British Bank's Value Tanks After Laundering Charges

At a time when European banks already are struggling, three huge British banks recently have been charged with engaging in bad practices or flat-out corruption. Barclay's had its LIBOR scandal, HSBC had its drug money scandal and now Standard Bank is being accused of money laundering. What's going on in London and what are the potential impacts on the U.S. economy?

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Shares of the British bank Standard Chartered have lost almost a quarter of their value. That's after New York regulators said yesterday that the bank illegally transferred $250 billion in and out of the U.S. and that it did so on behalf of Iranian companies and banks. Those transfers violate an ongoing U.S. economic embargo. The bank strongly denies the charges. As NPR's Jim Zarroli reports, the Standard Chartered affair is just the latest in a string of recent scandals to emerge from the British banking sector.

JIM ZARROLI, BYLINE: American banks have seen their share of scandals in recent years, but the United Kingdom has had it even worse.

MERVIN KING: What I hope is that everyone, everyone, now understands that something went very wrong with the U.K. banking industry. And we need to put it right.

ZARROLI: That was Mervin King, governor of the Bank of England speaking recently. Like the United States, Britain saw some of its most important banks falter during the 2008 financial crisis and it too had to rescue them. But Karen Shaw Petrou of the private company Federal Financial Analytics says their troubles have gone a lot further than regulators first suspected.

KAREN SHAW PETROU: When they took over the bank and started looking beneath the covers, they found significant failings that shocked them.

CORNISH: This summer, the Senate Finance Committee accused the British banking giant HSBC of laundering money for Mexican drug cartels. Then came the admission that another British bank, Barclays, had illegally manipulated a key interest rate that's used as a benchmark for loans all over the world. Now comes the Standard Charter investigation. Gregory Turnbull Schwartz, an investment manager at Kames Capital, says scandals like these occur in part because the banks have grown so large and complex.

GREGORY TURNBULL SCHWARTZ: When you have on top of that incentive structures that do tend to be heavily bonus-oriented, you do really get people trying to, you know, push the limit.

ZARROLI: But Karen Shaw Petrou says the problems go much deeper than that. Over the past few decades, she says, Britain adopted a light-touch approach to bank regulation.

PETROU: It really came from the mood at the time with which the U.S. was susceptible, which is that markets know best. They will discipline each other more effectively than a regulator ever could.

ZARROLI: In the United States, banks have to follow specific rules about what kinds of activities they can participate in. And though the system doesn't always succeed, they get audited to see whether they're complying. In the United Kingdom, banks were given general guidelines for behavior. And in the clubby world of British finance, compliance was taken for granted. Deregulation caused British finance to explode in size. Petrou says the series of scandals that has emerged since then has drastically changed the relationship between British regulators and the banks.

PETROU: It blew it apart. And the regulators feel not just that, as we hear in the United States, quote, "mistakes were made" but also that they were personally betrayed.

ZARROLI: Recently, Britain overhauled its regulatory system, abolishing its longtime regulator, the Financial Services Authority, and giving a much broader role to the Bank of England. James Cox of Duke University Law School says U.K. banks now face stricter scrutiny than they did before.

JAMES COX: In the past, it was kind of a gentle nudging culture. Now, it's more line drawing in the sand and saying you better not cross over this. And in some instances, don't get close to the line.

ZARROLI: Banks also face stricter capital requirements than they once did. How much of a difference this will make in the future is unclear. Bank scandals occurred in a lot of countries, some of which had much tougher regulation than the U.K. But the recent revelations have thrust the venerable British banking system into the headlines and a lot of people want to understand what happened. Jim Zarroli, NPR News, New York.

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