How much should the UK subsidise HSBC for a ‘competitive’ financial sector?

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The UK Financial Centre: soon to evaporate in a puff of bank levies?

Here we go again. Look at this latest piece of financial sector lobbying, courtesy of Reuters, which normally strives to be a fair and balanced news organisation.

This requires quite some unpacking. To begin with:

“Britain is prepared to review a tax on banks to head off the threat that large multinational banks like HSBC could leave London’s financial centre and shift their operations overseas, the Sunday Times reported, citing industry sources.

Finance minister George Osborne is to lay the ground for such a review in a speech this week, by saying that the newly-elected Conservative government is committed to maintaining the competitiveness of banks, the paper reported.”

Note the c-word, which we’ve underlined.

Now let’s get this straight.

Banks that are “too big to fail” threaten to derail the UK economy. The government, after the crash, slaps a tax on bank balance sheets, currently equivalent to 0.21 percent of bank liabilities (such as deposits) each year, up from 0.156 percent in March, partly in order to curb the “too big to fail” problem. (Given all the evidence that oversized banking sectors (and we’ll be writing more about this) tend to harm the economies that host them, a progressive tax on bank balance sheets, where the tax rate rises sharply above a given point, would be more appropriate. But still.)  According to the Office for Budget Responsibility (p106), this levy is expected to raise £18.5 billion ($28 billion at current exchange rates) over the life of this government, or £3.7bn per year.

All in all, the levy seems to be working, on the terms it’s been set. These measures are constraining banks’ risk-taking at the taxpayers’ expense, and are expected to raise hefty revenues, equivalent to the UK’s total forecast government gross public sector investment (p125).

Cue shrieking from the banking sector, of course. But of course it isn’t shrieking. It’s sophisticated shrieking. Which tends to go in the form of whispers in the dark, to selected journalists. Back to Reuters:

“Both HSBC and Standard Chartered are looking at the viability of quitting London for Asia.”

They are “looking at” doing this?

Would they? Perhaps. Asia is a huge focus, but there’s no doubt that there are also big risks associated with moving from the UK to China’s orbit. And would HSBC shareholders be happy to see all that taxpayer risk shouldered by tiny Hong Kong’s government? Would they pay up, in event of collapse?

But in any case, it’s possible that they would move. The point here is that this argument about “examining opions” is a constant drumbeat. Will you take a look at this recent story, and note the similarity of the language and the approach that the bank lobbyists are taking. Always in the shadows: always threatening, always using the threat of relocation to achieve capture.

A question: will they come out of the shadows, and have the courage to say this boldly? Reuters again:

“The Sunday Times report cited sources, including one of HSBC’s top five shareholders, as saying that a review of the tax could stall any move by the bank to leave London. HSBC declined to comment on the report.”

The answer: No, they won’t. And a last word from Reuters:

“A finance ministry spokesman declined to comment directly on the report but said: “We are committed to maintaining our position as a global financial hub.”

That is the Competitiveness Agenda, right there. “Don’t tax us or regulate us too much or we’ll run away to Geneva or Hong Kong,” is the generic cry.

Now, what would happen if the government called the bankers’ bluff? Or if it were to chicken out?

Well, under Scenario 1, the bank levy stays in place, and HSBC departs. HSBC was paying a bank levy of some £950 million per year. That would be lost. HSBC would still pay corporation tax in the UK on its UK operations – which wouldn’t shrink by very much at all: probably a few hundred jobs, at most. (London is a financial super-cluster, and HSBC knows it has to remain heavily involved.) On the benefit side, the Too Big To Fail risks would be substantially transferred from the UK to the Hong Kong government, while the UK would get to keep the lion’s share of HSBC’s economic activity. What is more, the government would get to keep its bank levy for all banks – the last rise from 0.156% to 0.21 percent is currently expected to raise £900 million extra.

The balance of this equation is: an arguable hit to overall tax revenues; perhaps £50-100 million; a few hundred jobs lost — and the transfer of huge taxpayer risks over to Hong Kong. One could easily argue that this package, on these terms alone, is a positive one.

Under Scenario 2, the bank levy stays in place, and HSBC stays. It’s hard to see how the UK loses from this, except for the fact that the UK continues to shoulder the risk. This is what policy-makers would presumably like most.

Under Scenario 3, the bank levy goes (let’s say it’s cut back to the March rate of 0.156%) and HSBC stays.  This is the picture that the whispererers are dangling in front of UK politicians right now. How beneficial would this be to the UK? Well, on the plus side, there are a few hundred jobs retained, and HSBC’s bank levy retained, for let’s say £950 million annually. On the minus side, the reduced levy costs £900 million overall, and UK taxpayers still get to shoulder HSBC’s Too Big to Fail Risks. This doesn’t look like a particularly attractive option to be honest.

Under Scenario 4, the bank levy goes, and HSBC waltzes off anyway, since it’s always basically been an Asian-focused bank. The obvious benefit to the UK would be the transfer of risk to Hong Kong – but this would have been achieved anyway, with a higher bank levy. There would be a double hit to tax revenues: first, from a lower rate on all banks; and second, from HSBC’s loss.

Overall, the top two scenarios, where the bank levy stays in place, seem to look healthier than the bottom two scenarios, where the levy is cut back. But the night terrors of being seen to be ‘uncompetitive’ are politically so potent, that it’s hard for people to see this.

Yet this isn’t the end of the story. Returning to the topic of oversized financial centres, there is a phenomenon that has been called a Finance Curse, where research now seems pretty clear that oversized financial sectors can be more harm than help to an economy as a whole. (The original long report focuses quite substantially on the UK.) We will write more about this in due course, as it’s very relevant for “competitiveness” studies. There are Dutch Disease effects, brain drain effects, and other factors that kill alternative economic sectors — plus the corrupting effects of oversized finance. All factors mean that the benefits of finance tend to be massively overstated, and the costs routinely under-counted. This factor drags all of the four scenario in one direction – in favour of higher bank levies, and in favour of transferring the risks overseas.

No story about HSBC is complete without a mention of the ghastly scandals that plague it. One huge benefit of HSBC leaving is that the UK would be far less susceptible to what one might call ‘competitive criminalisation’ – via cries of “don’t crack down on us too hard or we will run away to Hong Kong.” Bill Black, a former US financial regulator, puts all this rather fiercely:

“It is insane for financial regulators to have “a competition objective.” It is, however, nirvana for corrupt senior bankers.”

If HSBC departed, the pressures on the UK authorities not to uphold the rule of law would be seriously reduced. There’d be another (unquantifiable) benefit to the UK from the bank levy, right there.

In light of all this evidence, does the bank levy make the UK as a whole more or less ‘competitive’?

Well, as we’ve argued repeatedly, the whole notion of ‘competitive’ countries is a nonsense.

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