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 concerned.”
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 supplier.
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 home.
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.