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Tom Holland

The British government's decision to separate domestic retail banks from their investment banking businesses will inevitably re-ignite speculation that HSBC is going to shift its corporate headquarters from London back to Hong Kong.
But for HSBC - and Hong Kong itself - things are a lot more difficult than a simple change of domicile and the relocation of a few senior bankers from Canary Wharf to 1 Queen's Road Central.
The British government's announcement was political rather than prudential.Certainly the professed reason for the decision - to ensure no bank is too big to fail, so preventing a repeat of the 2008 banking crisis when the government was forced to rescue two leading British banking groups - doesn't stand up well to examination.
Of the British banks that failed in the financial crisis, none collapsed because of its investment banking activities.
Northern Rock, which went bust in 2007, failed because it was overly dependent on wholesale funds to finance its retail lending.
Neither HBOS nor Bradford and Bingley, both of which collapsed the following year, had investment banking operations.
And of the two banks bailed out by the taxpayer, both were bought down by unwise acquisitions; Lloyds TSB because it bought the stricken HBOS and Royal Bank of Scotland because it over-extended itself acquiring the Dutch banking giant ABN-Amro.
Indeed, the only two British retail banks with sizable in-house investment banking operations, HSBC and Barclays, survived the crisis without needing a government bail-out.
And although HSBC sustained losses of more than US$50 billion, it made them not because of excessive risk-taking by testosterone-fuelled traders in its investment banking division, but by extending mortgages to retail customers in the United States.
As a result, ring-fencing retail from investment banking would have done little to prevent Britain's financial crisis. Nevertheless, the British government appears set on proceeding with separation, a policy which confronts HSBC with a tricky problem.
The new rules will not require British-based banking groups to hold extra capital against their overseas operations if they can show those businesses pose no potential costs to British taxpayers. Even so, HSBC is still likely to face a stricter capital requirements and higher capital costs than its international rivals.
In addition, it will also suffer from a more subtle regulatory disadvantage, because its lead regulators - the Financial Services Authority and the Bank of England - will be obliged to consider the whole international financial services group primarily as the owner of a domestic retail bank.
According to one former director of the Bank of England, this means that HSBC as a group will be penalised because it will be subject to stricter regulation than it would be as the owner of a British retail operation with its headquarters, and hence its lead regulator, based outside the United Kingdom.
'It will be a powerful incentive to move the group headquarters elsewhere,' he admits.
The obvious solution would be for HSBC to move its headquarters back to Hong Kong. But that too would pose regulatory problems.
Part of the difficulty is simply a question of manpower. Although the Hong Kong Monetary Authority has proved a competent supervisor of the local banking sector, overseeing a global behemoth like HSBC is a challenge of a different order.
But the real difficulty is that for Hong Kong, HSBC is quite literally too big to fail. The bank is a giant, holding a third of all the city's deposits and extending a quarter of all its bank loans.
But while HSBC is too big to fail, it is also too big to save. At the end of June, the overall banking group held assets of HK$21 trillion. That dwarfs the balance sheet of the Hong Kong Monetary Authority, which at the end of last year was worth a relatively meagre HK$2.4 trillion.
And unlike a currency-issuing central bank, the HKMA is constrained by Hong Kong's pegged exchange rate mechanism from blowing up its balance sheet by printing money to bail out the local banking system.
In other words, the HKMA would be unable to act as a credible lender of last resort for HSBC should it get into trouble.
In the final analysis, that would mean the true lender of last resort and ultimate regulator for HSBC should it move its group headquarters to Hong Kong would be the People's Bank of China, an unashamedly political organisation answerable to the Chinese Communist Party.
For all it vaunts its Chinese roots, that is a situation HSBC and its shareholders would hardly be likely to accept.
HSBC will not be coming home.



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