A mega-fine of more than $10 billion by US authorities on France’s BNP Paribas bank could have damaging knock-on effects which are worrying European policymakers, but analysts said the financial system would not be destabilised.
The penalties, which could also include action crimping the bank’s ability to provide services in dollars, are reported to amount to 7.4 billion euros or more on charges that BNP Paribas broke US sanctions against Iran, Sudan and Cuba between 2002 and 2009.
French officials are hitting back, arguing that the size of the fine US authorities are reportedly seeking is disproportionate, and that it will have repercussions throughout the financial system and will affect lending to businesses and economic recovery.
“We are working to protect the stability of the French financial system, to protect its ability properly to finance the economy” of France and Europe, Finance Minister Michel Sapin said on Tuesday.
French President Francois Hollande took the issue up with US President Barack Obama two months ago, when according to his office Hollande “drew the attention of President Obama to the disproportionate nature of the sanctions being envisaged and of the related risks,” his office said.
Hollande said he would bring up the issue again when he meets Obama on Thursday night for dinner ahead of commemorations to mark the 75th anniversary of the D-Day landings that marked a turning point in World War II.
“We will have to wait to see the bill to gauge its impact on the bank. But, even if the fine is high, there is no question of the bank failing,” a banking analyst told AFP on condition of anonymity.
But “we are not in an affair of a systemic scale,” added the analyst.
BNP Paribas has so far set aside only $1.1 billion to cover the US fine, although it has noted previously that it expects the fine to be significantly higher.
Nevertheless, “BNP Paribas should be capable to absorb the fine from its earnings or capital,” said Alain Branchey, a senior director at Fitch Ratings in charge of financial institutions.
Fitch, like its competitor Moody’s, has warned that the primary risk to the bank is commercial, that the penalties could spark an exodus of clients.
And on Wednesday Standard & Poor’s put BNP Paribas’ ‘A+’ credit rating on watch for a downgrade, saying a US fine and sanctions could hit the bank’s “risk-adjusted capitalisation, and disrupt some of its banking activities.”
– Secondary effects –
But beyond the health of the bank, there exist the risks of secondary effects.
If the fine is large, it could hinder the ability of BNP Paribas to issue loans, which is dependent on the amount of the capital it holds.
This comes at a time when European policymakers are concerned that the difficulty companies are having in obtaining credit is hindering recovery, and have been urging banks to step up lending.
“What I am worried about is the unpredictable nature of penalties. That could reinforce the hesitancy of banks to lend, especially export finance,” said Bernard Cohen-Hadad, who heads the committee studies financing issues at the CGPME association of small and medium-sized French companies.
And it is not just BNP Paribas. Other European banks are also being probed by US authorities, and a possible domino effect that chills lending would undercut a feeble economic recovery in the eurozone.
While the European Central Bank has refused to comment, the Wall Street Journal reported that it was looking to see if whether banks were putting aside enough funds to cover their risks.
And the EU’s banking regulator has asked national regulators to include the impact of potential penalties on banks as part of a wider examination of eurozone banks that is being carried out, it added.
The banking analyst said US authorities are reviewing each bank separately and there were no links between cases.
“The treatment of one bank’s case does not foretell anything about the treatment another bank will receive,” said the analyst.
“The United States does not have any interest in destabilising the European financial system, as everything is linked, and it will increase risks on the US system.”