settlements to resolve newer accusations that traders profited by gaming benchmarks for interest rates and currency exchange rates.
Bank of America alone has set aside an estimated $70 billion for litigation reserves, according to Moody's, more than its total revenue in the first nine months of this year. The bank still faces legal liabilities related to claims of improper mortgage and credit-card practices, in addition to antitrust activities in the market for credit derivatives, Moody's said.
"It's been dreadful," Chris Kotowski, a banking-industry analyst at Oppenheimer & Co., wrote in an email. "It will make banks more risk-averse. In the past, if you made a bad loan, it was bad because you lost principal and interest. Now, you lose that, and you lose a lawsuit as well."
Earlier this year, JPMorgan Chase, Citigroup (C) - Get Report and four other banks agreed to pay $5.9 billion after a U.S. investigation into rigged trades involving the dollar and the euro, the world's largest currency-exchange market. Goldman Sachs missed second-quarter earnings estimates after setting aside $1.45 billion for mortgage-related legal fees.
Bank of America's litigation reserves were almost double those of the second-largest payee, JPMorgan, which set aside $37 billion of litigation reserves, according to the Moody's study.
"We face significant legal risks in our business, and the volume of claims and amount of damages, penalties and fines claimed in litigation, and regulatory and government proceedings against us and other financial institutions remain high," Charlotte, N.C.-based Bank of America said in a 2014 annual filing that outlined risk factors.
Still, the bank noted in a regulatory filing last month that litigation expenses dropped 95% in the first nine months of 2015, to $776 million, on a year-to-year basis.
Altogether, legal provisions at the global banks increased from less than $10 billion in 2008 to almost $60 billion in 2014, according to Moody's. Five U.S. investment banks accounted for about 63%, or $139 billion, of the seven-year total, the company said.
Any criminal charges could significantly impact the banks, because the "confidence-sensitive nature of financial institutions" could drive some clients away, Moody's said.
"A permanent loss of a material amount of client business would reduce a bank's profitability and its ability to generate capital internally," according to the report.