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The Banks Are Bluffing – They Aren’t Moving Anywhere

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Yves here. This is a subject near and dear to my heart. Banks occasionally harrumph that if regulators are too mean, they’ll just pack up and go somewhere else. That’s complete bluster as far as TBTF banks are concerned. Any major bank needs to be backstopped by a real central bank. The Caymans don’t begin to cut it. And central banks are actually not all that welcoming of world scale players trying to take advantage of the slack they give to banks they’ve been in bed with a long time. UBS considered splitting in two and relocating its investment banking operations when the Swiss National Bank announced it would impost 20% equity requirements. It has concluded it has to stay put.

Andrew Newton debunks another sort of threat made by large banks: that they will move significant activities out of particular financial centers like London.

By Andrew Newton, a former bank compliance officer. Cross posted from Huffington Post

It’s official: London is the hub of banking cool. In August, Chicago-based CME Group Inc announced it was applying to open a new derivatives exchange in London’s already competitive financial center in order to offer traders “regulatory choice”. Back in June, in US congressional hearings on JPMorgan’s $6bn trading loss, Congressman Gregory Meeks of New York reported that many banks in his jurisdiction were threatening to leave the US for Britain to profit from the “London loophole” alleged to underlie the “London Whale”. Even French bankers want to leave Paris for London.

But wait. Banks noting the British regulator’s “overreaction” to a string of London-based scandals are talking about leaving London. The global financial crisis prompted what to most onlookers was a long-overdue review of regulatory controls on banking, as well as use of the tax regime to redistribute profit from the banks to the taxpayers they had harmed. As a result, threats to leave London have been made by Goldman Sachs, JPMorgan, Standard Chartered and Barclays. Even HSBC, which moved to London from Hong Kong in 1994 in advance of the Chinese handover, has responded to these scandal-driven regulatory initiatives by threatening to move its domicile repeatedly through 2010 and most of 2011.

So if not to London, where will banks go? Well, strangely enough, Europe’s ahead-of-the-global-regulatory-curve focus on pay reforms – specifically regarding the clawback of remuneration in the event of failure – means some European bankers including those in London are thinking of moving to – wait for it – the US, that excessively tight jurisdiction from which bankers are supposedly tempted to lax London. Barclays was apparently planning to move its headquarters there. Perhaps noting the apparent circularity of all this, Jamie Dimon, in his response to representative Carolyn Maloney berating the “London Loophole”, insisted that overzealous regulation in the US would lead to an exodus of business not to London but to Singapore.

Threats to relocate based on regulatory arbitrage – the lure of a more lax jurisdiction – are far from new. In 1986 when London’s ‘Big Bang’ financial reforms made it a more liberated place for banks to do business originating and trading securities, US banks flocked to buy up the old London partnerships. They then used their new freedom of choice to pressure the Fed to lift key restrictions on banks in the US. The Fed obliged within a year, long before the repeal of Glass-Steagall.

But whatever arbitrage manoeuvres might have made sense at the neoliberal dawn of deeply financialized capitalism, few now look plausible in the wake of late financialization’s progeny, the global financial crisis.

We should distinguish between two levels of arbitrage, the location of the bank headquarters and the location of particular financial activities. The first signifies which government is on the hook for any bailout stemming from a future financial crisis, and that government sets rules for the bank’s capital reserves and overall structure – so-called ‘prudential’ regulation – as well as tax on the financial firm’s overall group-wide profits. The second determines which governments get to say whether the financial system can be put at risk by permitting particular kinds of activity and remuneration structure – known as ‘conduct of business’ regulation – and the taxation of particular transactions.

Moving activities around to the least onerous jurisdiction is relatively easy and a time-honored pastime. Jamie Dimon’s assertion that activities will move to Singapore is plausible, up to a point. Asian financial centers other than Japan are expected to leap forward in importance over the next decade, and recent surveys appear to confirm that bankers would prefer to work in Singapore than London or New York, although that story has been getting an outing with oddly insistent regularity of late.

