Banks plot to withdraw repo trading from London

Foreign banks operating from the City of London are plotting a managed retreat from operations that expose them to the UK bank levy, according to senior figures within the industry.

Since March's Budget, when George Osborne raised the rate of the balance sheet tax to 0.21 per cent - the ninth increase since the levy was introduced in 2011 - banks have stepped up their examination of options to shift operations abroad.

HSBC and Standard Chartered, both UK headquartered and therefore subject to the levy on their global balance sheets, have made no secret of plans to look at shifting headquarters, probably to Asia.

Foreign banks are subject to the levy only on their UK balance sheets, giving them flexibility to move City-based operations overseas.

No bankers were prepared to talk publicly about the initiatives. But Citigroup, JPMorgan and UBS are among those looking at the issue, according to people familiar with the matter. The banks declined to comment.

One senior banker said moves to "de-emphasise" operations in the City of London were widespread: "There are things being considered by the whole industry in terms of the business mix and how much we book and how we structure our UK business versus other businesses. The bank levy is driving it. Every year they increase the percentages [of the levy]. That is frustrating."

Three senior industry figures said there was a particular focus on so-called repurchase agreements - repo transactions in banker jargon - which can inflate balance sheets unnecessarily.

Anthony Browne, chief executive of the British Bankers' Association said: "The levy means it is becoming uneconomic to do some of this business in the UK." He gave the example of both repo and international trading transactions that have traditionally been booked in London but are now being moved elsewhere.

Some bankers point out that in a low interest-rate environment, and amid tougher regulation, many repo and trading transactions can in any case become only marginally economic, prompting overall shrinkage on a global basis.

But the levy is seen as a "swing factor" by some bankers. One prominent Conservative donor said he planned to lobby the government soon over the issue. Aside from a European referendum, it was the biggest worry for the City under the Tories, he said. "The levy is short-sighted and will lead to valuable business - and tax revenue - moving overseas."

Another veteran financier said he thought Mr Osborne could well retreat from pre-election policies that had penalised banks. "The levy increase was a political manoeuvre to put Labour under pressure," he said. "They can probably row back on that now."

The scope of global operations run out of London has been a sensitive one ever since the financial crisis and the collapse of Lehman Brothers and Royal Bank of Scotland. The complexity of unwinding Lehman, the cost of bailing out RBS and Lloyds and subsequent affairs such as JPMorgan's "London Whale" trading scandal have all made UK policy makers wary of outsized operations being based in the City.

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