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* Potential $10 bln US fine for BNP unsettles rivals
* "Unknown political risk" a worry - bank bosses
* Adds to worries over euro zone, Russia, trading slump
* US, Europe bank shares up about a fifth in past year
By Steve Slater and Laura Noonan
LONDON, June 6 (Reuters) - A prized collection of Frenchpaintings and furniture at a London museum provided a fittingbackdrop this week for a dinner attended by 40 big bank bosses,where the conversation buzz was the huge fine potentially facingFrance's biggest bank.
BNP Paribas may have to pay a fine of about $10billion for allegedly evading U.S. sanctions, sources say, apenalty that executives from banks in Europe and the UnitedStates fear marks a step-change in the scale of punishments onoffenders in the financial services industry.
"It's a worry for any industry when there's an unknownpolitical risk that is impossible to quantify for," said one ofthe bankers attending the dinner at The Wallace Collection, a museum renowned for its displays of 18th century Frenchpaintings, furniture, porcelain as well as European suits ofarmour.
"No-one knows the seriousness of what's happened, but thenumbers (reported for the potential BNP fine) have gone from 1billion to 5 billion to 10 billion, and people want to knowwhat's driving that."
BNP Paribas' problems cast a shadow over the entire meetingthis week of Institute of International Finance (IIF), a financeindustry body, which was attended by around 1,000 bankers,regulators, hedge funds and other industry executives.
Bankers were taking stock at the meeting of progress made inrepairing damage to reputations and balance sheets from the 2008financial crisis.
Share prices point to some recovery in investor confidencein the industry. U.S. and European bank shares are up about 20percent on average over the past year and 58 percent in the lasttwo as the industry has stabilised since the crisis.
But investigations into alleged manipulation of foreignexchange markets, a slump in trading revenues and job cuts plus political tension in Russia have undermined optimism that banksare well on the way to recovery.
And a cut in European Central Bank interest rates halfwaythrough the IIF event was a reminder of the weak euro zoneeconomy that has driven up banks' bad debts. As a result, moreof the region's banks could need to bolster capital as part of ahealth check this year.
HIGH PENALTIES
But it was the implications of BNP Paribas' massivepotential penalty and possible criminal convictions of otherbanks that dominated chatter at conference drinks parties.
"Ten billion for BNP is ridiculous," Erste Bank chief executive Andreas Treichl told Reuters.
Other banks, including the British co-hosts HSBC,Barclays and Standard Chartered, have alsofallen foul of U.S. regulators in the past three years.
Analysts at Credit Suisse this week forecast Europe's bankscould end up paying $104 billion in litigation costs, nearlydouble their previous estimate of $58 billion. The $104 billionestimate includes $66 billion of losses to come.
These costs could hit banks' dividends and returns and mayalso reduce the cash available to lend to businesses to getEurope's economy moving.
French officials have said the scale of BNP Paribas'possible penalty could hurt the euro zone's recovery and tradetalks with the United States. U.S. President Barack Obama hasdismissed any prospect he might intervene.
"Those fines are over-excessive, I think they are much toohigh and they are not healthy at all," Jeroen Dijsselbloem, thehead of the group of euro zone finance ministers, said. He saidit was creating a lot of nervousness.
Baudouin Prot, chairman of BNP Paribas, did not join hiscounterparts from HSBC, UBS, Barclays, JPMorgan and others at the Wallace Collection dinner on Wednesdaynight, held for the IIF's board of directors.
Prot also withdrew from speaking at the conference.
BNP Paribas' head of group public and regulatory affairsJean-Jacques Santini declined to comment on any aspect of theaffair.
The bank has set aside $1.1 billion to cover a potentialfine and said last month it could be far higher. It has declinedto comment on U.S. authorities potentially seeking nine timesits provision for an alleged breach of sanctions mainlyinvolving Sudan, Iran and other countries between 2002 and 2009,sources have said.
"WALKING WILLINGLY INTO COURTS OF JUSTICE"
The conference's main dinner was held in London's neo-gothicRoyal Courts of Justice, which allowed BBC political editor NickRobinson, who was the main speaker, to point to the irony ofthis choice of venue.
"Never before have so many bankers and so many financierswalked willingly into the courts of justice," Robinson said.
But despite the coats of arms of numerous Lord HighChancellors bearing down on them, the assembled financiersseemed at ease.
Some finance industry executives were confident that theindustry had made substantial progress in cutting risk andimproving standards in the six years since the financial crisis.
"We have gone very far to put 'too big to fail' in the rearview mirror and make the financial system, more safe, moresound, more secure, more transparent and more accountable," RobNichols, Washington D.C.-based head of policy organisationFinancial Services Forum.
But with senior bankers warning it is likely to take atleast two more years for banks to clear paying for past sins,they acknowledged there may not be much relief when the IIFmeeting moves to Qatar next year. (Additional reporting by Clare Hutchison and Marc Jones.Editing by Jane Merriman)
