Fallout from Standard Chartered PLC's alleged transactions with Iran could quickly become a liability to top U.S. custody banks, Bernstein Research analyst Brad Hintz said on Tuesday.
Hintz said British-based Standard Chartered is an important agent bank for U.S. custody banks such as Bank of New York Mellon Corp , JPMorgan Chase Co Inc and State Street Corp . Standard Chartered provides the banks important access to central securities depositories in mainland Asia and Africa.
Hintz, in a research note, said the U.S. custody banks rely on extensive sub-custodian networks to pass on economies of scale and scope to big institutional clients.
"If a sub-custodian were to be found guilty of an internal conspiracy to hide prohibited transactions from U.S. regulators, U.S. global custodial banks exposed to that sub-custodian may fall under increased scrutiny from their fiduciary clients," Hintz said in his note. "Among the more severe consequences, exposure to Standard Chartered could result in reputational damage and potentially negatively impact the ability of a U.S. global custodian to win new mandates from public funds and other fiduciary clients."
The New York State Department of Financial Services on Monday said Standard Chartered "schemed" with the Iranian government, which is subject to U.S. sanctions over its nuclear program, and hid 60,000 secret transactions to generate hundreds of millions of dollars in fees over nearly 10 years. The regulator has threatened to tear up Standard Chartered's state banking license for allegedly hiding $250 billion in transactions tied to Iran.
Hintz said JPMorgan and State Street each have extensive operating reliance on Standard Chartered as a sub-custodian in a number of markets, such as India, Hong Kong, Thailand, Ghana and Zambia. BNY Mellon has exposure in Bangladesh and Taiwan, Hintz said.
JPMorgan declined to comment. BNY Mellon and State Street were not immediately available to comment.