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Long arm of the Lawsky

12 May 2015 By George Hay

Barclays’ largest regulatory overhang looks to be entering its endgame. The UK bank is close to a deal with regulators for manipulating foreign exchange rates, Reuters reported on May 11. If forecasts of a 2 billion pound fine are accurate, investors’ main sentiment will be relief.

For Barclays, the big fear was that FX would be worse than Libor. Early settlement kept the fine for manipulating London Interbank Offered Rates to a relatively modest 290 million pounds ($455 million), but the reputational damage was horrendous.

For the currency market malpractice, Barclays took a different tack. In November, it stayed out of a group agreement with the U.S. Commodity Futures Trading Commission and the UK’s Financial Conduct Authority. Barclays wanted to settle simultaneously with New York’s Department of Financial Services, which did not regulate the banks that settled then. It can be costly to irritate the DFS and its aggressive head Benjamin Lawsky. In 2014, BNP Paribas had to pay $9 billion for sanctions abuses.

The French bank set a scary standard. It makes Barclays’ expected 2 billion pound ($3.1 billion) fine look almost modest, especially as 2.05 billion pounds have been provisioned over the last three quarters. True, Barclays will pay more than the $661 million, $634 million, $668 million and $662 million respectively paid in November by UBS, Royal Bank of Scotland, Citi and JPMorgan to the CFTC and FCA, but those banks have not yet settled with the U.S. Department of Justice and Federal Reserve. And for Barclays, the loss of a 30 percent early settlement discount is preferable to a BNP-style hit.

An admission of criminal guilt might further tarnish Barclays’ reputation. Yet while it may bring with it intrusive DFS monitors overseeing the bank’s activities, the economic consequences shouldn’t be too bad. Clients are unlikely to desert it and a group plea makes it practically impossible for American authorities to take away any banking licences.

The settlement is not yet agreed, and post-fine Barclays will still be in the middle of a major turnaround. But a clean break will take away one justification for the shares trading at a ratio to forecast book value that is 20 percent below domestic peers.

This article has been corrected to reflect that the fine paid by UBS to CFTC and FCA was $661 million; the earlier reference to $800 million included the amount paid to Swiss regulator FINMA.

 

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