Midnight in Paris

BNP's reputation hit harder than its finances

BNP Paribas's reputation has been hit harder than its finances. The immediate financial impact of the French bank's long-awaited settlement with US authorities for sanctions violations looks, by the weird logic of what it could have been, just about bearable. BNP's management has little to cheer about, though.

The financial penalty, unveiled after US markets closed on June 30, can be seen as relatively good news. An $8.8 billion fine is over three times the previous biggest punishment levied on a foreign bank by a US regulator, on Credit Suisse a month ago. But judging by some previous reports, BNP could have paid well over $10 billion.

Factoring in net income likely to be generated by BNP by the end of this year, and $1.1 billion already provisioned against the US fine, the bank could still muster a 10.1 per cent core Tier-I ratio under Basel III rules, even if it pays a dividend. If it scraps dividends altogether, the ratio would jump to 10.5 per cent. That's still higher than where peers like Societe Generale are now.

BNP's agony isn't over yet. Its main concern was always the insistence of US authorities on banning its dollar-clearing activities in New York. For any sizable global lender, the role of the dollar as currency of choice in global trade makes that activity essential. Hearteningly for BNP top brass, the year-long ban will only apply to "certain transactions" - mostly oil and gas financing. It will also only start on January 1, which will give them a few months to tap up friendly domestic dollar-clearers such as Credit Agricole to tide it over during the period of the ban.

On the debit side, the ban on dollar clearing will hurt in any case: it's a bread-and-butter service through which wholesale banks cross-sell higher-margin business. BNP also entered two guilty pleas in New York state, for falsifying records and conspiracy. Although Credit Suisse hasn't shown obvious signs of distress from its own recent guilty plea on criminal charges, it's much too early to assess what the long-term consequences will be. Any sign of weakness - even the perception of it - could lead clients to scarper.

BNP has long prided itself on being a sober and conservative institution. Judging by the opening section of its US settlement, that needs a reappraisal. American regulators may have succumbed to fine inflation, but the wrongdoing is BNP's fault. Beyond the immediate settlement, it needs to do more than just send a few heads rolling.