Is the U.S. picking on our banks?
By Kathleen Brooks. The opinions expressed are her own.
Standard Chartered is the latest UK-based bank that seems to be getting it in the neck from our friends across the water. Firstly, there was Barclays and the Libor scandal, then there was HSBC which was fined for allowing drug-trafficked money from Mexico to go through its system and now there is Standard Chartered which is charged with “wilfully misleading” the New York Department of Financial Services and clearing $250 billion of Iranian transactions through its U.S. operation.
Two can be a coincidence, but three in as many months? Since the news on Standard Chartered broke there has been a torrent of investors, politicians and even some in the media who have queried whether this is just an attempt by Washington to discredit London and re-establish New York as the world’s financial centre.
There are three reasons why I don’t think this is so. Yes, the Standard Chartered case in particular, is sensationalist to say the least. The newly established New York Department of Financial Services and its head, Benjamin Lawsky, are trying to make a name for themselves on the world stage with this case. However, the recent attacks against some UK banks suggest that regulation is on the increase in the U.S. and financial services are in the firing line. This isn’t just going to affect UK banks, but also domestic bank and other foreign financial institutions with operations in the U.S. This is my first point. Not only do banks and other financial companies have to deal with the Dodd Frank legislation, they also have to deal with a whole new regulator based in New York, the beating heart of the U.S.’s financial sector.
Whether or not you agree that a bank should be able to do business with whoever they like (and not be dictated to by the U.S.), more regulation tends to mean higher costs, and in the current environment when it is hard enough to make money some banks may choose not to relocate from London or elsewhere and move to New York if they think the regulatory burden there is growing or going to cost them money in the future.
The second reason is that the U.S. hasn’t “discriminated” only against UK banks. Credit Suisse was hit by a suit from the U.S. Department of Justice in 2009 for illegally processing Iranian transactions through the U.S. to avoid detection by official agencies. Looking beyond the Iranian issue, UBS was targeted for trying to help wealthy Americans avoid paying taxes back in 2008. That led to a diplomatic spat, with Swiss Justice and Finance Ministry officials eventually flying into Washington to try and balance the U.S. Department of Justice’s request for the bank to disclose the details of 20,000 of its clients and the bank’s need to protect client confidentiality. Back then critics of the U.S.’s actions said the treatment of UBS could put off foreign investment into the U.S., which is a vital source of growth for the world’s largest economy. Foreign-Direct Investment totalled $2.4 trillion in 2009, it will be interesting to see if the trend in FDI changes due to the vigorous way the U.S. is enforcing some regulations.
My last reason why the UK is not being unfairly picked on by the U.S. authorities is that the Standard Chartered case is not about financial services at all, instead it’s about U.S. foreign policy. In the days after the Standard Chartered scandal there has been a slight murmur in some sections of the UK media that the U.S. is getting serious about sanctions on Iran and is treating them as an alternative to outright military action to stop Iran from developing a nuclear weapon. The prospect of launching an attack on Iran’s nuclear operations has a high chance of failure that could be politically costly in an election year. Instead the U.S. may have more success by acting as block between Tehran and its nuclear suppliers.
Thus, it is disingenuous to say that the U.S. is acting in a spiteful way towards the UK. More regulation is not going to attract business to New York and away from London, after all New York can’t compete with London’s time zone that is more convenient for doing business in the Middle East and in Asia. Standard Chartered is defiant that it did not break the U.S.’s rules on trade with Iran, but it faces an uphill battle to defend itself against the new financially focused U.S. foreign policy.