Enormous fines for banks' bad behaviour do not seem to bother investors much. Sometimes fines and restrictions send the shares up, as if they were relief rallies – relief that the bank under scrutiny did not lose its operating license or that the fine was not larger.
And so it was on Monday with BNP Paribas. France's biggest bank is reportedly set to pay a record fine of a much as $9-billion (U.S.) as part of a settlement with the United States for sanctions violations, chiefly involving Sudan. The settlement could see the bank pleading guilty to a criminal charge, plus a temporary ban on U.S. dollar transactions.
BNP shares did fall, but they were down by less than 1 per cent this morning in Paris trading, after the Wall Street Journal and other media reported details of the potential settlement. But by noon Paris time, that insignificant loss was erased. Over the year, BNP is up by a quarter, outpacing the Paris bourse's CAC 40 index.
How could a fine potentially equivalent to about 10 per cent of BNP's market value have such minor effect?
Investors seem relieved that BNP is highly unlikely to lose is licence to operate in the United States, though they may be underestimating the potential damage that could be done by the temporary ban on U.S. dollar transactions, should that restriction form part of the settlement. Fear that BNP could get shut down in the United States had triggered some rather frantic transatlantic diplomacy. French president François Hollande called the demands by the U.S. Justice Department and other American financial authorities "unfair" and "disproportionate," to the point they threatened the economic stability of the euro zone. In response, president Barack Obama said he does not "meddle" in U.S. prosecutions.
Judging by the rather benign market reaction, Mr. Hollande's fears were exaggerated. By one measure, the potential fine does not seem disproportionate.
The Wall Street Journal noted that U.S. investigators focused on about $30-billion of transactions that they believed were constructed to avoid detection by the authorities who enforce sanctions. If BNP's fine does come out to $9-billion, the penalty works out to 30 cents per dollar for every dollar of the alleged transaction. RBS, Standard Chartered and Credit Suisse paid far more, comparatively speaking, for their violations. RBS in 2013 settled a sanctions violations case for $100-million, which worked out to more than $3 for every dollar of the alleged violation.
Under American law, a bank can be force to pay up to double the amount of the allegedly illegal transaction. In BNP's case, that would have worked out to $60-billion, an amount that would have wrecked the bank. In that sense, a fine of $9-billion is the equivalent of a get-out-of-jail-free card.
The American investigators were looking at transactions conducted by BNP between 2002 and 2009 (Sudan's second civil war, which may have killed two million, ended in 2005). The transactions were chiefly related to oil trading. The U.S. investigators reportedly concluded that BNP used a network of banks outside of Sudan to make it appear the transactions had no relation to Sudan.
In a radio interview, French finance minister Michel Sapin said, "The French state, the government ... has played its role in telling the Americans: Be careful – by all means punish the past but don't punish the future.' " Judging from the market reaction, the BNP's past wasn't punished much at all.