Archive for the ‘Banks:Costs/Benefits’ Category

Banks: Costs versus Benefits.

Jeudi, avril 21st, 2011

The previous Labour Chancellor, Alistair Darling, having experienced first-hand the recent crisis in the banking sector during his three years in office, agreed that it made sense for the banks to hold more capital (10% tier one capital ratio) and to formally ring-fence off the riskier investment banking operations, as recommended by the Interim Report of the Independent Commission on Banking and Competition (see also Categories/Chairman’s Blog/Interim Report – Banks in the right-hand index column of this Blog). However, he did not seem convinced that such a rational approach to the problem of protecting the retail operations of the banks, would be sufficient to prevent the collapse in market confidence and resulting irrational sense of panic in the financial markets that occurred last time around or could occur in the future.
There is also the issue raised by the Commission, of the costs versus benefits of having large British banks such as HSBC, Barclays and Royal Bank of Scotland (RBS) based in the UK. The Interim Report claims that such large banks benefit from an implicit state subsidy of more than £10 billion a year by being headquartered in the UK since investors assume that a British government via the taxpayer will always bail them out in a financial crisis. Since the banks dispute this claim, they could decide to move if they find the new banking regulations too onerous and this will impact the British economy.
The Commission, however, views the City of London as representing far more than a few large, British banks and has found no conclusive evidence that they enhance the role of London as a leading international centre for financial services. Indeed, historically the growth of the City has been driven more by its openness to foreign companies and their success in entering the financial markets there. Needless to say, our major banks do not necessarily see it that way!
Our banks contribute to the British economy via tax receipts (to the tune of £53.4 billion in 2009/10) and employment. However, around 60% of this tax paid can be traced to domestic operations such as retail banking, which would still remain in the UK and employ the same people, even if the bank head office was moved offshore, the British-based profits still being taxed in the UK under international tax law.
Even investment banking would apparently not be that much impacted since British banks only account for around 10% of fees earned globally. Tougher regulations applied to British banks would not apply to major players such as Deutsche Bank, UBS, Credit Suisse, Morgan Stanley, JP Morgan or Goldman Sachs. They employ thousands in the City of London and around half of taxes from investment banking come from that paid on bonuses and salaries there. These major foreign banks have also chosen the City of London because it still offers one of the best environments for banking, with its knowhow and cluster of supporting services, the convenient time zone positioning between the USA and Asia, together with traditionally a stable tax regime (which British governments should never forget even with the current budget difficulties).
That said, market sentiment as illustrated in the opening paragraph of this article, can be a most irrational thing and for a major British bank to move its head office to New York or Asia, could have a negative impact on the City of London.