Bloomberg News

HSBC Says U.K. Wholesale Banks May Be Harmed by Firewalls

November 05, 2012

HSBC Holdings Plc (HSBA) said U.K. plans to force lenders to separate their consumer operations may put banks with securities arms at a disadvantage, leaving client companies increasingly dependent on financial institutions based outside the country.

The proposals by the Independent Commission on Banking will make so-called wholesale banks smaller, with more volatile cash flow and lower credit ratings, the London-based lender said in a written submission to the Parliamentary Commission on Banking Standards. Banks will also be forced to hold more capital than international competitors without being able to draw on consumer deposits as a source of funding, said HSBC, Europe’s largest bank by market value.

“We see a risk of a long-term decline in U.K.-domiciled wholesale banking and a rising dependency among U.K. corporates and other institutions, such as pension funds, on overseas universal banks for their more sophisticated requirements,” HSBC said. “This could leave the City of London more vulnerable to external competition than it is today.”

The government is putting into law the Independent Commission on Banking’s recommendation to partially separate consumer and investment banking. The panel, led by Oxford University academic John Vickers, recommended that banks create separate boards for their consumer and securities units with at least two-thirds of their members sitting on only one. Banks will also be forced to have separate risk committees.

Extra Capital

HSBC, which operates in about 85 countries, did not require a government bailout during the financial crisis, unlike British rivals Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc. Unlike some of its global rivals, its worst losses during the crisis weren’t focused on investment banking.

The lender has criticized U.K. regulation before, and Chief Executive Officer Stuart Gulliver said last year he’d consider moving HSBC’s head office abroad.

Large banks should have “loss-absorbing capacity,” including equity, of 17 percent to 20 percent of their so-called risk-weighted assets, according to the ICB report, which was published in September 2011. The remainder could be held as so- called bail-in bonds, which can take a loss when a bank fails and may be converted into equity.

HSBC today said that extra capital requirements will make U.K. banks less attractive stocks to hold.

“In the global marketplace in which wholesale banking operates, if it is not possible for wholesale banks headquartered in the U.K. to attract the necessary incremental capital because they offer returns to investors which are below those available elsewhere,” then “activities will migrate over time” to other institutions, HSBC said.

Barclays Plc (BARC), in a separate submission, said banks not protected by a firebreak should be allowed to fund ring-fenced units should they need it.

Earlier today, HSBC reported profit that missed analysts’ estimates and said it was likely to face criminal charges in the U.S., where the costs of settling U.S. anti-money laundering probes may “significantly” exceed the $1.5 billion the bank has already set aside.

To contact the reporter on this story: Howard Mustoe in London at hmustoe@bloomberg.net.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net


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