From accusations of interest rate manipulation, to charges of illegally hiding transactions with Iran, the spotlight is well and truly on the banking industry. Institutions appear to have been operating right at the edge of what’s reasonable where the line between right and wrong can become blurred. Crucially, it highlights how issues can occur outside ‘investment banking’, and therefore attempts to classify one part of the industry as bad and one part good is flawed. Nevertheless, public opinion is against the banks and it’s up to them to earn back respect. We’re entering a tough new paradigm of tighter regulation, greater demands for transparency and less incentive to lend. Vindication, conviction and takeovers are all possible but one thing we can be more certain of, the regulator is watching closely and further turmoil is likely.
Working On The Border Between What’s Right And Wrong
Standard Chartered has been accused of illegally hiding transactions with Iran. The aggressive attack of money laundering charges came as a shock to investors, who punished the bank’s shares with a sell-off of more than 16%, wiping $6bn from its market value. So what can we take away from this latest scandal? Is this a one-off or an indication of an industry wide shortfall?
The complication seems to arise from the claim that the bank was already working openly with US agencies and 99.9% of this business complied with legislation.
However therein lies the shortfall, the opaqueness. Investors maintain these discussions should have been better highlighted in their last annual results. The confusion surrounding whether they did or did not do wrong may signal that they could have been operating right at the edge of what’s reasonable.
With a focus on profits and market share, the line between right and wrong can become blurred. Indeed previous fines have merely moved not mitigated risk. As other banks closed their doors on these types of transactions, Standard Chartered, it has been argued, may have instead welcomed the new business. Changing this culture may prove prudent.
Issues Aren’t Black & White But Murkier ‘Shades Of Grey’
An interesting aspect of this investigation is the type of bank business it is targeting. This is not an investment banking scandal. Instead commercial banking dealings are under attack. Could this have been avoided by having investment banking and retail banking separated? Arguably no. It is not as binary as one part good, one part bad and not all banks overall are the same as each other either.
Indeed, investment banking can help subsidise the cost for running other banking operations and although transgressions may have been made, not all who work in the industry can be tarred with the same brush.
A New Paradigm
There is huge political capital in ‘bank bashing’, finding a common ‘enemy’ to engender sympathy and support. But the pressure is on the banks to earn back trust. Likewise, whilst banks have to get used to tougher regulation, we must accept that fines could erode their reserves and reduce their incentive to lend. A tougher ‘new paradigm’. Furthermore, whilst financial institutions must accept greater demand for transparency, both banks and regulators must improve the way they communicate with the public to avoid unnecessary panic.
Vindication? Conviction? Takeover? Next Wednesday we’ll hear Standard Charter’s response to these accusations. Analysts admit that at this stage it’s hard to know which way the case will go. An unintended consequence could be a potential takeover, with JP Morgan already mentioned as a possible buyer (source: John Kirk at Redburn). As some hope to split banks up so they are easier to control, this would not be a welcomed outcome. Meanwhile the LIBOR scandal continues as additional institutions are investigated. Further turmoil is likely. And the regulator is watching…