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How to Shake Down a Bank for Fun and Profit: Street Whispers

The bulk of the DFS's budget for its bank regulatory activities comes from examination fees charged to state-chartered banks and other financial entities, and to state-licensed New York branches of foreign banks, including Standard Chartered of London.

According to a 2006 study by the Federal Deposit Insurance Corp., the New York State Banking Department lost "approximately 30%" of its assessment revenue in 2004, when JPMorgan Chase Bank -- the main banking subsidiary of JPMorgan Chase (JPM - Get Report) -- switched to a national charter to become JPMorgan Chase Bank NA, and HSBC (HBC) unit HSBC Bank USA also switched to a national charter.

The state could well be overstepping its bounds in handing down its own order, without first seeking a settlement that also includes the FDIC, the Federal Reserve and the legal authorities.

Annemarie McAvoy, adjunct professor of law at Fordham University School of Law and a former federal prosecutor, says "the point of these charges is to set the bank on its heels, making it very difficult to fight back," and with Standard Chartered's share price falling 16% on Tuesday, "customers are asking if you are trustworthy and if you will be able to survive, and they begin to flee."

The bad publicity and market disruption "puts you in a much better position to impose a big fine," according to McAvoy. "States have very few ways to raise money right now, other than hefty fines," she said, adding that "this could be a billion-dollar fine ... It's a real money maker."

While a $1 billion fine seems astronomical, the DFS says that Standard Chartered funneled "at least $250 billion" in illegal transactions through the New York Office, "reaping SCB hundreds of millions of dollars in fees," and huge fines have been paid to the state before.

Way back in 1996, Daiwa Bank pleaded guilty to criminal charges of covering up $1.1 billion in trading losses, agreeing to pay the state a $340 million fine.


-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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