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A last hurrah for the globalisation of finance
SET astride the entrances to HSBC s main building in Hong Kong are two huge
lions, guardians of the wealth of Britain s biggest bank. On the roof, two
large metal rods point menacingly at the angular tower occupied by Bank of
China, a rival. Both were installed on the advice of HSBC s feng shui advisers,
the latter to protect the bank from the negative energy generated by Bank of
China s building.
Britain s banks, heirs to empire, have long coveted the riches of China. On
October 15th their hopes of reaping them rose greatly when the chancellor of
the exchequer, George Osborne, announced a deal with China that is intended to
make Britain the main offshore hub for trading in China s currency and bonds
and for foreign institutions investing in China s fast-growing economy.
But there was a price. Mr Osborne conceded that British regulators would
consider (which tends to mean approve ) applications from Chinese banks
wanting to enter Britain as branches of their parent banks rather than as
subsidiaries. The difference may seem arcane but in the world of banking
regulation it is hugely important. Branches are overseen by their parents bank
supervisors at home. They are not required to have thick cushions of capital to
absorb losses or large chunks of cash to see them through hard times. Instead
they are expected to call on their parents for help if they run into
difficulties. This makes branches much cheaper and more attractive for banks
than subsidiaries.
It also explains why regulators generally dislike them. The laxer rules on
branches leave them more vulnerable if they or their parent banks get into
difficulties. In allowing Chinese banks to use branches, British authorities
are in effect betting that if anything goes wrong the Chinese government will
bail them out, says Simon Gleeson of Clifford Chance, a law firm.
The chancellor s decision has raised eyebrows in London s financial district.
Some worry that a supposedly independent regulator has been subjected to
political interference and has been forced to lower its standards. Yet critics
of the deal overlook two important points. The first is that there is an
inevitable tension between a bank regulator s mission of maintaining financial
stability and the wider aim of promoting economic growth. Tension between a
regulator and elected officials is not just inevitable but healthy.
Lonely island
Just as important is the tricky balance regulators must find between protecting
their own banking systems and encouraging the smooth functioning of global
capital markets. Letting banks use branches allows capital to flow more easily
around the world. Forcing them into subsidiaries can lead to the creation of
stagnant pools of cash and capital.
Although Britain has cast a more sceptical eye over branches of foreign banks
since the crisis particularly after its taxpayers were left out of pocket by
the collapse of Icelandic banks and their British branches it has generally
stood on the side of financial globalisation. In this it is increasingly
lonely. American regulators are likely soon to force foreign banks to establish
fully-capitalised units. EU officials are threatening to do the same. Given
this trend, Britain s stance looks less like an opportunistic grab for Chinese
business and more like a last, probably hopeless, stab at keeping alive the
dream of a seamless global financial market.