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June 23, 2014 10:21 pm
What is BNP Paribas facing as part of its settlement with US authorities over alleged sanctions violations?
As well as an expected fine of about $8bn-$9bn, and a guilty plea, the French bank is also facing a demand from the New York Department of Financial Services that its ability to clear US dollar transactions is temporarily suspended. This is a penalty that has rarely, if ever, been meted out by regulators to banks in the US.
What would it mean for the bank?
BNP Paribas would no longer be able to process payments or transactions for clients that involve US dollars, probably for several months. The exact period that its clearing ability would be restricted and the mechanism for doing so remain the subject of negotiation between Benjamin Lawsky, the head of the New York DfS, and the French bank. Mr Lawsky sees the suspension as an alternative to the much more serious option of revoking BNP’s New York banking licence.
How damaging could this be for BNP?
While clearing is not a major source of profits, the provision of such a service helps attract clients to a bank. Such corporate relationships enable a bank to generate more business such as underwriting bond sales and engaging in dollar-based derivatives and foreign exchange transactions for its clients.
Is there anything the bank can do to mitigate the situation?
BNP can seek to have the US dollar transactions of its clients cleared by another bank through a correspondent banking relationship. However, some US banks have indicated that they would hesitate to agree such an arrangement without sufficient reassurances from regulators that they will not be at risk as a result. Even if BNP can agree such a deal, it would still lose revenue from handing business over to a rival and it is possible that some clients will never return.
Why is access to US dollar clearing important for a European bank like BNP Paribas?
For non-US banks seeking to service their US clients, having access to dollar clearing is critical for confirming payments and remittances. As the world’s reserve currency, the US dollar is the foundation of a highly developed global payments system. Also the global commodity and trade finance markets – in which BNP has a vast operation – are mostly denominated in US dollars.
By Martin Arnold in London, Kara Scannell, Michael Mackenzie and Camilla Hall in New York
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