Last week U.S. regulators imposed a large fine on BNP Paribas, France’s largest bank. The nearly $9 billion settlement, in which the bank admitted its guilt, was not the largest in U.S. regulatory history; that title still goes to JPMorgan Chase. But it had a twist: part of the bank was banned from conducting U.S. dollar transactions for a year. It’s the first major international bank to be sanctioned in this way.
The activities that earned the ire of U.S. regulators were certainly dubious on moral grounds; one American regulator described the bank as “the de facto bank for the Sudanese government” during the war in Darfur. Other offenses included financial transactions with more regimes that were and are on the outs with the U.S. government — Cuba and Iran.
None was illegal under French or European law. But because of the dominance of the U.S. dollar in settling international transactions, it’s very difficult for international banks to avoid funds flowing through New York at some point during a complex transaction. And that exposes them to the scrutiny of U.S. regulators — who, as in this case, are often enforcing statutes designed to promote U.S. foreign policy.
[Hear: Martin Armstrong: A Rising Dollar Is Still the Greatest Threat to the U.S. Economy]
In this case, BNP Paribas went to great lengths to hide the trail, stripping identifying information from documents and shunting payments through a network of other banks. It is no secret to U.S. regulators that foreign banks chafe at regulations which serve U.S. foreign policy goals, and would love to avoid them altogether if they could — but the dominance of the U.S. dollar in international trade and financial markets makes such avoidance almost impossible.
Most International Trade Is Still Settled in Dollars (and Euros)
Date Source: SWIFT Watch
There’s a duopoly in the currency used to settle international financial transactions: the dollar and the euro dominate, with the British pound falling a distant third.
The Euro Can’t Challenge the Dollar…
In reality, the euro is still only a few years removed from the near-death experience it suffered during Europe’s financial crisis. It was just in 2012 that fears of a Greek default made it seem that without fiscal integration among Eurozone economies, the euro was built on a foundation of sand. Europe is stronger now, but such recent fears preclude the euro dethroning the U.S. dollar from its preeminent position.
… and Neither Can Any Other Currency…
The same is true for other currencies. The Chinese government may dream of a day when the renmenbi is truly an international currency, but with the Chinese financial system is still so closed, and Chinese financial regulations still in such an embryonic state, China is very far from that long-term goal. Other international grumblers about U.S. dollar dominance, such as Russia, are even further from any real clout in this regard.
… For Now
History shows us, however, that currencies don’t retain their dominant status forever. A hundred years ago, the British pound was the uncontested king of international trade. Its fate waned with the fate of the empire that gave it birth.
There are many geopolitical and macroeconomic reasons why the U.S. currency could ultimately slip from its dominance; we don’t think any of them is imminent. That being said, the BNP Paribas penalty sounded a note of caution for us. By being barred from U.S. dollar transactions, the bank is essentially being forced to conduct some greater part of its business elsewhere. France’s finance minister took particular umbrage, suggesting that more euro-based transactions would make European banks less beholden to U.S. regulators.
[Hear also: John Butler on Geopolitical Flare-ups, the Market, and Commodities]
In our opinion, while a non-dollar-dominant future is still remote, it is not a future that should be hastened by regulators. If U.S. officials insist on a regulatory regime that serves more and more as a tool for U.S. foreign policy, alienating large international banks and forcing them to conduct transactions in euros, pounds, or eventually, renmenbi, that could ultimately prove highly damaging for U.S. global economic and political strength — which is probably not the outcome that our public servants are looking for.
For more commentary or information on Guild Investment Management, please go to guildinvestment.com.