Noting that Asia’s financial centers are growing in importance is one thing. Arguing that this presents banks with substantial opportunities for regulatory arbitrage in the conduct of business is another. After all, the recent regulatory tightening of remuneration structures and derivatives trading is born out of a demonstrable need to rein in bankers’ excessive risk-taking. The consequences of that risk-taking were no more desired and just as criticized post-crisis in Asia as in the West. All the major Asian financial centers including Singapore have already demonstrated a desire over the last decade to tighten up on standards in finance and to build greater capacity to enforce them. Even if Asian financial centers would welcome an influx of Western bankers in the short-term, they will have little political appetite to indulge bankers’ self-destructive excesses over the medium to long term. Whatever temporary regulatory relief Asia’s financial centers might be prepared to extend the West’s weary bankers surely amounts to the regulatory equivalent of predatory lending: ensnaring desperate bankers with a low regulatory bar and then raising that bar once the banks are locked in.

There is another development that could interfere with banks shopping for lax jurisdictions to conduct business. Their home country regulators increasingly recognize that a big problem occurring in an overseas unit operating under loose supervision often comes home to roost. Conduct of business issues are merely prudential business issues-in-waiting. To address this, the US Dodd Frank Act has been drafted so as to apply to overseas trading operations of US-based banks. If this becomes a trend, arbitrage could become all but impossible without moving headquarters.

So what about moving headquarters? HSBC* considers relocation of the bank’s headquarters a “non-trivial matter“, and yet insists on bludgeoning UK politicians and their anxious constituents with the possibility of exodus every three years. It’s as if they were just talking about moving to new premises down the street. They manage to string out this three year cycle so that the threat can be wheeled out whenever the latest banking scandal cycle demands. If the political response to scandal is due in the period approaching the relocation decision then the bank delays the decision until after the political process has been resolved. If a scandal erupts mid-relocation decision cycle then the bank makes it known that political action taken now will impact the bank’s next relocation decision. It is hard not to view HSBC’s very public three year cycle for reconsidering domicile as anything more than a platform from which to mount continuous blackmail-based assaults against accountability, control and taxation priorities arrived at through legitimate democratic processes.

For their part, any jurisdiction that wants to attract (or, for that matter, retain) the headquarters of major banking institutions with the incentive of lower standards of prudential regulation or light taxation, however, had better have very deep pockets for the substantial public-funded bailout that indulgent regime – and the banks’ current subsidized cost of capital - implies. And that jurisdiction will also need a compliant population from which to extract the bill.

Does Dubai really fit this profile? Does prudent Singapore? For its part it doesn’t seem to think so.

Does Hong Kong? Hong Kong may look relatively free-wheeling now, but in the end it must look over its shoulder at China. Nothing in the 63-year history of the People’s Republic indicates an inclination towards being “hands off”, especially if they might be on the hook to provide a bailout.

All in all, you have to wonder why the US or UK governments would entertain these threats to an extent that makes the threat worth making. Politicians in hock to the financial sector for campaign contributions presumably love the relocation threat story because it deflects attention away from their own inaction towards those mean-but-oh-so-importantly-big banks. Banks in turn deflect attention to “a few of their biggest shareholders” who are demanding that the bank’s location be put back into question.

Shareholders, of course, are never accountable for anything, so the buck stops nowhere. You have to wonder, though, why any shareholders go along with this story. While the public suffers, shareholders gain handsomely from a ‘too-big-to-fail’ bank’s domicile in a country able and demonstrably willing to stump up bailout funds. And it cannot be assumed that shareholders are enthusiastic about all the banks’ anti-regulatory positions concerning conduct of business, either, such as that relating to the claw-back of remuneration.

Clearly, if the G20 nations not only spoke with one voice on financial reform but also acted as one then we wouldn’t have to listen to the threat any more. Short of that, let’s at least recognize that perceived opportunities for regulatory arbitrage in the post-crisis world are deceptive, or else closing fast, and give them short shrift in the public policy debate.

*Disclosure: I worked in compliance at HSBC from 1994-1999.

