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Opinion
The View
by Peter Guy
The View
by Peter Guy

No bigger player of financial regulation arbitrage than HSBC

By subtly threatening to move its headquarters, HSBC is playing financial regulation arbitrage

Players will always be playing. And there is no bigger player of financial regulation arbitrage than HSBC.

It has altered its destiny by subtly threatening to move its headquarters from London.

Even if this is merely a high-stakes gambit to modify or repeal Britain's bank levy, last month's surprise announcement by chairman Douglas Flint has irrevocably altered HSBC's relationship with the current and future British government. Unpredictable outcomes would emerge if the bank actually relocated.

The group finances about 14 per cent of the world's trade and is involved in a substantial amount of global capital flows. The bank levy is a competitive disadvantage relative to what other major banks pay and represents an unpredictable and volatile tax burden. American banks only pay a levy based on the liabilities of their British entities, while HSBC's levy is assessed on its global liabilities.

In reaction, HSBC acted as no other bank in the world and few in history could - to consider changing domiciles. One could not imagine a major American bank pulling out of New York under any circumstances today.

Indeed, the last time banks could operate transnationally without the burden of national restrictions was in the 19th century when family-owned institutions like JP Morgan, Warburg and Rothschild dominated finance and governments.

Hong Kong feels like home for HSBC given its shared history with the city. But that is where the familiarity ends. Since it departed in 1993, HSBC has become a sprawling empire.

Today, financial service regulations are supranational so there really is no escape from banking supervision. But the British bank levy is a tangible source of political concern for HSBC.

Political risks exist everywhere all the time, but China presents different risks today than it did 25 years ago or when HSBC made its decision to depart from Hong Kong. How would markets re-rate HSBC's risk and how would it be supervised if it was domiciled in Hong Kong today?

HSBC currently has to answer to 475 regulators around the world and that is unlikely to change wherever it chooses to move.

HSBC hired about 3,500 compliance staff last year to meet global regulatory standards. The Hong Kong Monetary Authority only has 800 staff. While the HKMA would welcome HSBC's return, it appears ill-equipped to effectively supervise it.

Before the financial crisis it was impolite to confront bankers about who would step in to buy and save a bank if it was collapsing from a run of depositors or defaults by counterparties. However, after the global financial crisis, addressing this question has become the central purpose of regulatory reform. Every bank today has clearly defined its stress-tested limits and its rescue plan with its government. Who would be HSBC's lender of last resort?

Looking closer at an HSBC move to Hong Kong reveals some troubling issues.

HSBC's US$2.6 trillion balance sheet is 9.49 times the size of Hong Kong's 2013 gross domestic product of US$274.1 billion. Its balance sheet is six times that of the HKMA. The HKMA cannot possibly act as HSBC's central banker and lender of last resort, not only because of the bank's size but because the HKMA does not have the authority or ability to print money.

If the HKMA cannot act as the lender of last resort then the responsibility falls to the People's Bank of China.

In the event of a crisis, an HSBC headquartered in Hong Kong could only be supported by the mainland's central bank. This complicates its return to Hong Kong because the PBOC would surely produce a list of governance demands before agreeing to play that onerous role.

Therefore, the HKMA could not act as the bank's lead regulator. That role must reside with the PBOC and its related authorities. Would the culture clash between HSBC and mainland regulators create an unworkable relationship?

But the Monetary Authority of Singapore can print money as Singapore is a sovereign entity. It would constitute a major accomplishment and boost for Singapore's financial sector if the MAS convinced HSBC to relocate to Singapore.

If HSBC pursues the road it has embarked upon it will eventually come to decisions that will take it completely by surprise.

This article appeared in the South China Morning Post print edition as: Players gonna play
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