BNP Paribas’s record $9bn fine is capturing the
headlines but the risk of losing its US clearing business is a
major long-term concern for the world’s fourth
largest investment bank.
The French bank was fined on Monday $8.97bn for handling US
dollar trades on behalf of parties under US sanctions and
banned from US dollar clearing through its New York and other
US branches for one year starting January 1 2015.
The bank said in a statement: "During 2015, the activities
of the perimeter concerned will clear all US dollars through a
third party bank instead of clearing through BNP Paribas and
all necessary measures are being taken to ensure smooth
transition and no material impact for the clients
No third party had been nominated at the time of writing but
BNP must push ahead and name its partner as soon as possible to
reassure its clients, some of whom will surely be spooked by
the announcement and independently looking for an alternative
There are only a handful of banks that could take on the
extra business so BNP is not overwhelmed by options.
There is also the question of whether the banks would want
those accounts. There is an obvious reputational risk for
anyone taking on BNP’s clients and there is also
the small matter of balance sheet.
Banks are generally looking to reduce the number of clearing
clients they have to shrink their balance sheet and lighten
their obligations under the tough new capital adequacy
requirements imposed on banks by regulators.
That said, the banks remain fiercely competitive in a market
where margins are wafer thin so it is likely BNP’s
clients -- the most lucrative ones at least -- will find a
BNP has little say in the matter but the obvious medium term
risk is that clients might prefer the service they receive from
the third party next year and opt not to go back to BNP when it
reopens for business in 2016.
The French bank will be mindful of this and will no doubt be
offering clients assurances in the hope they will come back but
there’s only so much they can do and they are not
in a strong bargaining position right now.
A possible factor in whether clients will stay away after
the ban comes off will be the extent to which BNP can stay
involved with clients’ clearing without actually
handling the clearing itself.
It is not clear from the US Department of Justice order
whether BNP must outsource the entire process to a third party
or the firm can white-label a third party offering and retain
the client relationship.
What is certain, however, is that clearing is a crucial part
of the service that BNP and its rivals offer to clients so the
loss of this business would certainly have wider ramifications
for the French firm’s ambitions in the US.