Are Banks Prepared for
Litigation Risk?

With the financial sector constantly under scrutiny for one scandal after another, it is difficult to determine which institutions are worthy of being trusted with consumers' money. All banks set aside a reserve to manage their risk of lost profits over litigation risks, but no one is sure just how much--it may be too little to cover a costly suit, or it could be much more than a bank should ever need. Each bank decide on how much to set aside for their litigation reserve differently, so consumers have no way of comparing their risk when banking with one institution or another.

As customers get charged monthly fees and investors blindly place their money with these banks without being provided vital financial information, the consumers' disadvantage when choosing to bank and invest in these institutions becomes more and more obvious. Large banks are unwilling to disclose how much they put aside for litigation, and this should worry all investors.

Just recently Citi doled out 590 million dollars in settlement fees for actions related to early behavior during the financial crisis. This news hardly shocked the public, but the total amount expected to be paid by Citi, Bank of America, JPMorgan Chase and other banks for private suits related to the Libor scandal is anywhere from 10 billion to 200 billion, and this news should concern anyone regardless of who they bank with.

No one is sure whether the banks are prepared for that kind of a loss, and this has spurred the action of proponents for reform for litigation risk. As investors and consumers of retail banking, knowing your bank's litigation risk is information necessary for making important decisions. Comparing your risk from one bank to another is nearly impossible with no information available about how much a bank has in reserve to mitigate their litigation risk, and many financial transactions being too complicated for the average consumer to truly understand; but in the near future the finance world is expected to see big changes in consumers' banking relationships.

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