Why London bankers are shrugging off Standard Chartered threat

August 8, 2012, 6:23 PM UTC

FORTUNE — Standard Chartered may be down, but it is certainly not out. While it appears that the bank is in very hot water with state regulators over its business dealings with the Islamic Republic of Iran, its story is far from unique. Many major international banks have done business with Iran in violation of U.S. sanctions – with most paying hefty fines for doing so.

That may be why senior bankers and portfolio managers in the City of London don’t seem too worried about the beating Standard Chartered’s stock has taken in the past few days after New York State regulators threw the book at the bank on Monday. Talk that the bank could lose its ability to work and trade in the state is being dismissed as simply “loony.”

Meanwhile, money managers in the City believe that the bank’s credit looks solid and its equity value is now cheap compared to its peers – even ones that have their plates full with their own scandals ranging from the Libor fixing to insider trading. Nevertheless, the company’s stock and bonds are expected to trade at a discount to its peers until the bank either resolves the issue or sets aside the cash to deal with it.

It wasn’t too long ago that the big European banks actually flaunted their close relationship with entities connected to Iran. Bankers would take regular trips to Dubai and Tehran to court the mullahs and their apparatchiks to secure a piece of the nation’s business. As a major oil exporter, Iran engaged in a number of big dollar-denominated transactions and needed a way to recycle that cash through the international banking system. The margins in that business were high while the risks were relatively low – exactly what banks like to hear.

MORE: Business’s real problem: Uncertainty

But it wasn’t all risk free for the banks. In 2004, UBS was singled out by U.S. government officials for engaging in transactions over a seven-year period with Iran and other “rogue” nations, including Cuba, Libya and Yugoslavia — all in violation of U.S. sanctions. The bank settled quickly with U.S. regulators, paying $100 million to the US Treasury as penance. While it was never disclosed how much UBS gained from its dealing with the four nations, it was generally viewed to be a fraction of the fine handed down by the U.S. government. Even with the fine UBS continued to do business in Iran, not pulling out officially until late 2006.

For a while, that was no matter for Iran, which still had plenty of European banks willing to help it move its hoard of U.S. dollars through the banking system. All that changed when the Obama administration decided to step up pressure on Iran’s banking sector in a bid to get Tehran to give up its supposed nuclear weapons program. “Banks were essentially put on notice that the government was no longer looking the other way,” a London-based banker who did business in Iran during that time tells Fortune. From September of 2009 to last month, federal regulators levied fines on at least six international banks for their dealings with Iran in the previous decade. Among them were a number of British banks including Lloyd’s TSB, which paid a fine of $350 million; Barclays (BCS), which paid $176 million; and HSBC, which has yet to have a fine levied against it. Standard Chartered was simply the next in line to take a hit.

But it wasn’t just UK-based banks that were served. The Feds also went after continental banks like Societe General of France, which paid a fine of $100,000 and Credit Suisse, which paid $536 million. Even U.S. banks were caught in the Iranian cookie jar, with JP Morgan (JPM) fined $88 million for its role in violating US sanctions law, including those connected with Iran.

MORE: Two weekends, two cars, $730,000

What appears to be different this time with Standard Chartered (SCBFF) is that NY State filed its complaint against the bank alone. Regulators in Washington, which usually lead any investigation, typically handle things in a more discreet way, announcing the violation and the fine at the same time to avoid a situation where the bank would be in limbo. Where the Feds announced the violation before the fine was issued, the government may have hinted to what the fine could be to the banks. HSBC, for example, is currently in limbo like Standard Charter for similar violations, but has set aside $700 million to absorb any potential fine. The government alleges that HSBC engaged in unscrupulous transactions with rogue nations, including Iran, with a total notional amount of around $20 billion.

Like the other major international banks, Standard Chartered was allegedly more than happy to help Iran with its banking needs. From 2001 to 2010, New York State regulators allege that the banks had engaged in $250 billion – with a “B” – worth of inappropriate transactions with Iran in violation of U.S. sanctions. The bank, meanwhile, says it could only find $14 million worth of transactions that might have tripped the wire. There is clearly some disconnect here.

In any case, given what HSBC has put aside, analysts believe that Standard Chartered will end up paying a fine of around $1.5 billion. That seems a bit arbitrary, but it is far less than the $17 billion that the market chopped off the bank’s market value in Tuesday’s trading. Investors are betting that the bank will be barred from doing business in New York, threatening its U.S. dollar clearing operations, which make up an estimated 15%-20% of the bank’s total revenues. Equity analysts that follow the bank believe that it will in no way lose its license, especially as it was Standard Chartered that reported the violations voluntarily to the government during the 2010 crackdown.

MORE: Bernanke boards the happiness bandwagon

But even if it does lose its New York license, it doesn’t have to give up its clearing operations. It could set up shop in another banking center in a different city and state, like Chicago, Il.,  Stamford, CT., or even Charlotte, N.C. It is not expected to get to that point, but there are still options on the table if need be.

In any case, it looks like the market is ready to give Standard Chartered the benefit of the doubt as the bank’s stock moved up 6% in early trading Wednesday in Europe. But the firm’s stock is still down 15% for the week. Analysts warn that the stock will probably continue trading at depressed levels until the bank either pays the fine or sets aside a good chunk of money as a provision.

It is unclear when or if the bank will act. For now, Peter Sands, Standard Chartered Chief Executive doesn’t seem too concerned. Despite all the whirlwind, he packed his bags last night and set off for his summer vacation.