Hong Kong stands out as most likely choice for HSBC headquarters

When HSBC rescued Hong Kong's Hang Seng Bank in the 1960s, it did so to prevent a wider panic because it was the territory's de facto central bank.

Now Hong Kong's Monetary Authority, the current central bank, may have to decide whether it would be able to handle a rescue of HSBC, if the bank were to push ahead with a return to its roots.

HSBC, which on Friday said it was reviewing its headquarters, is already the dominant local player in Hong Kong.

In spite of growing competition from mainland banks, led by Bank of China, HSBC is still responsible with Hang Seng for about a third of Hong Kong lending and the same in deposits. It is the most systemically important institution in the city - and Hong Kong is the bank's most profitable big market.

As the largest dealer in Hong Kong dollars and one of three note-issuers - alongside Bank of China and Standard Chartered - HSBC already works closely with the HKMA.

Bankers who deal with the regulator generally respect its staff and competency.

"The HKMA is active on the global stage, it's inherently conservative but it is more pragmatic than some other regulators. They haven't let themselves be exposed to some of the thematic whims elsewhere such as bank levies," said Keith Pogson, head of Asia financial services at EY.

The regulator on Friday said it would take a "positive attitude" should HSBC consider relocating to Hong Kong.

The big question is whether Hong Kong could cope with a bank with almost 20 times the assets it had when it left the city for the UK in the early 1990s.

"For Hong Kong regulators, HSBC is such a big animal to regulate given their limited resources. Who is the lender of last resort - is it the PBOC [People's Bank of China, China's central bank] or the HKMA?" said a Hong Kong-based HSBC executive.

Cynics suggested that with 32 years to go before Hong Kong becomes fully part of China under the 1997 handover agreement with Britain, the bank could always relocate to Hong Kong for perhaps two decades - as it has done with the UK - before perhaps returning to London when the local environment had improved.

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In Shanghai, the elegant neoclassical building that housed the bank's operations from 1923 to 1955, situated on the glitzy waterfront district known as the Bund, is one of the city's best known landmarks and today hosts the municipal government.

HSBC also owns a fifth of Bank of Communications, China's fifth-biggest bank, although Hang Seng is in the process of selling down its holding in Industrial Bank.

Yet the many constraints on foreign banks in China - ranging from employee visas to capital controls - make the choice of Shanghai or Beijing as a global headquarters all but unthinkable.

That leaves Hong Kong the most likely choice. HSBC recently used its note-issuing status there as a reminder of its role in the fabric of the city by offering a special HK$150 note to commemorate its 150th anniversary.

On Friday the HKMA referred to HSBC's strong historical ties with the city - and the regulator is not the only organisation to still consider the Hongkong Bank, as it is still often known, a local institution.

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