HSBC likely to stay in London headquarters

Over the next few days HSBC, Europe’s biggest bank, will make the announcement on what the City of London has been waiting almost a year for: will it or won’t it move its headquarters out of the UK capital?

According to insiders, it has decided to stay – which will be an enormous relief to the chancellor George Osborne, who introduced a tax based on any UK bank’s global balance sheet in 2010 and then threatened to increase it.

HSBC is a big bank by any standards. Its market value of US$147 billion makes it the ninth-biggest in the world, and is more than the combined value of Lloyds Banking Group and Barclays, Britain’s No 2 and No 3 lenders, put together. Its total assets of $2.6 trillion are about equal to the entire UK GNP. It makes annual profits of $25bn, 80 per cent of it outside the UK.

The bank’s headquarters, a landmark 200-metre tower designed by Sir Norman Foster in Canary Wharf, is one of the most visible buildings in London. Its departure would deal a serious blow to London’s claim to be the centre of global finance.

The HSBC board has been debating its future since April, promising a decision by the end of 2015 then postponing it again because the directors decided they needed more information. It is a gigantic, seminal decision for the bank which dir­ectors don’t want to get wrong. Its culture has never been quintessentially British, as, for example, Lloyds is, with 250 years of history steeped in the City of London.

HSBC roots are in the Far East where it grew up, first of all in Shanghai, later in Hong Kong – where for years it was simply known as “the Hong Kong Bank” and where in effect it was also the central bank.

Up to its acquisition of Midland Bank in 1991, it wasn’t even a proper British bank, and was treated by the authorities as a second-rate colonial institution that should not be allowed into the inner circle.

According to HSBC’s official historians, David Kynaston and Richard Roberts, the Bank of England’s deputy governor, Eddie George, told the HSBC chairman Willie Purves “that the bank would fight his proposal [to acquire Midland] on the grounds they were not financially suitable to own a major bank in the UK”.

Later George relented and allowed the merger to go ahead, but only if HSBC moved its headquarters – or its “mind and management” as he put it – to London, where it would be regulated by the Bank of England. So it did, and became a model citizen, helping out in the banking crisis of 2008-09 by recapitalising when it didn’t need to and feeding liquidity into the system, the only bank strong enough to do so.

It got precious little reward for it, and found itself operating in the anti-bank sentiment that gripped Britain after the global financial crash of 2008 and the failures of HBOS and RBS. All banks, not just the failed ones, were made scapegoats for the financial crisis and had new taxes, capital requirements and regulations heaped upon them to the point where they almost stifled. In the old days a clearing bank ran with a capital base of about 2 per cent. Today the Bank of England requires that to be in double digits – HSBC now has a core tier 1 capital ratio of 11.8 per cent, twice what it was in 2008, making it that more difficult to earn a decent return on capital.

The banking system had done much to bring it on itself, but HSBC felt it was a cut above the others and should not be dumped in with the baddies.

When Mr Osborne threatened to raise his levy, the bank’s chairman Douglas Flint and its chief executive Stuart Gulliver hit back. HSBC still earns most of its profits in the Far East but also has major operations in the Middle East, where it is building a handsome new local headquarters in Dubai. It also has a major operation in the US and Canada. The UK is a small part of its business, so it felt it was being singled out for special punishment. That’s when it threatened to pull out and immediately began carving out its UK retail bank into a ring-fenced entity headquartered in Birmingham.

Where would it go if it left London? Uncertainty over China and back-pedaling by Mr Osborne, who promised to trim back the levy in his summer budget in 2015, have made it think again. Hong Kong would be its favourite venue, but it has looked at others: Singapore would love it to go there, as would Frankfurt. The US’s banking laws are rather more sympathetic than those of the UK, as are Canada’s. Dubai and the Middle East were also considered.

At the end of the day, however, London seems to have won out. The logistics of moving the headquarters out of London are vast and daunting, and that alone may have been the factor which tilted the scales in favour of staying. The Cameron government in the UK is going through a phase of “let’s be nice to the bankers” and is genuinely looking at ways to soften the regulatory corset it overtightened in 2009.

It was almost too late. But it looks as if it has done enough.

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