BNP Paribas: $10bn cloud

They're getting off lightly. Guesses for how much BNP Paribas might have to pay US authorities to settle charges of violating sanctions jumped from $5bn to $10bn this week. But the market wiped just $4bn off its market capitalisation. And reputational damage is hardly a worry - customers looking for a pristine global bank will look for a long, long time.

Now put the champagne away. This unresolved affair is troubling in many ways. First, $10bn is a huge sum for anyone. In context: BNP Paribas generated net profits of €4.8bn in 2013. A $10bn fine would wipe 120 basis points off the bank's common equity tier one ratio, according to Berenberg, leaving it below BNP's 10 per cent target and at the bottom end of its peer group. A fine at that level would also threaten an expected €1.95 dividend for 2014 (the shares yield 4 per cent).

In response, BNP could either raise more equity or (more likely) hold back its lending. But even a $10bn fine would be a known quantity. Far more serious, and far less certain, is the impact of possible restrictions on its business activities. The US may ban BNP Paribas from US dollar clearing for a time. Dollar clearing is an important part of transaction banking, but not a huge fee earner. It could be outsourced to another bank - at a cost. But the consequences run well beyond expense. Imagine a supermarket is caught selling sour milk, and is banned from selling it for a time. Milk is low-margin, but its absence forces customers to other stores, where they might buy the meat, too.

But there is a deeper concern about regulatory uncertainty. BNP Paribas made a $1.1bn provision for the fine in February. Back then, a $10bn settlement was clearly not on the agenda. So penalty inflation is not just high, it is unpredictable. Conspiracy theorists will suggest that this is part of a plan on the part of US authorities to hobble European competition. Disastrous, if true. But even if the penalties are merely unpredictable, rather than vindictive, they are a threat to the industry. Severe punishments may be justified. But they should at least be predictable.

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