Misbehaving banks must have their day in court

Almost seven years since the financial crisis crashed over the global economy, many of its repercussions are still being felt. Among them is the public's opinion of finance, which remains low despite repeated attempts by the industry's leaders to turn the page on its role in the crisis.

A fundamental reason is the almost total absence - with the exception of some small countries such as Iceland - of a thorough public reckoning with the financial industry's ethical problems. No sooner has the public digested the shock from one revelation of rampant misbehaviour than another scandal erupts, be it rigging global price benchmarks, fraudulently selling rotten products to retail customers, or helping tax evaders and sanctions busters.

In the US, the most blatant expression of the failure to rein in the financial industry is the use of deferred prosecution agreements. These are deals which, despite sufficient evidence for criminal prosecutions, allow wrongdoers to pay fines and make commitments to improved conduct in return for avoiding the admission of criminal guilt.

In an important speech last Wednesday, US Senator Elizabeth Warren condemned the widespread use of DPAs against financial industry lawbreakers. Her main argument is that DPAs' main punitive tool - fines - have far too little deterrent effect. A fine paid by a corporation is essentially a raid on its shareholders' funds. What is more, the lag from the commission of a financial crime to the implementation of a DPA is long. Both mean that even huge fines (some have been in the billions) are highly unlikely to make much difference to the economic prospects of the responsible individuals when they decide whether or not to break the law.

To put it simply, too many get away with cheating. Criminal prosecutions would stand a better chance of holding culpable individuals to account - and therefore to discourage wrongdoing in the first place. Deterrence aside, there is also an important democratic value in lawbreakers being publicly branded as such.

So Ms Warren is right. DPAs, originally intended to deal with low-stake crimes with little chance of repetition, have become a blight on a financial sector that has proved capable of crimes that are neither low-stake nor one-off.

The senator proposes, as a minimum, that no new DPA should be offered to a bank that is already in one. It is hard to disagree with this idea, which has quickly been dubbed "two strikes and you're out". If anything, it seems too weak. Given the flaws of DPAs, why allow even one strike?

A pragmatic reply is that DPAs are so rife most big banks already have one. A deeper one goes to why DPAs are so popular with prosecutors to begin with. The reason is a belief that has governed US policy throughout the crisis: that the failure of any big financial institution would cause an economic calamity, the avoidance of which takes priority over anything else.

Since a criminal conviction could quickly put a financial company out of business altogether, too big to fail entails too big to jail. The analogy is often drawn with Arthur Andersen, the accountancy firm that was brought down by its association with Enron.

Ms Warren disputes this view. She may well be right that big banks are more jailable than the administration thinks. But as long as it does, banks will be given as many strikes as they like.

Ending too big too fail is therefore the overarching goal - one that Ms Warren shares with this newspaper and many others. That it would help end the use of DPAs is one more reason to complete this long-overdue task.

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