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24 comments

  1. C

    You know, Al Davis owner of the Oakland Raiders made a long practice of this. He threatened to move the team when he didn’t get what he wanted (new taxpayer-funded stadiums) and he did so twice. Oakland’s attempts to appease him left the city in debt for two stadium projects.

    When he passed away the flags in Oakland and LA remained at full staff. No city officials, no politicians at all, went to his memorial service. I’m not even sure they tweeted about it.

    In the end we have to do as a nation what the people of Oakland and LA did. Tell our politicians that cozying up to Wall St. will cost you more than all their ad money can buy.

      1. C

        A telling quote from the article:

        This week, the National Journal named her one of its “up-and-comers” to watch in the 2016 presidential race. She remains close to Obama, last speaking to him a few weeks ago about everything from the foreclosure crisis to the campaign. This fall, she anticipates spending weekends in the swing state of Ohio as a surrogate for her friend.

    1. Procopius

      I suppose bankers are too dignified to chew gum, so they won’t have to worry about that, but somebody better warn them about farting in elevators. Oh, yeah, and before I forget, Singapore is really, really serious about following the law unless you’re one of the Chinese elite (rather like Hong Kong but even more so). No matter how rich you are, if you aren’t Chinese you’re a barbarian and better remember your place. Also, too, illegal drugs like cocaine (a favorite with bond traders, I’ve heard) will definitely get you hanged in Singapore.

  2. Christopher Fay

    Ha, ha, Singapore would not hesitate to throw white bankers in the clink, or give them whacks from the cane. And I don’t think they will put their sovereign wealth funds behind the banks when they fail.

  3. Clive

    Theatre, pure theatre. The government in the UK is dumb but it is not *that* dumb. It knows that the threats of the TBTFs are simply that — threats. Yes it goes along with the ruse by pretending to be scared but nevertheless standing up to the TBTFs in classic gesture politics. It knows that the risk isn’t real of the TBTFs leaving, it knows that its “concern” isn’t real either and it knows that its “standing up to the TBTFs” is for popular consumption only. This is because it enables the government to then make concessions (which are portrayed as minor but actually aren’t) on the basis of not doing so would be unfair and might make the TBTFs resolve to leave more genuine in the future.

    But, as has oft been said here, we get the governments, the TBTFs and the resultant society we deserve. Everyone moans about Europe — but at least the transaction tax is a step in the right direction.

    And while the Eurocrats are a pretty self-serving bunch, they at least see the TBTFs as a power which could rival them so — in pure self interest — it is trying to weaken the banks.

    1. Synopticist

      I think your UK analysis is wrong there dude.

      “The government in the UK is dumb but it is not *that* dumb. It knows that the threats of the TBTFs are simply that — threats. Yes it goes along with the ruse by pretending to be scared but nevertheless…”

      That attitude would fairly accuratelly describe the LAST UK government, who went along with the banks demamnds for the sake of expediancy and whos members generally loathed them but thought they were the golden egg laying goose to be protected and cherished.

      The present Tory led government have a different outlook. They’ve always been the party of financial capital, and they LOVE the bankers. Most of their funding comes from the city, their party treasures have always come from that background, their last treasurer resigned swiftly and quietly when the LIBOR SHTF, they adore big banks and their evil ways. Most of their friends are bankers.

      The present UK govt will defend the City and their abominations 100%. Whether it loses them popular support, or whether or not its to the benefit of the UK as a whole, is ultimatelly irrelevant.

      The NEXT UK administration MAY have a different attitude. I don’t know, but i’d love to think the Labour party has learned some lessons from the crisis. Money raising is less important here than in the States. But the fact remains, while the Tories are governing, they’ll suck the banks dicks no matter what.

    2. Synopticist

      I think your UK analysis is wrong there dude.

      “The government in the UK is dumb but it is not *that* dumb. It knows that the threats of the TBTFs are simply that — threats. Yes it goes along with the ruse by pretending to be scared but nevertheless…”

      That attitude would fairly accuratelly describe the LAST UK government, who went along with the banks demamnds for the sake of expediancy and whos members generally loathed them but thought they were the golden egg laying goose to be humoured, protected and cherished.

