24 April 2015

HSBC this morning announced that it would be reviewing the status of its headquarters in London and may consider moving them to Hong Kong. Many have warned that fears of a UK exit from the EU (Brexit) would trigger such a response. But is that the case here? In his statement did HSBC Holdings Group Chairman Douglas Flint actually link the two issues?

HSBC headquarters decision more about UK regulation than Brexit

The full statement can be found here, but on careful reading it does not seem that the link was as clear or as some have made out. On the decision to review the HQ’s location Flint said:

We also have to take fully into account the repositioning of our industry being driven by the regulatory and structural reforms which have been put in place post crisis…we are beginning to see the final shape of regulation and of structural reform, including the requirement to ring fence in the UK…the Board has therefore now asked management to commence work to look at where the best place is for HSBC to be headquartered in this new environment. The question is a complex one and it is too soon to say how long this will take or what the conclusion will be.

So, the key points he references here are the changing nature of financial regulation following the crisis and in particularly the UK Vickers rules on ring-fencing different banking activities.

Flint then continues on with his long statement to the shareholders, starting a separate section looking at the “very broad range of uncertainties and challenges to be addressed in 2015 and beyond.” It is here that he says, “One economic uncertainty stands out, that of continuing UK membership of the EU,” along with other risks such as the Eurozone crisis, geopolitical tensions and unconventional central bank policies.

It is important to note then that, Flint makes no explicit link between the risk of Brexit and HSBC’s decision to review the location of its headquarters. In fact he focuses largely on the UK regulatory environment and the response to the financial crisis.

As we noted in our recent Brexit report, there is no doubt that such a change would involve uncertainty for the financial sector. However, in the end what is more important is what is done before or after an EU exit. Flint himself alludes to part of this, in highlighting the need for EU reform, including the completion of the single market in services and the Capital Markets Union. If the UK succeeds in becoming open and liberal outside the EU it could see a GDP boost of up to 1.6%. If instead it falls back into protectionism it could see a GDP contraction of 2.2%. In fact our central estimate is an impact from -0.8% to +0.6%, showing that the case is not as clear cut as is often made out. In the same vein neither are Flint’s statements.

Finally, as we noted in a blog earlier today (and have argued many a time), ignoring a referendum is not necessarily the answer to reducing Brexit risk in the medium and long term, in fact it could actually increase it.