Neil Woodford warns of “fine inflation” risk in banking sector

BankBank stocks have drawn in large investment flows recently, but Neil Woodford, the leading fund manager who left Invesco Perpetual to

launch his own fund, says he has sold his shares in HSBC as fines in the sector increase.

Woodford reveals in a blog that he has not invested in banks since 2002 but last year bought HSBC.

However, he is concerned that fines resulting from the Libor scandal could hit HSBC hard as regulators appear to be fining banks more on their ability to pay than on the size of the financial crime.

Woodford called this "fine inflation" and writes: "Clearly, banks have attracted many fines in the post-financial crisis world as regulators and policy-makers have cracked down on past and ongoing wrongdoings in the industry. The size of the fines, however, appears to be increasing."

He notes that in 2012, HSBC was fined $1.9 billion (€1.4 billion) for failing to prevent Mexican drug cartels laundering money through its bank accounts. Last month, Bank of America agreed to pay $16.7 billion to end investigations into its role in the run up to the financial crisis, selling toxic mortgages. This would represent the largest single federal settlement in the history of corporate America.

"I am concerned ... that these fines are increasingly being sized on a bank's ability to pay, rather than on the extent of the transgression," writes Woodford.

"In particular, I am worried that the ongoing investigation into the historic manipulation of Libor and foreign exchange markets could expose HSBC to significant financial penalties. Not only are these potentially serious offences in the eyes of the regulator, but HSBC is very able to pay a substantial fine."

As the fine is unquantifiable, so is the risk, says Woodford.

Bank of America Merrill Lynch noted on August 29 in its Flow Show fund report that banks saw their largest inflows in 12 weeks and described this trend as a "clear sign of risk-on sentiment".

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