HSBC: Is the grass greener?

After ten months of deliberation, HSBC’s board are expected to meet on Sunday to decide whether to shift the bank’s headquarters from London.  Moving the bank’s domicile will determine its tax base, lead regulator and lender of last resort – issues all considered critical by the board and outlined in the eleven factors said to be influential in their decision making. With Canada, the U.S., China, Australia, Singapore, France and Germany touted as possible destinations, commentators consider HSBC to most likely to return to its roots in Hong Kong if it decided to relocate its headquarters.

Despite this, in recent weeks the rhetoric has shifted to the likeliness of the bank remaining in the UK. To an extent, this is not surprising as the political conditions today are far more favourable than when the review was launched. Things have calmed with the with the election of a Conservative majority in May, and Chancellor George Osborne’s decision to reduce the bank levy which wiped 10% off HSBC’s profits last year. The further axing of ex-FCA Chief Martin Wheatley, and other decisions to drop the reverse burden of proof to be implemented within the Senior Managers Regime have also served to create a more favourable domestic regulatory environment.

On the other hand, the Brexit debate continues to loom on the UK’s political landscape, with any decision to leave the European Union likely to damage the country’s financial industry. Further regulatory change through the implementation of ring-fencing rules is expected to cost the bank an additional $2 billion as it relocates the headquarters of it’s from London to Birmingham. Both the bank levy, albeit reduced, and incoming ring-fencing requirements duplicate other domestic measures aimed at the same problem—silos, capital surcharges, “bail-in” bonds and liquidity buffers.

Furthermore, current volatility in the Chinese stock market is considered by those close to the situation to be of little consequence to decision making, with the board considering the future of the bank in the next 20 to 30 years. Asia currently accounts for 60% of the bank’s profits, and there is little contention that over time this region will grow at a faster rate than Britain. The bank must also consider the possible acquisition of rival Standard Chartered by a Chinese institution – a move many consider to be inevitable. If this were to take place, Standard Chartered would become the only foreign notes-issuing bank in Hong Kong if HSBC decided to stay in London, with HSBC losing out on this valuable franchise.

Although analysis has shown that moving to Hong Kong would not ease HSBC’s tax bill or capital level by much, or insulate it totally from Britain leaving the European Union, the bank would avoid the UK bank levy, intrusion by Western regulators and be physically closer to its biggest markets. But the biggest worry remains a geo-political one, in that Hong Kong is a territory and not a country in its own right. Whist being a favourable regulator, the Hong Kong Monetary Authority (HKMA) both lacks the crisis toolkit of a central bank and does not possess a credit line from America’s Federal Reserve to supply it with dollars, HSBC’s operating currency. In instances of crisis, with a balance-sheet nine times bigger than Hong Kong’s GDP, HSBC’s ultimate backstop would be mainland China’s government – an option far less favourable to that in the UK.

Therefore, despite a persuading argument to pull it overseas, it appears that on this occasion the grass is not greener on the other side for HSBC.

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