Barclays Plc, Standard Chartered Plc and HSBC Holdings Plc, three of Britain’s biggest lenders, are toning down threats they made last year to leave London as pressure to break up commercial and investment banking eases.
Barclays Chief Executive Officer Robert Diamond told U.K. lawmakers last month that London remains the “premier financial center in the world.” HSBC Chairman Douglas Flint listed its advantages over rivals. Mike Rees, Standard Chartered’s head of corporate banking, praised the city’s “great neutrality.” Five months ago, the three banks warned that any attempt by the U.K. to force their breakup risked triggering an exodus.
The change in tone was prompted by the U.K.’s Independent Commission on Banking, which was asked by the government to consider splitting bank’s consumer and investment units. John Vickers, the commission’s Chairman, said in a Jan. 22 speech he wouldn’t recommend a breakup. Six days later, Prime Minister David Cameron said the U.K. shouldn’t take “revenge” on the banks and pledged a more “balanced” approach on bonuses.
“The mood music has definitely changed and become more conciliatory in recent weeks,” said Ian Gordon, a banking analyst at Exane BNP Paribas in London. “The shift in tone suggests we’re getting past the greatest excesses of the brinkmanship and moving towards the end game.”
HSBC, Europe’s biggest bank, and Standard Chartered make a majority of pretax profit outside the U.K. Barclays earned two thirds of its first-half profit in 2010 from its investment banking unit, which includes the former North American unit of Lehman Brothers Holdings Inc. The U.K. government is the biggest shareholder in Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc, the country’s two remaining top-five banks.
The tax and regulatory complexities of moving, coupled with the challenge of choosing a new base without offending other cities and governments makes it very difficult to move a bank’s headquarters, Standard Chartered’s Rees, 54, said in an interview at the World Economic Forum in Davos, Switzerland.
“You can’t just uplift a company on a whim, that’s a huge thing to do,” Rees said. “Think of the destruction you put through your shareholding. Think of the disruption from a management point of view.”
A move elsewhere would also spark adverse reactions from the losers, Rees said.
Still, the banks feel “real frustration” that the “significant reforms of the past few years are seldom recognized in public debate,” the British Bankers’ Association, the industry’s largest lobby group, said last month.
Britain’s Financial Services Authority in December approved new rules agreed by European Union regulators that restrict guaranteed bonuses and up-front cash payments for banks’ proprietary traders and broker-dealers. The rules mean bankers will receive about 25 percent of their bonuses in cash immediately, with the rest deferred or held in shares for a minimum of three years.
The Labour government also imposed a one-time levy on banker bonuses to help plug a record budget deficit after taxpayers propped up the financial system with more than 1 trillion pounds ($1.6 trillion) of assistance since 2008.
The coalition government, which took office in May, followed with a levy on bank balance sheets designed to raise 2.5 billion pounds annually. It also appointed Vickers, an Oxford University professor and former Bank of England economist, to investigate ways to increase competition in the industry. The five-member inquiry will report in September.
Talks between the government and banks over an agreement to limit pay and boost lending to small companies, the so-called Project Merlin, have helped to improve the relationship between the coalition and the lenders, analysts said.
“It would appear that the banks have reached some sort of an understanding with the government, whereby they stop threatening to leave the U.K. and the government stops bashing them,” said Simon Maughan, co-head of European equities at London-based MF Global Ltd.
“We’ve been consistent in saying that investors and shareholders ask us to look at where we are headquartered and we do that, but there are a number of benefits to remaining regulated in London,” Standard Chartered spokesman Jon Tracey said.
No ‘Ironclad Guarantee’
HSBC spokesman Brendan McNamara referred to CEO Stuart Gulliver’s comments at a conference in September, when he said the bank’s preference was to remain headquartered in the U.K. A spokesman for Barclays wasn’t immediately available to comment.
The banking commission will recommend a Swiss-style increase in capital holdings, Jonathan Pierce, a banking analyst at Credit Suisse Group AG, said in a note to clients today.
“The commission, like Switzerland, will opt for substantially increased capital and liquidity requirements for systemically important firms, i.e. all of the listed U.K. banks, rather than major structural changes,” Pierce wrote.
Should the burden of regulation become too great, shareholders may still press banks to quit. Diamond, 59, told the House of Commons Treasury committee on Jan. 11 that while London was “the place where we want to be,” he could not give “an ironclad guarantee.”
Flint, 55, this week told the same committee that HSBC was conducting a regular three-yearly review on where it should be based. Even so, he explained why the British capital is so valued by financial firms.
London ‘Most Attractive’
London “has set its stall out as being the most attractive place for wholesale market activity,” said Flint. “It dominates the foreign-exchange world, the interest-rate world, equity capital market flows and is second to New York in terms of servicing hedge funds. No other country in the world has quite the unique competitive advantage London has.”
Britain is home to about 80 percent of Europe’s hedge funds and about 60 percent of its private equity firms. The U.K. accounted for about 37 percent of all global foreign exchange trading in April last year and 46 percent of global interest rate over-the-counter derivative trading, according to TheCityUK, a lobby group started by the City of London Corporation, the financial center’s municipal government.
The British government benefits, with the financial services industry generating about 61 billion pounds of tax revenue, 12 percent of the U.K. total, according to estimates by PricewaterhouseCoopers LLP and the City Corporation.
“There has been no city in the world that has benefited more or been more supportive of foreign trade and flows of business” than London, Barclays’ Diamond told parliamentarians. “London has become a place that is recognized as very good for business and very good for talent. This is the place that we want to succeed.”
Cameron paid tribute to the City when in Davos last week and promised to “fight extremely hard” to defend it against European Union regulations that might jeopardize London’s share of the financial services industry.
“The City of London and financial institutions are a great strength to our economy,” Cameron said. “It is one of the reasons businesses from all over the world want to come and invest and grow in Britain. I don’t want us to lose that competitive advantage.”
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