Wednesday, 8 August 2012

Bank battle: New York vs London

Yesterday's news that US regulators are investigating yet another British bank for illegal activity has provoked a roar of indignation and incredulity from the City of London. Today a member of the British parliament accused the US government of launching the string of investigations in order to weaken the British banking sector.

“I think it's a concerted effort that's been organised at the top of the US government,” fumed Labour MP John Mann to British media. “I think this is Washington trying to win a commercial battle to have trading from London shifted to New York.”

This week the New York State regulator charged the British bank Standard Chartered of money laundering $250 billion in funds aimed for Iran. The US has a trade embargo against Iran, and under US law all companies publicly traded in the US, including Standard Chartered, must comply. The money laundering went on for nearly a decade, the regulator alleges.

The announcement comes just weeks after the US Congress held highly confrontational hearings of British-based HSBC executives over allegations that HSBC was laundering money for Mexican drug cartels. Earlier this summer London-based Barclays bank was discovered to have been manipulating libor rates – the rates at which banks lend to each other.

At a congressional hearing in June there was a fair amount of Brit—bashing going on. "It seems to be that every big trading disaster happens in London," exclaimed an exasperated Carolyn Maloney, congresswoman from New York, to the panel.

But now British politicians are hitting back, accusing US politicians and regulators of over publicising the investigations and specifically targeting British banks in order to distract from the problems on Wall Street. London Mayor Boris Johnson warned US regulators against a "self-interested attack on London's status as the pre-eminent financial centre.”

It is the language of the charges against Standard Chartered that seems to have gotten the Brits’ knickers in a particularly gnarly twist. The US alleges that Standard Chartered’s actions have left the US "vulnerable to terrorists, weapon dealers, drug kings and corrupt regimes.”

“You F**king Americans”

The griping is likely about more than just a suspicion that the US is using its regulatory power to cripple foreign competitors. There is also a feeling in London and other financial capitals that following the US banking scandals of 2008, America has no business continuing to operate as the ‘world’s financial regulator’.

This is reflected in some embarrassing e-mail exchanges released by the New York regulator. According to documents released, a US executive at the bank sent an email to a London executive warning that the dealings with Iran risked exposing the bank to reputational and legal damage. The British Standard Chartered exec replied: “You f---ing Americans. Who are you to tell us, the rest of the world, that we're not going to deal with Iranians."

Of course the executive should know full well who they are to tell them that – they are the world's dominant financial power through which global banking must be conducted, that's who.

Because of US law, particularly the Foreign Corrupt Practices Act, all companies who are publicly traded in the US must follow US law globally, even on activities that have nothing to do with the US. No other country has such requirements for foreign companies trading on their markets. Thus, the US is the defacto world financial regulator.

For years people have complained that this is an extra-territorial application of domestic law, which violates the general principle of international law. But of course when it comes to international law, US law is always the exception. Those British banks who don’t like the US requirements are free to have no involvement with the United States. But good luck to them if they want to become a global player without routing through New York.

Standard Chartered may be about to learn this the hard way. The bank’s shares dropped by 20% yesterday following news of the charges, the worst fall in decades. Now the bank is waiting for a 15 August meeting with the regulator at which it will defend itself. But the regulator could decide next week to ban the bank from US trading. This would dramatically damage Standard Chartered, one of the UK’s top five banks. It could be a blow from which the bank can not recover.

The frustration felt by many British politicians and City of London bankers is that no matter how frustrated they are with the US regulators, they have to follow their rules. And when a situation like this develops where they feel that enforcement of the rules is being manipulated for political or competitive gain, they have little recourse. London may be a global financial capital, but Britain as a country has little power to resist the American giant.

There have been attempts by the EU to establish a more unified – and therefore more powerful – European banking system. But these attempts have been fiercely resisted by British bankers, fearful of losing regulatory powers to Brussels and Frankfurt. Proponents of such regulatory unification argue that the combined power of Europe’s capitals would be enough to stare down the US dominance – something the UK alone is unable to do.

So far this argument has not been able to sway British bankers. And despite this newest round of anti-American grumbling, it is unlikely to sway them still. Any frustration with the US regulatory system is dwarfed by the city’s deep-seated suspicion of Brussels.

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