Badly designed taxes, part the manieth.

From City AM:

HSBC moved a step closer to leaving the UK yesterday, piling pressure on chancellor George Osborne to take action to persuade the bank to stay...

Osborne is speaking at the Mansion House tonight, and is expected to soften his bank-bashing tone. But the industry does not expect him to take any big steps, such as cutting the bank levy which he introduced and has hiked nine times.

That levy is a major cost for HSBC – it is a 0.21 per cent charge on its global balance sheet, and is expected to cost it $1.5bn (£975m) this year. By contrast Barclays is set to pay around £600m, and RBS less than £300m.

Well, duh.

There is a basic principle of taxation called 'the territorial principle', which means that governments can get away with taxing profits and assets in their own country, regardless of the residence of the earner/owner, but if they try taxing residents of their own country on their income and assets in other countries, those residents will go elsewhere.

In other words, the bank levy ought to be applied only to the UK portion of banks' balance sheet, regardless of whether they are UK banks or not, in which case HSBC's bank levy would fall by three-quarters and they probably wouldn't be too fussed about it.

To give a silly example, we can charge fuel duty on fuel purchased/used in the UK, but we cannot expect UK residents to record how much petrol they purchase/use when they are abroad and then pay tax on it here.

(Taken to its logical conclusion, the tax which best complies with the territorial principle is LVT and similar taxes).

"HSBC rapped for doing something sensible"

From The Daily Mail:

A couple in their 40s became unusual victims of common sense after their bank rejected an interest only £250,000 mortgage equity withdrawal application because it deemed the husband to be too old.

HSBC was ordered to pay them compensation after the banking industry watchdog found it ‘relied on sensible assumptions and were acting in the couple's best interests' in the case.

The banking giant was criticised for refusing to hand over £250,000 secured on unrealised and unearned capital gains on a home on which the purchase mortgage had not even been paid off yet because the husband would have been over 65 when the 18-year-deal finished, according to The Sunday Times.

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!"

Banks are run badly, say bankers.

From City AM:

THE TREASURY is preparing to water down a key recommendation in the Vickers report that would protect savers in the event of a bank going bust. Investors and banks have argued that Vickers’ suggestion that retail depositors should be paid back before all other creditors if a bank collapses could risk destroying the market for bank debt and cause corporate deposits to flee the UK...

HSBC and Standard Chartered, the banks most likely to leave the UK, have lobbied against the requirement that they issue billions in bail-in bonds – bonds that can be written-down in the event of the bank’s collapse. The measure would cost HSBC $2.1bn a year, its chief financial officer Iain Mackay said recently, which he added would be "too high" to justify staying in the UK.

i. A bank holds financial assets, i.e. money lent out at interest, and all financial assets require corresponding financial liabilities, i.e. ownership. So a bank can finance itself with a mix of deposits, bonds/loans and share capital/retained profits (to use three broad categories, there are of course huge overlaps between them).

ii. In proper free market capitalism, there is a balance between risk and return. So if a bank has £20 in assets and generates £1 in gross income, the senior staff swipe 10p for themselves and the rest is dished out between the three classes of financiers (depositors, bondholders, shareholders).

iii. If the bank were funded solely by £20 in deposits, they would receive 4.5% interest and bear the whole risk; if it were funded entirely by bonds, they would also receive 4.5% and bear the whole risk etc.

iv. But people's risk preferences are different, so some are prepared to accept a lower return in exchange for bearing less risk, and 'risk' for these purposes is where they rank in priority of repayment. For example, if the bank is financed with a third from each category, the depositors are paid 1%, the bond holders 5% and the shareholders 7.5%.

v. Remember also that how a bank is financed has little impact on that £1 gross income, it's just a question of how it is split up. The whole point of Vickers is to release the taxpayer from the burden of bailing out banks.

vi. Simplest would be to increase their share capital/retained profits, either by issuing shares, paying out less as dividends or paying out less in obscene bonuses. Or we can invent a new category of finance called 'bail-in bonds' which are a hybrid of bonds and share capital. So if the bank is financed with a quarter from each category, the depositors would be paid 1%, the ordinary bondholders 1.5%, the bail-in bondholders 5.5% and the shareholders 10%. And so on; but the total cost of finance from the bank's point of view is exactly the same, it always adds up to 90p.

vii. I don't know how HSBC calculated their $2.1 bn a year cost. Using my simple examples, this would be the extra which they have to pay to those bondholders from iv. who choose to subscribe for the slightly riskier 'bail-in bonds' in vi. These bond holders receive 27.5p interest(£5 x 5.5%). But we can minus off from that the 1.7p less which depositors are getting and 25.8p less which ordinary bondholders are getting (£6.67 x 5% minus £5 x 1.5%). Whatever you do, it always adds up to 90p.

viii. Unless, of course, what HSBC are really saying is that their bank is not particularly well run, i.e. risky, and that if their bondholders are expected to bear some of the risk (clearly the share capital is not enough, or else there'd be no risk to bondholders at all), they will expect $2.1 bn more a year in interest or dividends. They could of course just run their bank properly and get the interest cost down that way or they can fob off the risk onto the taxpayer (i.e. you) and keep the rewards to themselves.

