New York's Department for Financial Services' recent intervention in Standard Chartered's affairs in Iran were intended to show the city's might as a financial centre. However, this action may well have the opposite effect to that which was desired, and play directly into China's hands.

In April 2010, our cover story 'America’s legal reach' highlighted rising concerns about the willingness of US lawmakers to impose their own regulatory norms far beyond their borders. A lawyer from US firm Sullivan & Cromwell warned that, while foreign banks were unlikely to stage a rush for the exits, they might undertake a gradual strategic reappraisal of their presence in New York if the regulatory environment became too hostile.

Sullivan & Cromwell has since defended a growing number of foreign bank subsidiaries under attack from the rapidly multiplying US regulatory bodies. Last month, another was added to the list, when Standard Chartered faced a broadside from the New York Department for Financial Services (DFS). The DFS was created in 2011, just in case banks did not receive enough attention already from the Department of Justice, the Treasury’s Office for Foreign Assets Control, the Federal Reserve, the Office of the Comptroller of the Currency, the New York Attorney General, and the District Attorney of Manhattan, to name but a few. Standard Chartered had apparently been in touch with most of these bodies regarding its affairs in Iran for more than two years prior to the heavy-handed intervention by DFS superintendent Benjamin Lawsky. The bank’s decision to settle by paying a fine of $340m does not detract from the cumbersome and inappropriate nature of the process, but could the ultimate victim be New York rather than Standard Chartered?

A vote winner?

There has been considerable consternation about the affair. Little wonder that Bank of England governor Mervyn King openly criticised the apparent lack of supervisory coordination in the US. But then it is questionable whether coordinated supervision is really the aim of these agencies. Instead, the DFS is the latest in a long line of bodies to provide a vehicle for political ambition. Demonising foreign banks looks like a cheap and painless vote-winner, especially in an election year.

That, at least, is the sentiment of several UK politicians who alleged a deliberate attempt to undermine London’s status as a financial centre for the benefit of New York. Indeed, the DFS website clearly states that among Mr Lawsky’s key objectives for the DFS are "enhancing New York’s status as the world’s financial centre”, which sounds like a potential conflict of interest for a supposedly neutral regulator.

His choice of target is also contentious. Rigging Libor undoubtedly jeopardised many banking clients, while laundering Mexican drug money is illegal in just about any jurisdiction. But the Iran Sanctions Act is a diplomatic more than a regulatory tool, and one that puts the US out on a limb. No other country has forbidden so many types of activity in Iran, nor identified so many companies as prohibited counterparties. Nor has any other country sought to push its application so vigorously onto foreign-headquartered banks.

If Standard Chartered were to move part of its dollar transaction banking business to Hong Kong, the Chinese authorities would surely welcome this as a boost to their own ambitions

And of all banks, Standard Chartered came through the financial crisis with both its reputation and its results relatively intact. Moreover, its client base is almost entirely in Asia, the Middle East and Africa. In short, its New York operations matter mainly because this is where the bank handles its global dollar transaction banking business.

US under threat

But the Iran sanctions regime dates from an era when the US was the unchallenged global financial market superpower. Those days are gone. Four of the world’s top 10 banks are Chinese – the same as the number of US banks in the top 10, only much faster growing. China’s financial system is awash with trillions of export-generated dollars. And Hong Kong already has its own global dollar payments platform, the Clearing House Automated Transfer System (Chats). This handled transactions worth $2300bn in the first half of 2012, a rate that has more than doubled in just three years.

It is still a fraction of the volumes passing through New York, but if a major global bank such as Standard Chartered were to move part of its dollar transaction banking business to Hong Kong, the Chinese authorities would surely welcome this as a boost to their own ambitions to build an international financial centre. And other banks might well follow. HSBC is already committed to the project, as the clearing bank for Chats dollar payments.

There are signs that a strategic reappraisal is already beginning. A number of European banks have been quietly reorganising their US subsidiaries, and our data shows that capital levels have been falling, suggesting that they expect to handle smaller volumes of business in future years. Ratings agency Standard & Poor’s recently downgraded a Deutsche Bank transaction banking subsidiary in the US on the basis that it was no longer “core” to the group. As the balance of economic power shifts towards Asia, New York is increasingly engaged in a fight to maintain its status as a global financial centre. It would be a bitter irony if the New York DFS ended up decisively weakening the city’s position in that battle.

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