      The present Tory led government have a different outlook. They’ve always been the party of financial capital, and they LOVE the bankers. Most of their funding comes from the city, their party treasurers have always come from that background, their last treasurer resigned swiftly and quietly when the LIBOR SHTF, they adore big banks and their evil ways. Most of their friends are bankers. The Tories are the party of the City to an even bigger extent than the Reps are the party of Wall street.

      The present UK govt will defend the City and their abominations 100%. Whether it loses them popular support, or whether or not its to the benefit of the UK as a whole, is ultimatelly irrelevant.

      The NEXT UK administration MAY have a different attitude. I don’t know, but i’d love to think the Labour party has learned some lessons from the crisis. Money raising is less important here than in the States. But the fact remains, while the Tories are governing, they’ll suck the banks dicks no matter what.

    1. Synopticist

      Its the China/Hong Kong threat that cracks me up.

      “You better do what we randian hyper capatlists want, or we’ll move to a single party quasi-communist state with no rule of law, and on the wrong side of any future trade dispute.”

  4. DANNYBOY

    30 years ago, while at Citi, I had prepared the testimony given to the NYS Assembly pitching Usury relief. I was stunned at the end of the presentation, when the presenter (Head of NY Consumer Banking) threatened to move his 6000 bankers out of NY if he didn’t get his way.

    I guess, it’s always been so.

    1. Andrew Newton

      I don’t think the threat was any more credible then that it is now. Before Riegle-Neal, you were stuck with state usury laws. What would moving 6,000 bankers do for you, assuming you could get them to move out of NY?

      1. DANNYBOY

        Citi had just moved its Credit Card Business to South Dakota. At that time, the threat was to move to a more Bank-friendly state.

  5. OMF

    I think countires are ultimately better off if those demanding pampered behaviour actually do leave. It removes a dangerous and destabalising toxin from society.

  6. F. Beard

    Who the heck needs banks? Risk-free money storage and investing/gambling have no business sharing the same bed.

    The ONLY reason many don’t take their money completely out of the banking system is the lack of a free, risk-free storage and transaction service to put it in. The US Federal Government should provide one.

    So why not fully nationalize the FED and have it provide free (up to normal household limits) accounts for all US citizens and then cancel deposit insurance for the banks?

  7. BondsOfSteel

    Ya know… this whole globalization thing isn’t a law of nature. It’s a political construction. Just like it was created, it can be undone or changed though politics.

    We can simply tax [some] offshore banks punitive fees, or restrict their ablity to transfer funds, or any number of creative things that would put them out of buisness in the US.

    They just have to *pee* off enough people. I think the big banks are almost there. Moving overseas in a huff would probably put them over the edge….

  8. TC

    A sovereign national bank, legislatively empowered and capitalized to a considerable extent via the national treasury would go a long way toward addressing both the relocation issue as well as the backstop issue. Functioning as a rock solid lender facilitating capital intensive infrastructure projects, agriculture, industry and commerce, a systemic leash of sorts would be in place. Although not necessarily restraining relocation, those nations going this route would over the long-term present no brainer opportunities incentivizing private sector banks to participate in the business of that nation’s economy.

    Thanks for the heads up per: “Threats to relocate based on regulatory arbitrage – the lure of a more lax jurisdiction – are far from new. In 1986 when London’s ‘Big Bang’ financial reforms made it a more liberated place for banks to do business originating and trading securities, US banks flocked to buy up the old London partnerships. They then used their new freedom of choice to pressure the Fed to lift key restrictions on banks in the US. The Fed obliged within a year, long before the repeal of Glass-Steagall.” The means by which the imperial enemy of the United States lured the nation into its self desruction is instructive.

  9. Galactus

    Bottom line

    They can’t actually leave because if they did we’d all of us with money in the bank want our money back and they don’t have it.

    So Speaks Galactus

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