Pay or we take it away

Jumbo fine could help BNP out of US morass

BNP Paribas may find that money is the least of its problems in the United States. The French bank's financial penalty - for allegedly violating the American sanctions regime on dollar transactions with some countries - could top $5 billion, according to Bloomberg. Yet, BNP Chief Executive Jean-Laurent Bonnafe could afford to pay more - if it helps the bank avoid some of the costlier consequences that could follow a guilty plea.

The best outcome for BNP would be a Credit Suisse-style settlement. The Swiss bank's punishment on May 19 for abetting tax evasion was a $2.8 billion fine and an admission of its own guilt. US regulators pledged not to remove the firm's banking licence. It's still too early to assess the full consequences, but counterparties should continue to trade, and Credit Suisse's US arm survive.
 
But, says Bloomberg citing a source, BNP's penalty could also entail a short-term ban on parts of its US business. Such a settlement would take the bank into uncharted territory. Even a "temporary" interruption of the bank's ability to transfer dollars cross-border carries the risk that clients may head elsewhere. BNP should do everything to resist that outcome.

Bonnafe's problem is twofold: US justice officials are out to prove that banks on their turf aren't "too big to jail;" and BNP is perceived to have dragged its feet during the probe, compared to, say, Standard Chartered which settled over similar charges in 2012. BNP Chairman Baudouin Prot, who was chief executive when the alleged wrongdoing occurred, should face calls to resign if the French bank ultimately accepts a guilty plea. A possibility would be to offer his resignation preemptively, in an attempt to sweeten the blow to the bank. But that may unsettle investors without achieving much: Ben Lawsky, head of New York's Department of Financial Services, is seeking a big fine rather than a top-level departure, while US Attorney General Eric Holder mostly wants the bank to admit guilt. Once a deal is struck, BNP would ideally want to demonstrate closure to its customers, shareholders and the markets.

BNP can afford to pay up if US authorities in return agreed to leave its business in the country intact. Even a $6.5 billion fine (30 per cent more than the maximum currently touted) would leave the bank's core Tier 1 capital ratio at an acceptable 10 per cent under Basel III, according to Breakingviews' calculations.

The downside would be BNP's dividend. If the bank sticks to its 45 per cent payout ratio, the 2014 dividend will be less than half the Euro 1.50 a share paid last year. Investors won't be amused, but a huge one-off fine makes more sense than risking BNP's business. If Bonnafe is offered the chance, he should take it.