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Location, location, location: Why the HSBC headquarters stayed in London

Last month HSBC, one of the world’s largest banks, decided not to move its headquarters from London to Hong Kong.

The revelation that a company is staying put is usually not earth-shattering news. Nonetheless, HSBC’s decision made headlines in Asia, Europe, and the US for three reasons. First, HSBC is the world’s fifth largest commercial bank; it holds more than $2.5 trillion in assets and is exceeded in size only by four state-owned Chinese banks. Wherever such a financial behemoth decides to hang its hat will have an important impact on that location…and the one it leaves. Second, and more importantly, the decision highlights the crucial role that a country’s legal and economic institutions play in the health of its financial institutions. Third, it shows how large banks like HSBC can—and do— use the threat of moving to secure more favorable treatment.

HSBC was established as the Hong Kong and Shanghai Bank almost exactly 151 years ago, opening for business in Hong Kong on March 1865 and in Shanghai a month later. It extended its reach throughout east and south-east Asia for the next three quarters of a century. With the communist take-over of China after World War II, the bank retreated from China and expanded its scale, scope, and geographic reach elsewhere, increasing its presence in the US, where it acquired Marine Midland Bank, and in the UK, where it purchased Midland Bank, one of the big four UK banks.

HSBC has more than a quarter of a million employees; nearly a fifth are located in Hong Kong and Mainland China, just slightly more than the proportion working in the UK (see Figure 1).

Geographic distribution of HSBC workforce 2014 graph by Richard Grossman. Used with permission.
Figure 1: Geographic distribution of HSBC workforce 2014 graph by Richard Grossman. Used with permission.

Nearly half of the firm’s assets are located in the UK, about a third in Asia, and about a sixth in North America (see Figure 2). Hence, from a logistical perspective, London and Hong Kong would both seem to be good choices for a headquarters location.

Geographic distribution of HSBC assets in 2014 by Richard Grossman. Used with permission.
Figure 2: Geographic distribution of HSBC assets in 2014 by Richard Grossman. Used with permission.

From a purely commercial perspective, however, Hong Kong seems to have the upper hand: the long-run potential growth in less-developed Asia is certainly higher than in Europe. And, in fact, nearly two thirds of HSBC’s pre-tax profits in 2014 came from its Asian business. And yet, there are many reasons HSBC might be wary of decamping to China. Although Hong Kong has a large and well-run financial system, and its regulators get high marks from the IMF, if HSBC were to get into trouble, the Hong Kong authorities might not have sufficient resources to act as a lender of last resort. In 2012, Hong Kong’s banking sector assets amounted to more than seven times its GDP—HSBC’s balance sheet alone is nine times the size of Hong Kong’s GDP. Finding the resources to bail out a bank that is bigger than the entire economy would pose a substantial challenge.

Further, because Hong Kong is a special administrative region of China with a currency board, and not an independent country with its own central bank, it could not bail out a bank by issuing unlimited amounts of money. Hence, any serious crisis would require China to step in. And, given that China’s economic institutions are neither efficient not transparent, and its commitment to corruption-free rule of law is tenuous, a large multinational institution like HSBC might be wary of putting its future in Beijing’s hands.

HSBC had been officially considering the move to Hong Kong for almost a year before it decided to stay put. As a healthy and relatively profitable bank, the British government was keen for it to remain in London. So keen, in fact, that recent government moves could be interpreted as an attempt to … convince (bribe is such an unpleasant term) HSBC and other multinational banks to remain in London.

Britain’s Chancellor of the Exchequer (i.e., finance minister), George Osborne, made it clear during his Mansion House speech in June 2015, that he was prepared to make life more comfortable for banks to stay in the UK, offering a “new settlement” to Britain’s financial industry. “I want Britain to be the best place for European and global bank HQs. It’s in our national interest to be so.” And so the government will reduce a special tax that had been imposed on banks in the wake of the financial crisis. He also signaled that the substantial fines that had been imposed on banks for bad behavior would be used more sparingly: “… simply ratcheting up ever-larger fines that just penalise shareholders, erode capital reserves and diminish the lending potential of the economy is not, in the end, a long term answer.”

The HSBC board, which voted unanimously to keep its headquarters in London, understood that moving to a more economically dynamic Hong Kong would subject it to China’s not-yet-ready-for-prime-time economic institutions. Still, the threat of the move encouraged the British government to make life cozier for its banks.

The Chancellor was taking no chances.

And neither was HSBC.

Featured image credit: DLR / Barclays, HSBC by George Rex. CC-BY-SA-2.0 via Flickr.

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