BANK REGULATORY – Lessons for Standard Chartered Bank and for others

Rahm Emanuel, the former Chief of Staff to President Obama, is famous for many things during his tenure in the White House.  One of them is his unforgettable saying “you never want a serious crisis to go to waste”.  (http://www.youtube.com/watch?v=1yeA_kHHLow ).  Mr. Emanuel went on to explain that a crisis allows an institution to do things that it could not do otherwise.  It is a mantra that should be adopted by any institution that has encountered, endured and overcome a serious regulatory probe. 

Standard Chartered Bank has had quite a week commencing with the Order of the New York State banking regulator, the publicity of the sanctions being sought by that regulator, its being labelled a “rogue institution” by Mr. Lawsky (http://business.financialpost.com/2012/08/07/iran-accusations-wipe-us15-billion-off-standard-chartered-shares/ ) and yesterday’s settlement.

What can and should be learned by Standard Chartered Bank and others?

·         Sensitivity – this may be an odd concept for an institution; however the members of management responsible for dealing with Mr. Lawsky’s office needed to be attuned to the fact that their negotiations pre-Order were not addressing the regulator’s timetable and issues.  SCB said it was taken by surprise by the issuance of the Order and by the fact that the New York banking regulator acted alone.  Someone on their team must not have been listening.

·         Reputational risk – nothing is more important than the reputation of an institution especially at a time when so many other financial institutions are being taken out to the woodshed.  Great results and earnings are no balm for shareholders who hear in the press that their holdings have lost more than 15% in a day due to a regulatory probe.  Even a swift settlement will not completely cleanse the name of the institution  and restore investor confidence. 

·         Management moved too slowly to solve it – Once the Order was made public, the matter was solved in four days.  Only people familiar with the earlier negotiations can comment on whether SCB had shown any movement prior to that time.  The moral for a regulator who is meeting with intransigence seems to be that the issuance of an Order and making public statements brings an institution to heal and causes the CEO to return from his/her holidays. 

·         Tone matters – the first salvo from SCB post-Order was an aggressive defence of itself.  (http://www.business-standard.com/india/news/standard-chartered-refutes-us-chargesiran-deals/181822/on )  While the organization is entitled to do so, one wonders whether that helped their settlement position or whether they had to tell the regulator privately that those comments were for the press and that they were truly interested in making a settlement.  Is this a prudent stance or one that merely muddies the waters?

·         Who is the team going forward? – the New York banking regulator should take some solace that SCB is taking the matter seriously if SCB selects and puts a strong and well-known team of subject matter experts in place to work through the long list of requirements set out in the Joint Written Agreement.  This will go a long way to re-building the regulatory relations between the SCB and its regulator.  It will be a strong signal that SCB truly takes the matter seriously. 

So one lesson for handling these regulatory complaints in the future might be: “listen, be responsive, be aware of the downside and speak to them as you would wish to be spoken to.”

Undoubtedly SCB hopes not to be front page news after Friday.