Is The Latest Forex Settlement By Barclays PLC, HSBC Holdings plc & Royal Bank of Scotland Group plc Just The Beginning?

Nine global banks last week agreed to a $2bn payout to settle a class action suit brought in New York over the foreign exchange rigging scandal, according to US law firm Hausfeld — and it includes three big UK banks, namely Barclays (LSE: BARC), HSBC Holdings (LSE: HSBA) and Royal Bank of Scotland (LSE: RBS).

Share prices of all three dipped on Wednesday last week, but only HSBC had failed to recover the loss by Friday, with Barclays and RBS ending the week ahead of the FTSE 100. And HSBC’s woes are more tied to its operations in China and the region at a time when the Chinese economy is slowing and its stock markets are in chaos — HSBC shares are down 14% over the past 12 months, to 557p.

Share prices mixed

The Royal Bank of Scotland share price has remained flat at around the 340p level over the same period, but to my mind that’s at least in part due to the shares being overvalued in the past, as they soared along with Lloyds Banking Group while RBS was still at least a year behind in its recovery. Meanwhile, Barclays has done well with a 25% rise to 276p over 12 months, so does that mean this forex thing is nothing to worry about?

The latest settlement comes on top of big fines handed out by the FCA in the UK back in May, with RBS one of those that had to cough up and investigations into Barclays still ongoing. And, according to The Independent, Hausfeld chairman Michael Hausfeld has said there could be similar legal action brought in London on behalf of investors in pursuit of compensation for rate-rigging losses here — with something happening perhaps as early as October.

First, how did they suffer? The dynamic nature of the foreign exchange market makes it hard to keep a tab on daily volumes and values, and so the markets used to take a daily “fix” in the minute centering on 4pm in London each day — it’s been widened to five minutes now. But by sharing confidential information about their clients’ intentions, dishonest bankers colluded to coordinate orders of their own in that crucial minute and manipulate the daily fix to their own advantage.

Anyone who traded in foreign exchange during the time this was going on could potentially have lost money, and we’re talking of a time span from 2007 to 2013 here, in a London forex market that’s larger than America’s. That could add up to a lot of compensation.

Will it hurt?

Is that a reason for bank shareholders to worry? In the short to medium term, there does seem to be an increasing appetite amongst regulators to punish banks for their back catalogue of greed-driven dishonesty, and there’s little sympathy from people who suffered in the economic downturn.

But on the other hand, how much does a share of an overall billion or two really matter to the big banks? It’s not nice to lose that amount of cash, but to put it into perspective, Barclay’s revenue exceeds £25bn per year and there’s a pre-tax profit of around £7bn forecast for this year. In the long term, banks are going to keep on being great cash generators, in which further forex fines will most likely only cause relatively small dents.

Even with short-term hurdles like this, long-term investment in banks can form part of a strategy has brought great long-term rewards for a century and more.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Barclays and HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.