Has The UK Rejected Universal Banking?

As HSBC considers redomiciling, we look at whether the UK rejected universal banking


The ‘optimum’ structure and regulation of the banking system has been the subject of intense discussion since time immemorial, and the financial crisis of 2007/8 brought the debate firmly into the public eye. There are numerous parties with a vested interest in what the structure should be, each of them attempting to influence who exactly it is ‘optimum’ for. The government must balance public concerns with the national economic advantages of housing globally competitive banks. The major banks too must aim to be globally competitive, and they must also consider their shareholders.

HSBC CEO Stuart Gulliver’s declaration today that the UK has “rejected the concept of universal banking” has been widely seen as a further hint that his bank will relocate its headquarters abroad. Gulliver blames the decision to redomicile on the raft of regulations introduced since the financial crisis, arguing that they demonstrate that the UK has moved away from the universal banking model that his bank aspires to. He cited in particular the bank levy - which Labour’s Ed Balls has pledged to raise further should his party get into power.

Ed Balls’s levy increase, on top of the 0.21pc that George Osborne raised it to in March, would see HSBC pay £1.6bn a year on the tax, a figure that Mr Gulliver says makes it impossible for HSBC to stick with their pledge to progressively raise the dividend. He added that the EU bonus cap, a new Senior Managers’ Regime, and ring-fencing rules that mean HSBC having to legally separate its UK retail bank from its investment banking operations, were all reasons why the bank would consider relocating, with the most likely destination being Hong Kong.

Universal banking has always attracted mixed opinions among experts, and its apparent ‘demise’ will be greeted with celebrations by those who believe it to be a system that leads to greater risk. Having both commercial and investment banking activities conducted under one roof means that banks can reduce information asymmetries and internalise risk, although it is also argued that their mixed asset structure decreases versatility during economic downturns. Universal banks were among the hardest hit during the financial crisis. They were over-leveraged, held excessive balance sheets, had overly-complex business models, and partook in reckless risk taking. This risk taking was one of the primary concerns when the Glass-Steagall act, which separated the banking divisions in the US and prevented universal banking, was effectively repealed by the Gramm–Leach–Bliley Act of 1999. It led to universal banks being held widely responsible for the crash, and created an atmosphere of public demand for regulation, which resulted in Basel 2.5 and III, and the Vickers Commission’s proposals.

Stuart Gulliver’s assertion that the UK has rejected universal banking correlates with a number of other bankers who claim that regulatory over-reach is bringing about its death. One outlier is Barclays chief executive Antony Jenkins, who told the Financial Times in December of 2014 that “universal banking is dead”, but offered a wholly different explanation. Rather than blame regulations, Mr Jenkins cited technological improvements as the primary cause. He argued that technology is going to drive competitive advantage in the banking industry, and investment in technology in every division was unaffordable, thus banks would be forced to invest where they feel they have the competitive advantage.

The deadline for banks to ring fence their retail operations from their investment banking activities is 1 January 2019, leaving little under four years before they have to implement plans. During this time, banks have a number of options, and it will be interesting to see whether they choose to follow Stuart Gulliver’s lead, or gravitate to those divisions where they feel they have a technological advantage and offload those where they do not. 


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