x Abu Dhabi, UAESaturday 29 July 2017

Lenders around the globe feel the thick end of the lash

There seems to be no end to the pain for the world's banking system. On top of the euro-zone crisis and the ever widening Libor scandal, there now come serious allegations against HSBC that it supplied services to suspected drug dealers and terrorists, writes Frank Kane.

HSBC admitted that it failed to detect business by criminal elements in Mexico and the Middle East. Simon Dawson / Bloomberg News
HSBC admitted that it failed to detect business by criminal elements in Mexico and the Middle East. Simon Dawson / Bloomberg News

There seems to be no end to the pain for the world's banking system. On top of the euro-zone crisis and the ever widening Libor scandal, there now come serious allegations against HSBC that "the world's local bank" supplied services to suspected drug dealers and terrorists over a number of years.

And, while not connected to the grave allegations bankers face elsewhere, banks in the UAE also came in for criticism yesterday from the ratings agency Moody's Investors Service on the way it has been accounting for loans impaired as a result of the 2008 crisis.

If the Moody's criticisms are well-founded, it casts serious doubt on the strength of the UAE financial sector at the worst possible time.

The global trials of the former "masters of the universe" are unrelenting. It seems slightly ridiculous now to think of the atmosphere in 2010, when the investment bankers were once again making big profits and paying big bonuses while they queued up (at least in the United States) to hand back the multibillion-dollar government subsidies that had got them over the initial acute phase of the crisis.

Since then, nothing has gone right for them.

The prolonged euro-zone crisis has cast doubt on the balance sheets of all but the biggest financial institutions.

Whole swathes of the European banking sector are living on borrowed time, and on promises from the euro-zone authorities of further bailouts. Surely for some that assistance will come too late.

The knock-on effect of the euro disaster for the global industry would have been bad enough but now other western banks have conjured up some nasty scandals all of their own.

The misuse of the London interbank offered rate (Libor) has already claimed high-profile scalps at the top of Barclays but it should be noted the bank had the good sense to own up and cooperate at quite an early stage.

Other global banking giants are also under investigation over Libor-rigging, including the biggest names in the business: Citigroup, JPMorgan Chase, UBS, Deutsche Bank and HSBC, to name just some that have caught the eye of regulators from New York to Tokyo.

It could all end in criminal prosecutions and swingeing fines, reinforcing the impression there is something rotten at the heart of banking.

Meanwhile, just when you thought it couldn't get any worse, two of the names on that list have come up with individual scandals of their own.

JPMorgan has lost nearly US$6 billion (Dh22bn) from unauthorised trading in its London operations, an affair that has also attracted the attention of the FBI and the US justice department.

HSBC, which had managed to avoid the worst of the crisis fallout, has now admitted to American authorities that it failed to detect, and possibly even facilitated, business by criminal elements in Mexico and the Middle East involving money laundering and terrorism funding.

It's worth pointing out, too, a Middle East connection that fell outside the scope of the US senate investigations: HSBC is also one of four banks accused of failing to detect possible money laundering of huge sums in the course of the Al Gosaibi affair in Saudi Arabia, which is also being looked at by US investigators.

Set against this global ocean of banking scandal, the Moody's criticism of UAE banks may seem a wrap on the knuckles.

The ratings agency estimates the country's banks have been significantly underrating the impact of $46bn worth of problem loans from companies caught up in the collapse of 2008 to 2009.

Inconsistent accounting treatment of bad loans, according to Moody's, means there are still big write-offs yet to come from UAE banks, which would seriously affect their reputation for prudent capital management and have serious consequences for financial restructurings currently under way in the country.

Last week, three foreign lenders walked away from the most high-profile current restructuring, that of Dubai Group.

If the Moody's assessment is accurate, local banks will have only limited ability to take up the slack.

The banking system is being assailed on all sides and no region of the world is immune.

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