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Coronavirus loan moratoriums could be bank misconduct 'hotspot,' EBA warns

Coronavirus loan moratoriums and rapid digitalization during the pandemic could create new "hotspots" for banking misconduct, according to European Banking Authority Chair José Manuel Campa.

Most major banks in Europe have offered loan repayment holidays to retail and commercial borrowers that have struggled amid the coronavirus crisis. Speaking at a Sept. 15 webinar organized by City University Business School, Campa said the EBA wants to ensure these clients are treated fairly by banks when the time comes to start repaying.

"I have been worried about ensuring that all consumers know what they are getting into and are treated fairly. ... Once the [moratoriums] run out, it will be imperative there is full transparency and fair treatment of consumers both for existing and new loans," he said.

Banks' renewed efforts to ramp up digitization and shift to cashless or contactless payments during the pandemic could also create new conduct risks. And there is a risk that customers who do not use digital channels could be left behind, he said.

"Whilst digitization offers benefits, we must be cognizant of consumers who cannot, or choose not, to use technology for their financial services," he said.

Greater use of online banking services also increases the potential for fraud and cyberattacks, and the EBA is concerned that existing lines of defense in the banking industry may not be up to the job.

"It worries me that the data used to power fraud detection engines may not be keeping up with the new trends, which also means that old datasets may not be well flagging the emerging range of fraudulent activity online," he said.

Outsourcing, ESG risks

The EBA will also closely monitor operational resilience in the context of higher use of outsourcing providers by banks in third countries, Campa said. He also said the heightened focus on environmental, social and governance issues in banking at present, particularly with regards to climate change and the treatment of workers, brings the risk of green and social washing, which could emerge as a misconduct risk in the future.

Campa's comments came the same day as City University Business School and the Euro-Mediterranean Economists' Association published new research showing that 20 of the world's largest banks paid a total of £377 billion in fines and conduct costs between January 2008 and December 2018.

Between 2014 and 2018, Royal Bank of Scotland — now known as NatWest Group PLC — racked up the highest level of conduct costs and provisions at £26.56 billion, followed by Bank of America Corp. at £26.54 billion and Lloyds Banking Group PLC with £18.79 billion.

Residential mortgage-backed securities misselling was behind the largest number of misconduct fines in the decade between 2008 and 2018, totaling £98.10 billion, according to the study. Fines for misselling, other than payment protection insurance or mortgages, totaled £59.11 billion, while fines for PPI misselling stood at £36.32 billion. Fines for failure to disclose as required by law or regulation stood at £16.58 billion while fines for "egregious loss due to bad judgment," such as the 2012 "London Whale" case in which JPMorgan Chase & Co. made a trading loss of $6.2 billion, totaled £5.90 billion. Fines for anti-money-laundering failures totaled £10.13 billion.

GSIBs

Banks with a global systemically important bank, or GSIB, classification account for the lion's share of conduct fines, according to the study, which highlights the importance of continuing to closely monitor GSIBs and their conduct and culture, the reports' authors said.

Certain business models are more prone to conduct risk, with large, international banks with a lot of cross-border transactions being a case in point, Rym Ayadi, director of the Euro-Mediterranean Network for Economic Studies, said during the webinar.

But small banks have conduct risks too, and a faster pace of digitalization could amplify existing conduct risks in banks of all sizes, she added.