HSBC is a familiar feature of many high streets in the UK and this is hardly surprising, given that it is the largest bank in Europe. But could this be about to change? With uncertainty surrounding the UK’s in-out vote on the EU, the future of the banking levy and HSBC’s desire to reduce the size of its operations, the UK high street might start to look quite different.
In the UK, 26,000 staff are employed in its retail banking sector, with 48,000 workers across the whole of its UK banking operations. HSBC has plans to downsize its business globally, with expected job losses in the UK of 8000 workers and a total of 25,000 jobs across the world. This would reduce its workforce by around 10%. This could have big implications for the UK economy. Although many of the job losses would not be enforced, given that HSBC does have a relatively high staff turnover, it is likely to mean some forced redundancies. With job creation being one of the big drivers of the UK economy in the last couple of years, this could put a dampner on the UK’s economic progress.
A further change we are likely to see will be the renaming of high street branches of HSBC, as new government rules are requiring HSBC to separate its investment and retail banking operations. Much of this stems from the aftermath of the financial crisis and governments trying to reign in the actions of the largest banks. Ring fencing has aimed to do this as a means of protecting the retail banking sector, should the investment banking part of the bank become problematic.
However, perhaps the biggest potential shock could be the possibility of HSBC leaving the UK and moving to a new base in Hong Kong. A list of 11 criteria has been released by HSBC, outlining the factors that will influence its decision on whether to stay or go.
The UK’s decision on Europe is likely to be a key determinant, but other key factors against remaining in the UK are ‘the tax system and government policy in support of [the] growth and development of [the] financial services sector’. HSBC pays a large banking levy, as it is based not just on UK operations, but on its whole balance sheet.
HSBC’s Chief Executive, Stuart Gulliver, has said that the discussion on the potential move to Hong Kong is based on the changing world.
“We recognise that the world has changed and we need to change with it. That is why we are outlining the following… strategic actions that will further transform our organisation… Asia [is] expected to show high growth and become the centre of global trade over the next decade… Our actions will allow us to capture expected future growth opportunities.”
Leaving the EU will have big effects on consumers and businesses, given that it is the UK’s largest market, trading partner and investor. Whether or not decisions of key businesses such as HSBC will have an impact on the referendum’s outcome will only be known as we get closer to the day of the vote (which is still some way off!). It will, however, be interesting to see if other companies raise similar issues in the coming year, as the referendum on the EU draws nearer. We should also look out for any potential change in the UK’s banking levy and what impact, if any, this has on HSBC’s decision to stay or go and on the future of any other banks.
Has HSBC already decided to leave the UK? The Telegraph, Ben Wright (10/6/15)
HSBC plans to cut 8,000 jobs in the UK in savings drive BBC News (9/6/15)
The Guaridan view on HSBC: a bank beyond shame The Guardian (10/6/15)
HSBC brand to vanish from UK high streets Financial Times, Emma Dunkley (9/6/15)
HSBC job cuts should come as little surprise Sky News, Ian King (9/6/15)
HSBC in charts: Where the bank plans to generate growth Financial Times, Jeremy Grant (9/6/15)
HSBC’s local rethink can’t shore up global act Wall Street Journal, Paul Davies (9/6/15)
Can George Osborne persuade HSBC to stay in the UK? BBC News, Kamal Ahmed (9/6/15)
Questions
- What is the UK’s banking levy and why does it affect a company like HSBC disproportionately?
- Look at the list of 11 criteria that HSBC have produced about staying in the UK or moving to Hong Kong. With each criterion, would you place it in favour of the UK or Hong Kong?
- Why is the banking sector ‘not a fan’ of the government policy of ring fencing?
- What impact would the loss of 8000 UK jobs have on the UK economy?
- Why does it matter to a bank such as HSBC if the UK is a member of the EU?
Insolvencies in England and Wales have fallen to their lowest level since 2005, official records show. The Insolvency Service indicates that bankruptcy, individual voluntary arrangements and debt relief orders have fallen, with the largest and worst form of bankruptcy falling by 22.5 per cent compared to the same period in 2014. There has also been a fall in corporate insolvencies back to pre-crisis levels.
The British economy is recovering and despite an increase in consumer borrowing of £1.2 billion from February to March, which is the biggest since the onset of the credit crunch, the number of people in financial difficulty and living beyond their means has fallen. However, there are also suggestions that the number could begin to creep up in the future and we are still seeing a divide between the north and south of England in terms of the number of insolvencies.
There are many factors that could explain such a decline in insolvencies. Perhaps it is the growth in wages, in part due the recovery of the economy, which has enabled more people to forgo borrowing or enabled them to repay any loan more comfortably. Lower inflation has helped to reduce the cost of living, thereby increasing the available income to repay any loans. Interest rates have also remained low, thus cutting the cost of borrowing and the repayments due.
But, another factor may simply be that lending is now more closely regulated. Prior to the financial crisis, huge amounts of money were being lent out, often to those who had no chance of making the repayments. More stringent affordability checks by lenders may have a large part to play in reducing the number of insolvencies. President of R3, the insolvency practitioner body, Phillip Sykes said:
“It may be too early to draw conclusions but demand could be falling as a result of low interest rates, low inflation and tighter regulation. This trend is worth watching.”
Mark Sands, from Baker Tilly added to this, noting that fewer people were now in financial difficulty.
“As well as this, we are seeing lower levels of personal debt and fewer people borrowing outside of their means due to more stringent affordability checks by creditors.”
