LONDON (Reuters Breakingviews) - Karsten Dybvad is putting on a brave face. Danske Bank’s new chairman recently insisted that the Copenhagen-based lender did not face an “existential crisis”, despite helping clients launder up to 200 billion euros between 2007 and 2015 via a Baltic subsidiary. In 2019 that will be put to the test. Over the past year U.S. lawmakers have ramped up regulatory pressure on foreign lenders that fall foul of anti-money laundering (AML) guidelines and sanctions violations. They have already pushed the closure of two European banks this year, Latvia’s ABLV and Malta’s Pilatus. The fact Danske acknowledges that around 46 billion euros in suspicious funds came from Russia raises the possibility some may have originated from sanctioned individuals, raising the stakes yet further. True, Denmark’s biggest bank by assets would represent a much larger target. Its chief executive and chairman have already stepped down. And certain characteristics complicate Uncle Sam’s scope to throw the book. Firstly, Danske has no U.S. banking licence. Secondly, its U.S. dollar transactions were cleared by correspondent banks, including Deutsche Bank. The obvious objection is: but Trump. The fact that the Nordic lender hardly registers in the United States gives Maxine Waters, Financial Services Committee chair of the House of Representatives, wide latitude to make an example of it. Using powers under “Section 311”, the U.S. Treasury can order American-licenced banks to sever their correspondent relationships, cutting off lenders from U.S. dollar funding. Deutsche Bank itself may not make a sufficient fall guy: correspondent banks are not required to perform substantial customer due diligence on the clients of their respondent institutions, according to guidance from the Paris-based Financial Action Task Force, an intergovernmental organisation which sets industry standards. With a robust common equity Tier 1 capital ratio of 16.4 percent, Danske shareholders arguably have a lot of protection. Assuming current risk-weighted assets of 738 billion Danish crowns ($113 billion), the bank could afford a financial hit of around $5.3 billion before breaching its regulatory minimum of 11.9 percent. That would be an unusually large fine for AML violations. But if Danske is judged to have skirted U.S. sanctions too, it would justify a stiffer than normal response. Dybvad may have spoken too soon.
- This is a Breakingviews prediction for 2019. To see more of our predictions, click reut.rs/2R6H5pG
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