Jonathan Rogers_ifraweb
Jonathan Rogers
I wonder if the CEOs of the big bulge-bracket banks have yet succumbed to a condition I will refer to as “fine envy”. That would mean that you’re not really in with the big boys unless US prosecutors have fined you in the billions, or – if the huge fines recently doled out to JP Morgan and BNP Paribas signal a rising trend – in the tens of billions. If the condition really does exist, poor old Peter Sands, CEO of Standard Chartered, must surely be a sufferer.
The institution he heads was last week slapped a paltry US$300m fine by the New York Department of Financial Services (DFS) for failing to keep tabs on potential money laundering activity from its clients in Hong Kong and the United Arab Emirates. Just US$300m? How terribly embarrassing. Better to be hanged for a sheep than a goat, as the old expression has it. If you’re going to get fined make sure it’s an eye-popping number that makes the man on the Clapham omnibus exhale in outrage.
Well yes, US$300m is a mere bagatelle compared to the US$8.9bn slapped on BNP in July, except there’s a bit more to it than just the monetary aspect of the fine. The DFS – which, somewhat to the British bank’s embarrassment, two years ago appointed a monitor to keep an eye on the bank’s internal compliance systems – must approve all new deposit or clearing accounts at Standard Chartered’s New York branch. Added to this rather humiliating state of affairs, the DFS has ordered the bank to cease handling dollar clearing for what are deemed “high-risk clients” at its Hong Kong operation and is preventing the bank from processing dollar trades through the US for its “high-risk” UAE customers.
The DFS, which to me has a rather shadowy, Orwellian ambiance, is run by a chap called Benjamin Lawsky. He had this to say last week after slapping the fine on StanChart: “If a bank fails to live up to its commitments, there should be consequences. That is particularly true in an area as serious as anti-money-laundering compliance, which is vital to helping prevent terrorism and vile human rights abuses.”
I’M NOT GOING to argue with that. But it’s somewhat tantalising that the DFS didn’t reveal the nature of the clients with whom StanChart is said to have transgressed. More to the point, the transaction it has been penalized for were described by Lawsky as “potentially high-risk.” Is that the same as “high-risk?” I don’t know. I imagine any transaction over a certain size is potentially high-risk in that proceeds can be used to buy a weapon and to then run amok through the streets. Quite how StanChart’s systems were supposed to identify the category of “potentially high-risk” I must admit, is beyond me.
Still, financial pundits were out in force last week after the fine was announced, with one suggesting that StanChart had installed a “useless” compliance system. The Hong Kong corporate governance panjandrum David Webb suggested that the fine would have a “deterrent effect” on clients based on the increased bureaucracy they will face as the bank rushes to placate the DFS. He might be right, but StanChart’s stock barely moved after the fine was announced last week. The market either thought the fine was too small to affect StanChart’s bottom line or isn’t terribly concerned about the bank losing its big clients thanks to increased bureaucracy.
What we can learn from Lawsky’s comment is something we picked up on when the US recently slapped financial sanctions on Russia’s elite: banking is increasingly wrapped up in global political conflicts and banking regulation is a political tool. It always was, to some extent, but not quite to the extent it is these days.
IN THE MEANTIME there’s another disquieting backdrop to the global banking game which comes in the form of the rush to meet Basel III compliance. Singapore’s new deadlines and definitions under Basel III’s liquidity coverage ratio requirements were seen as explaining the rush to grab a slice of a five-year private placement for Triple A rated IBRD and the bond’s subsequent disappearance from the screens.
By January 1, Singapore’s banks must own enough liquid Singapore dollar instruments to be able to fund their local currency liabilities for 30 days in the event of financial stress. If it leads to a boom in Singapore dollar bond issuance as banks scramble to book liquid assets that meet the criteria, then all well and good.
But it somehow strikes me as the tail wagging the dog. Since when should bank regulation determine the stock of debt rather than the natural funding need of public institutions and corporations? A similar situation will exist across emerging markets which have similarly small liquid bond markets like Singapore. In the rush to comply with Basel III, an artificial yield premium will be put on scarce bonds which meet the liquidity coverage criteria. Or there will be rampant government bond issuance in a bid to provide supply.
Perhaps that’s all a good thing but it’s not quite classical economics. Increasingly, banking regulation boggles the mind.
