NEW YORK/WASHINGTON, June 6 New York's banking regulator has threatened to hit BNP Paribas where it hurts by telling it to halt its dollar payments business, sources say, which would almost certainly cause a client exodus.
France's biggest bank is trying to limit the damage as it works out a deal with U.S. authorities for allowing payments from countries such as Sudan, which Washington says is supporting terrorists, in breach of U.S. sanctions.
In an unprecedented move, Benjamin Lawsky, superintendent of New York's Department of Financial Services, has threatened to suspend the bank's dollar clearing business as one condition for not taking away its license to operate on Wall Street, people familiar with the talks said.
BNP is coming up with proposals for Lawsky on how to implement a ban, two of the people said. But halting any part of the business in which BNP shifts around hundreds of billions of dollars daily for clients could be detrimental.
"(It's) a very threatening thing to the New York branch and the bank. A client wants to have a bank that can clear," said one person familiar with the business.
BNP does not disclose how much money it makes from dollar clearing, but the business is crucial in many client relationships. The bank is one of only 50 participants in the CHIPS system, in which approximately $1.6 trillion is cleared each day.
The prospect of an untested sanction with a potentially damaging impact gives Lawsky - an often aggressive regulator - a powerful bargaining chip, some of the sources said.
A spokeswoman for BNP declined to comment, as did the New York banking regulator.
Besides a fine of as much as $10 billion, as well as a criminal conviction, the negotiations are mainly about an unprecedented suspension of the bank's authority to clear U.S. dollar transactions, the sources said.
Credit rating agency Standard & Poor's said it could lower the bank's credit rating by one notch as a result of the U.S. penalties, putting it on "CreditWatch Negative."
Big banks like BNP hold dollar accounts with the two main U.S. payment systems - CHIPS and FedWire - so that foreign companies can make payments in dollars to suppliers, for instance, or get paid by their American clients.
This is an essential business even for a bank like BNP, which mainly clears dollars on behalf of its own clients, and not primarily on behalf of other banks. CHIPS is owned by 23 large commercial banks and supervised by the Federal Reserve.
Switching off access to both systems if a complete ban is instituted would force BNP's clients to look for a different bank to clear dollars during the suspension.
If that were to happen, few clients would be likely to return to BNP once the sanctions were lifted, said one person, who is familiar with the dollar clearing business.
The French bank could ask another bank to take on its dollar clearing business temporarily as a so-called correspondent bank, but it was not clear whether authorities would allow that. Even if they would, clients could still run.
"To the extent you have to rely upon others to make those payments on your behalf, the bank is in jeopardy potentially of losing clients," said Gilbert Schwartz, a former Federal Reserve lawyer and now a partner at law firm Schwartz & Ballen.
"The timing of the payments becomes much more variable and the assurance that the payments are going to be made in a timely fashion becomes problematic," he said.
This is why the bank is looking at options such as sacrificing one business unit to keep the damage to the overall company limited, one source familiar with the negotiations said.
BNP may be lining up back-up providers, a person familiar with the clearing business said, and might have to go through its business line by line to see who the main clients are and list existing relationships with other banks.
Suspending the business would be the equivalent of the "wild, wild West," a source familiar with the negotiations said.
No major bank has ever been threatened with a suspension of its dollar clearing capability, sources familiar with the business said. But authorities want to send a message to make the bank feel the pain, without crippling it.
Last week, French banking regulator Edouard Fernandez-Bollo and Christian Noyer, the governor of the country's central bank, met with prosecutors and regulators in New York, according to people close to the negotiations. (Reporting by Douwe Miedema and Karen Freifeld; Editing by Dan Grebler)