HSBC should seek its future in Hong Kong

Scottish nationalism figured prominently in the campaign for Thursday's UK general election. But the first true act of independence could be a move by HSBC, a bank that has never been happy in London, back to Hong Kong. The Scots expatriate clan that founded and still heads HSBC is losing patience - a virtue it never possessed in abundance - with being taxed, ringfenced and unappreciated.

HSBC ought to move, perhaps along with Standard Chartered, the other product of the former British empire that is starting to look out of place in a discontented UK. Asia is a better location for HSBC to have its head office, as it did until 1993, when it was forced to emigrate to London as a condition for buying Midland Bank. There is not much point in dallying.

Not only are economic growth prospects far better in Asia, but banks are regarded by British politicians - and many voters - with hostility and disdain. There are obvious reasons for this, but it might do them good to realise that the UK cannot remain complacent about its role in the world. It has some attractions as a global financial centre, but they are not infinite.

It is an anomaly that HSBC is headquartered in the UK and thus due to pay a levy of $1.5bn on its global balance sheet this year. The bank's heart lies in Hong Kong, where it was founded in 1865 and still issues banknotes. Asia contributed 78 per cent of its profits last year, while only 3 per cent came from Europe. That becomes ever truer as it retreats from ill-advised global forays.

The UK bank levy, introduced in 2011 and increased eight times since, has been rapidly transformed from a targeted incentive to reduce systemic risk by trimming balance sheets into permanent, all-purpose taxation. Both the Conservative and Labour parties would raise the levy if elected, with Labour adding £800m to pay for childcare.

The levy falls more heavily on HSBC and Standard Chartered than it does on foreign banks that pay only on UK activities, or UK banks that do not have big operations abroad. As a contribution to the government for providing a backstop in a crisis, it has its merits, (although banks also pay deposit insurance and corporation tax), but it is badly targeted as a general tax.

After all, neither HSBC nor Standard Chartered, which gains only 8 per cent of its turnover from the UK, needs to pay the non-UK element. It might cost them £1bn each to move head office, but they could recoup it quickly while shielding themselves from further rises in the levy, and political uncertainties including the possibility of the UK leaving the EU.

For Standard Chartered, London has historic advantages. Its operations are evenly spread across different countries and regions and the UK has provided a neutral, stable home with a strong legal system and regulatory structure (despite the flaws revealed by the 2008 crisis). Without a sharp prod to move, it would probably stay.

But British parochialism is evident both in how the bank levy has been imposed and the general reaction to HSBC raising the possibility of leaving ("They're only bluffing and good riddance to bankers, anyway," has been the dominant note). The truth is that Asia is an attractive alternative.

Not only is HSBC valued by Hong Kong investors more for paying dividends than taxes but it wins easily on "a 20-year view on where is the fastest economic growth in the world", as Stuart Gulliver, HSBC's chief executive, phrased the choice this week. HSBC came to the UK in 1993 to hedge political and financial risk, but this is a logical time to double down on Asia.

Both Hong Kong and Singapore are well supervised financial centres that emerged intact from the 1997 Asian crisis - one US chief executive rates Singapore as "the gold standard" for regulation, with well-paid, technocratic and strict supervisors that impose firm risk limits. The Hong Kong Monetary Authority is known for intervening to curtail property lending.

The question is whether Hong Kong is strong enough to take on the whole of HSBC's $2.6tn balance sheet. It is already highly banked - banking assets are 700 per cent of gross domestic product and HSBC is the largest local bank. China could stand behind the territory in a crisis, but HSBC would not want to risk the dragon's embrace.

The UK has made it easier for HSBC to leave in this regard. By imposing ringfencing of balance sheets of UK retail banks from 2019, it is mirroring how HSBC structures itself. Instead of relying on a central pool of capital - whether in London or Hong Kong - to support all of its activities, it holds capital at each subsidiary, lessening the weight for Hong Kong to bear.

It would be useful for HSBC and the UK to part ways now. The former has grumbled for a long time about having to be in London and has a natural home to which to relocate. The latter would get a reality check - evidence that it stands to lose something by treating global banks that choose to domicile there largely as taxable pariahs.

The loss would involve more than the levy - although halving the amount that HSBC pays would be significant enough. It would also mean a reduction in jobs and in work for professional services firms. The UK, along with other countries, is right to regulate banks more tightly than before. But it needs them to settle too.

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