Is HM Treasury really this thick?

From City AM:

THE TREASURY will kick off a consultation on the Vickers Commission banking reforms today that could deliver a major lobbying victory for HSBC after its tough talking on capital rules... Any signal of a watering down would be a major victory for HSBC and Standard Chartered, the two banks that have led the lobbying against the suggestion that they should have to raise billions in new unsecured debt that can absorb losses if they go bust...

HSBC has consistently been critical of the capital proposals, saying they penalise safer banks. The bank has also spoken to Hong Kong regulators about moving its headquarters abroad. And as City A.M. revealed recently, banks submitted a confidential lobbying paper warning that front-running the Vickers capital proposals in the UK before they are implemented in the EU could trigger a credit crunch in Britain worse than the one already underway on the continent.

The paper said: “Adopting a regime which is at odds to that which prevails internationally would have serious consequences for UK banks’ ability to attract funding and therefore the UK economy more broadly.” HSBC would be particularly badly hit if the Vickers Commission’s proposal on extra capital were to apply to its global operations because of the vast size of its non-UK balance sheet.

HM Treasury's first act of stupidity is not to restrict UK rules to UK activities and assets as a matter of course. The old Midland bank is merely the UK subsidiary of a vast international bank called HSBC, which happens to have its head office in London and is quoted on the London stock exchange. Our only concern is that the UK bit is properly capitalised and supervised, if our rules demand minimum share capital of nine per cent of total assets, then common sense says that means that the UK subsidiary's share capital has to be nine per cent of its UK assets, what the rest of HSBC gets up to and how it is financed, or indeed where it got the money from to pay up the nine per cent share capital is of little interest.

HM Treasury's second act of stupidity is to fall for HSBC's line that "a regime which is at odds to that which prevails internationally would have serious consequences for UK banks’ ability to attract funding and therefore the UK economy more broadly". For sure, the bank will have to pay a higher interest rate on bail-in bonds than it would on senior bonds, but by the same token, holders of senior bonds will accept a lower interest rate if they know that somebody else will have to bear any losses, so it all comes out in the wash. And if HSBC is as well capitalised as it claims (it might well be), then it will not have to pay a higher interest rate on bail-in bonds anyway, because there will be so little risk attached.

More detailed musings here.

And HSBC's comment about "serious consequences for... the UK economy" should have been greeted with snorts of derision, this is feeble blackmail along the lines of "Nobody move or the puppy gets it!"