Will clients and counterparties stick with BNP Paribas?

Obsession
Future of Finance
Obsession
Future of Finance

BNP Paribas’ balance sheet and reputation look set to take a hit from a $10 billion fine from US regulators to settle allegations the bank evaded US sanctions, according to reports in the Wall Street Journal.

The fine, which is just $3 billion shy of JPMorgan Chase’s record fine earlier this year, is an amount that could compel (paywall) BNP to temporally stop dividend payments to shareholders. The bank might also raise cash to bolster reserves. A settlement between US regulators and BNP—they’re still negotiating—isn’t expected to result in the bank losing its license to operate in the US. But there will be business repercussions, say analysts at Moody’s. In a report published last week Moody’s analysts wrote:

If BNP’s primary operating entity or indeed any affiliate with significant operations in the US were subject to a criminal charge, we believe the group could face a potentially significant loss of client business in the US. In particular, institutional clients are likely to be confidence-sensitive. Some clients may voluntarily choose to dissociate themselves from a bank facing criminal charges. Others, such as pension funds, fiduciaries or governments, may have internal policies or legal prohibitions preventing them from continuing to do business with a bank under criminal investigation.

The Department of Justice, the Federal Reserve, the Securities and Exchange Commission and other regulators are betting that taking a tougher line with banks won’t result in a chain reaction that damages the rest of the financial system. So far that’s been the case. Under pressure from regulators, Credit Suisse recently admitted guilt and agreed to pay a $2.6 billion fine to resolve charges that it helped US citizens evade taxes. And that admission—it was the largest bank to plead guilty to a US criminal charge in decades—hasn’t resulted in carnage for the bank or the industry.

Still that doesn’t mean things will always go that smoothly. As the financial stakes for BNP have gotten higher—in the form of the estimated size of potential fines—concerns over potential ripple effects have grown.

“Investors may now be more likely to shorten their durations to, or reduce exposures to BNP, which had a $39 billion footprint in the US money markets as of April month-end,” wrote JP Morgan money market analysts, in a weekend research note.

 

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