8th August 2012
Shares of Standard Chartered fell over 20% after the New York State Department of Financial Services accused the bank of laundering $250 billion with Iran over almost a decade.
The bank, one of the last to have remained untouched by recent banking scandals, was forced to deny the charges as the news swept through financial markets. In a statement the group said it "strongly rejects the position or the portrayal of facts".
Coming in the wake of the Libor scandal that rocked the City of London's credibility as a trusted financial centre, the latest revelations have caused some to speculate that Britain's capital has become a target for US regulators. The Guardian's Michael White wrote the Standard Chartered case highlighted a policy of "do as I say, not as I do" on the other side of the Atlantic:
"On a day like this when another British bank faces accusations of serious wrongdoing by a regulator in the United States, it's worth remembering that, for all its talk of level playing fields and open trading, the US has always practised a robust form of economic nationalism."
Certainly the spotlight of the regulators has been focussed on UK-domiciled banks in the recent past. On top of ongoing investigations into the rigging of interbank lending rates, last month the US Senate Permanent Subcommittee on Investigations released a report on British bank HSBC detailing alleged money laundering offences.
Yet even if this latest crackdown is "politically motivated", the reputational damage being inflicted on the banking industry may have a lasting effect.
The problem for banks is that confidence is an asymmetric game – notoriously hard to gain, but all too easy to lose. Neville White, Senior Socially Responsible Investment Analyst at Ecclesiastical, says the process of rebuilding trust in these institutions "could even be a generational issue".
Standard Chartered now faces a potentially critical decision. If it continues to deny these charges it will be gambling all on being able to outgun US regulators. The reputational damage of fighting and losing could be big, but the loss of their US banking license would be seismic.
Alternatively the bank could join the ranks of financial institutions like HSBC, which was quick to apologise for past sins and sacrifice some senior executives in an attempt to draw a line under the issue. As yet there are no signs that they wish to take this latter path.
For investors, this compounds the sector's run of bad news over recent months. Although falls in price can always represent a buying opportunity for those with strong stomachs, the outcome of the current standoff will no doubt be too uncertain for many.
Perhaps the only good news to be drawn from the debacle, however, is as Andrew Kahr suggests over on American Banker: "We'll know we've hit dead bottom when there's no more surprise or shock."
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