A new study, “Global Risk 2014-2015: Building the Transparent Bank” by Boston Consulting Group reports that since the financial crisis, both sides of the Atlantic have paid out a total of $178 billion in litigation costs. These litigation costs have grown four years in a row, the consulting firm says in its report. “Litigation is the new cost of doing business,” the firm’s analysts wrote.
Banks in the U.S. and E.U. paid out $60 billion to settle legal claims during in just the first nine months of this year. That was up from $46 billion in 2013, $44 billion in 2012 and $22 billion in 2011, the report said.
According to the report, in order to ensure that all existing and new regulations and internal policies are strictly followed, banks should establish a comprehensive control framework based on the three-lines-of-defense (3LOD) model, which consists of business support, independent controls, and internal audit. In order to derive a state-of-the-art 3LOD model, banks have to fundamentally upgrade their control frameworks:
Banks need to establish a comprehensive up-to-date risk inventory reflecting all regulatory, business conduct, and stakeholder requirements and clearly allocate responsibilities within the first and second lines of defense.
Furthermore, the second line is responsible for defining a global control framework, specifying how best to adapt global standards to local needs and how to achieve a well-balance, effective control intensity.
On the basis of this global framework, the first line of defense can build specific controls, driving the full integration into the bank’s operating model.