THE last couple of weeks have been an emotional rollercoaster for staff at Standard Chartered, an international bank with a London base but almost entirely focused on the emerging markets. Last week, a New York regulator accused it of being a rogue institution, guilty of servicing Iranian clients in the 2000s when, according to US rules, it was illegal to do so. Standard Chartered firmly refutes these charges. In an odd quirk of fate, the announcement, which sent shares in Standard Chartered spiraling downwards, came just a few days after its CEO, a British businessman called Peter Sands, said during a meeting with analysts to announce interim results that it could be described as a ‘boring’ bank. How wrong he was.
Among the global banking community’s powerhouses, Standard Chartered is often viewed by investors as a special case because of its emerging markets business model. Around 90 percent of its clients come from the Middle East, Africa, and Asia. Its largest shareholder, funnily enough, is the government of Singapore. And despite its London HQ, it does not have any branches in the UK. When some 60 percent of the world’s output is still based in what are usually described as ‘developed’ markets (Europe, North America and Japan), Standard Chartered’s strategy is quite unusual.
Standard Chartered has though always focused on the world’s faster-growing markets, ever since it was founded in the nineteenth century, when the parts which would later merge to form today’s Standard Chartered were originally based in India and South Africa. One hundred and fifty years ago was, of course, when the influence of the British Empire was at its greatest. The economies of countries such as India and South Africa needed financial institutions to help fund their growth and British administrators turned to British banks. Opinion will always be divided on this: Banks such as Standard Chartered either helped in the development of African and Asian economies; or they played a role in subjugating the peoples of those territories. Certainly, Standard Chartered’s antecedents were involved in what many today would see as questionable activities. For example, the diamond fields at Kimberley were financed by what was then Standard Bank, while Chartered Bank made substantial profits from the Asian opium trade.
Despite what is often viewed as the racier emerging markets business model, Standard Chartered for many years lived up to its boring reputation. During the meltdown of the developed world’s financial system in 2008, it stood apart from the rest and proudly did not make use of any central bank liquidity schemes. It appeared to provide a perfect example of how to grow safely: In the years leading up to 2008, Standard Chartered almost doubled in size, but not in a risky way. By any stretch of the imagination, the bank’s management had done a good job. Some may call this boring, others called it safe. Investors liked what they saw and the share price rose steadily.
This is why the sudden spat with the New York regulator is so strange. Strange because it was so out of character with what investors had come to expect of Standard Chartered. Why would one of the world’s best run companies make such obvious errors and thereby fall foul of one of the world’s most assiduous regulators? No one wants to take on the US regulator: It is one of the golden rules of international finance that ‘you don’t fight the Fed’. You won’t win. The answer as to why this has all blown up is, in my view, more to do with politics and culture than laws and regulations.
The first clue was the wording used by the New York regulator. Calling Standard Chartered a ‘rogue’ institution was inflammatory, and as shareholders who know the bank well say, by no means is that an appropriate word to describe it. It looks like someone was trying to make a point. Secondly, other regulators in the US have privately questioned why their New York counterpart acted in the way it did by going public with the accusations and even publishing embarrassing e-mails written by Standard Chartered employees. The regulator in question is, interestingly, a recently formed institution officially called the New York State Department of Financial Services. Being the new kid on the block, perhaps it wanted to make its arrival known. Certainly, the Treasury and the Fed have sat up and taken note. Lastly, some commentators in London suspect this is all part of an American plot to undermine London as a banking center. I doubt this, personally, as it sounds a bit far-fetched. But the argument that a new regulator wanted to throw its weight around is compelling.
There is a wider point to make here though, about the authority of a regulator to dictate terms to a foreign bank doing business with other foreigners. To be clear, financial regulation is a prerequisite for stability and long term financial health. There is no question of that. But every country struggles with the interface between domestic and foreign regulation, and these recent events show that two of the most developed economies in the world have still not solved this problem.
Any businessman, banker or not, will tell you that trust is a basic ingredient of any commercial relationship. The New York regulator’s attack on Standard Chartered brought its integrity into question and customers from Riyadh to Hong Kong will be wondering whether they can trust the bank. I would argue that regularly assessing who you bank with is a sound and healthy business process. I do not think, however, that it is fair if a foreign regulator possibly with a special agenda affects the way you do that.
— John Burman is managing director of an investment advisory firm based in London.
