There are many countries which do not much like the central role of the US dollar. But while they generally (and grudgingly) agree that there is not much to be done about it for now, a punishment recently meted out by US financial regulators against BNP Paribas (BNPP) has incensed European leaders into calling for the dollar, and its role in the application of bank fines, to be an item of discussion at the G20 Brisbane Summit. This is a tricky issue, and whether it has enough momentum among the entire G20 to make it to Brisbane is debatable, but if it does, it will be divisive.
The cause of the most recent spat relates to penalties imposed on BNPP, a French multinational and the world's fourth largest bank, with some US$1.8 trillion of assets on its books. At first glance, it is hard to see why the French Government would be interested in coming to the defence of BNPP. In June it became the first ever global bank to submit a guilty plea to the US Department of Justice for engaging in 'large-scale, systematic violations of U.S. economic sanctions'. As the DoJ's press release explains, over a period of eight years, BNPP 'unlawfully open(ed) the doors of the U.S. financial market to...Sudan, Iran, and Cuba...as well as to individuals and groups specifically identified and designated by the U.S. government as being subject to sanctions'.
The DoJ placed the amount of money illegally shifted through the US financial system over a period of eight years at around $8.8 billion. BNPP did not have much of a leg to stand on in its defence either, with the revelation that one senior compliance officer wrote to his colleagues in 2007 that their Sudanese clients 'play a pivotal role in the support of the Sudanese government which...has hosted Osama Bin Laden and refuses the United Nations intervention in Darfur'. And so, BNPP earned itself a US$8.9 billion fine, was forced to fire twelve employees, and has been barred from directly clearing dollar transactions through its oil-and-gas-trade-finance departments based in key financial centres throughout the world.
Although the US$9 billion fine is one of the DoJ's largest ever, it is the last of these three punishments that has particularly raised the ire of not only the French Government but also its German, British and Italian counterparts. [fold]
While the French have accepted BNPP's guilt, they have taken issue with what they see as America's exploitation of the central role of the US dollar by blacklisting BNPP's oil-and-gas divisions from USD clearing houses. Of the judgement, Francois Hollande pointedly stated 'I am conscious of the risks of totally disproportionate, unfair sanctions, that could have economic and financial consequences for the whole of the euro zone...there are other banks that could also be targeted, creating a risk and a doubt over the solidity of the European financial system'. Indeed, Societe Generale, Credit Agricole and Deutsche Bank are all believed to be in line for DoJ investigation on similar sanction-breaking grounds.
In essence, the European leaders are concerned about the precedent that might be set by the DoJ's ruling. Global banks rely upon access to USD clearing houses to complete international payments on behalf of their clients. If an Indian importer wants to buy goods from Russia, it is easier for both parties to complete the transaction in US dollars than rupees or rubles. Accordingly, of the US$5 trillion that is traded every day on foreign exchange markets, the US dollar features in 87% of transactions.
While the 'exorbitant privilege' US companies receive from rarely having to engage in foreign exchange swaps is generally exaggerated, this new DoJ ruling has opened up a new can of worms about the US dollar. BNPP broke US law, sure, but it did not break any laws in France or Europe, and the USD transactions it would otherwise now be conducting through its newly black-listed oil and gas divisions no longer involve sanctioned countries or companies (assuming BNPP sticks to its word). Whatever the merits of the scale of the fine (which the French also dispute), it is entirely another to impose penalties that actually impede banks from engaging in market-making activity.
As Michael Spence wrote recently: 'The cross-border flows of goods, information, people, and capital that are (the global economy's) lifeblood rely on a threshold level of safety, stability, and predictability.' Yet any unintended consequences from denying the world's largest banks access to USD clearing houses would constitute a negative spillover, and could run foul of the G20's commitment at Pittsburgh to promote a more integrated global financial system. BNPP is clearly guilty of a crime, but doubts around the nature of the response, and divergence between EU and US financial regulators on how to impose bank fines, means the G20 might now be forced into juggling one more item at Brisbane.