Er ... Vince?

From today's Metro:

HSBC was accused of 'profiteering' yesterday after a senior executive signalled it may not pass on interest rate cuts in full to its customers. The bank's chief operating officer, David Hodgkinson, said there could be 'stickiness' in rates* even if the Bank of England lowered them as expected later this week...

His remarks were seized upon by Liberal Democrat treasury spokesman Vince Cable. He said: 'It is difficult to see the justification for Mr Hodgkinson's comments. When the whole banking industry owes so much to taxpayers for their very survival, any bank will find itself on very thin ice if it is found to be unfairly profiteering from its customers.'

IIRC, HSBC and Barclays were the only two major banks who politely declined the taxpayers' shilling, along with Nationwide Building Society. Is he perhaps confusing 'HBOS' with 'HSBC'? Tut tut.

* Aka 'pushing a piece of string'.

"HSBC charges up to £9,999 for 'rescue' mortgage deals"

The first comment under the article in The Times sums it up nicely:

HSBC are just relying on Joe Public to be gullible enough to fall for the low rate. But they are not alone, all lenders are now doing this in their mad scramble for profit ... Graham, Bradford, England

I wonder what King Canute will say about this?

UK banking 'crisis' in perspective

Total UK personal debt (mortgages, credit cards etc) was £1,409 billion at the end of 2007. That's roughly the same as gross domestic product or nearly £60,000 per household. But there can't be a liability without an asset, rather unsurprisingly, total household bank deposits are around £1,000 billion.

The banks only have to worry about those people who can't afford to pay their mortgage and who are in negative equity. Let's assume that house prices fall by one-third to their long term average price/income ratio (reversing the last three or four years of price rises) and that a fairly catastrophic* five per cent of people lose their jobs. There are about eleven million people with outstanding mortgages so let's assume the banks repossess 550,000 homes** and suffer a loss of £50,000 on each one. That'd be a loss of £28 billion, which sounds like a heck of a lot, but it's only 2% of the total money that banks have lent out.

A brief summary of the main UK banks*** is as follows:


There seems to be a heck of a lot of double-counting (total assets over £5,000 billion!), but even assuming that banks have to write off as much as £50 billion and thus have to raise another £50 billion in cash from their own shareholders, via rights issues, like RBS, this is on average only asking shareholders for another £1 for every £5's worth of shares that they currently own.

In RBS's case, it's more like £1 cash for each £3's worth of shares****, but hey, so be it. And that £50 billion is only one-twentieth of all the money that households have on deposit with banks, so all the bank's shareholders are being asked to do is swap a cash deposit for more shares. Which they can then sell in the market and stick the money back in the bank if they want.

* i.e. one-and-a-half million workers. Unless it's those one-and-a-half million superfluous public sector workers, of course.

** There were 190,000 actual repossessions (not just 'repossession orders') in the years 1990 to 1992. This time is going to be a lot worse.

*** Excluding Nationwide (a building society), Abbey (owned by Johnny Foreigner, so who cares) and Northern Rock. Total assets as at 31 December 2007 per published accounts and market capitalisation is as at today's date from the rather excellent Yahoo finance section.

**** The rights issue is supposed to raise £12 billion, against a current market capitalisation (the total value of all shares in issue) of £38 billion.

"HSBC's mortgage offer bucks trend"

What a brilliant publicity stunt ...

"HSBC, is offering mortgages to homeowners whose fixed rate deals with other lenders are coming to an end. HSBC says it will match existing deals for up to two years and for a fee ...Customers will need to have at least 20% of the equity in their home and the fee paid will depend on how much they want to borrow and over what period of time".

A fee, calculated as a % of how much you borrow and for how long, isn't that what some folks call 'interest'?* I bet the discrepancy between headline rate and AER will be ginormous.

Heck, if HSBC were really keen to do mortgage lending, they wouldn't have closed their subsidiary First Direct to new customers!

* Update, according to thisismoney, the maximum loan available under the scheme will be £250,000 and the maximum fee will be £5,000. Does that sound a bit like 'an-extra-1%-interest-per-annum-disguised-as-a-fee' to anybody else?

"HSBC loses customers' data disc"

Oops! I have often pointed out that banks etc. seem to manage to avoid this sort of thing happening, so why can't the government? There goes that argument, I suppose.

Question - will HSBC's knee jerk response to its 370,000 customers be that this is a good reason to introduce ID cards? Methinks not.