Whatever the main reason behind the data, it is certainly a positive indicator, perhaps of economic recovery, or that at least some have learned the lessons of the financial crisis. The following articles consider this topic.
Personal insolvencies fall to 10-year low Financial Times, James Pickford (1/5/15)
Personal insolvencies at lowest level since 2005 BBC News (29/4/15)
Personal insolvencies drop to lowest level in a decade The Guardian, Press Association (29/4/15)
Corporate insolvencies at lowest level since 2007 The Telegraph, Elizabeth Anderson (30/4/15)
Interview: R3 President Phillip Sykes Accountancy Age, Richard Crump (1/5/15)
North-South gap widens in personal insolvencies Independent, Ben Chu (27/4/15)
Insolvency rates show ‘stark’ north-south divide Financial Times, James Pickford (27/4/15)
Questions
- What is meant by insolvency?
- There are many factors that might explain why the number of insolvencies has fallen. Explain the economic theory behind a lower inflation rate and why this might have contributed to fewer insolvencies.
- How might lower interest rates affect both the number of personal and corporate insolvencies?
- Why has there been a growth in the north-south divide in terms of the number of insolvencies?
- Do you think this data does suggest that lessons have been learned from the Credit Crunch?
The US economy has been performing relatively well, but as with the UK economy, growth in the first quarter of 2015 has slowed. In the US, it has slowed to 0.2%, which is below expectations and said to be due to ‘transitory factors’. In response, the Federal Reserve has kept interest rates at a record low, within the band 0.0% to 0.25%.
The USA appears relatively unconcerned about the slower growth it is experiencing and expects growth to recover in the next quarter. The Fed said:
“Growth in household spending declined; households’ real incomes rose strongly, partly reflecting earlier declines in energy prices, and consumer sentiment remains high. Business fixed investment softened, the recovery in the housing sector remained slow, and exports declined.”
Nothing has been said as to when interest rates may rise and with this unexpected slowing of the economy, further delays are likely. An investment Manager from Aberdeen Asset Management said:
“The removal of the Fed’s time dependent forward guidance could be significant. It means that any meeting from now on could be the one when they announce that magic first rate rise.”
Low rates will provide optimal conditions for stimulating growth. A key instrument of monetary policy, interest rates affect many of the components of aggregate demand. 
Lower interest rates reduce the cost of borrowing, reduce the return on savings and hence encourage consumption. They can also reduce mortgage repayments and have a role in reducing the exchange rate. All of these factors are crucial for any economic stimulus.
Analysts are not expecting rates to rise in the June meeting and so attention has now turned to September as the likely time when interest rates will increase and finally reward savers. Any earlier increase in rates could spell trouble for economic growth and similar arguments can be made in the UK and across the eurozone. The following articles consider the US economy.
Federal Reserve keeps interest rates at record low BBC News, Kim Gittleson (29/4/15)
Shock stalling of US economy hits chances of early Fed rate rise The Guardian, Larry Elliott (29/4/15)
US Fed leave interest rates unchanged after poor GDP figures Independent, Andrew Dewson (30/4/15)
Fed could give clues on first interest rate hike USA Today, Paul Davidson (28/4/15)
Fed’s downgrade of economic outlook signals longer rate hike wait Reuters, Michael Flaherty and Howard Schneider (29/4/15)
Five things that stopped the Fed raising rates The Telegraph, Peter Spence (29/4/15)
Questions
- By outlining the key components of aggregate demand, explain the mechanisms by which interest rates will affect each component.
- How can inflation rates be affected by interest rates?
- Why could it be helpful for the Fed not to provide any forward guidance?
- What are the key factors behind the slowdown of growth in the USA? Do you agree that they are transitory factors?
- Who would be helped and harmed by a rate rise?
- Consider the main macroeconomic objectives and in each case, with respect to the current situation in the USA, explain whether economic theory would suggest that interest rates should (a) fall , (b) remain as they are, or (c) rise.
In March 2009, interest rates in the UK fell to a record low of 0.5%. At the time, it is unlikely that anyone expected that we would still be talking about such low interest rates 6 years later. There has been no movement in the UK rate of interest over the past 6 years and many believe that we are unlikely to see an increase before 2016 or late 2015 at the earliest. With inflation at 0.3%, there is ‘little reason to raise the cost of borrowing’.
The cut in interest rates back in 2009 was in response to the financial crisis and recession. A key instrument of monetary policy, interest rates affect many of the components of aggregate demand. Lower interest rates reduce the cost of borrowing, reduce the return on savings and hence encourage consumption. They can also reduce mortgage repayments and have a role in reducing the exchange rate. All of these factors are crucial for any economic stimulus. As the recovery in the UK took hold, discussions started to focus on when (and not if) interest rates would increase. As the 6 year anniversary occurs, with the MPC keeping rates at 0.5% for March, this question has once again been raised.
Interest rates are used to target inflation and the target in the UK is 2% +/- 1%. With inflation at 0.3% and some predicting that it will turn negative, thanks to such a large fall in oil prices, perhaps the most likely change in interest rates is that they will fall further. A senior Economic Adviser to the EY Item Club commented:
“While the risks of an earlier rate rise have probably increased lately, we still think it most likely that the Bank will wait until February 2016, by which time inflation will be back above 1% and heading towards the 2% target.”
This was echoed by the Chief Economist at the British Chambers of Commerce, who said:
“The strengthening pound against the euro is already posing challenges for many UK exporters and higher interest rates would only make matters worse…Given this background, business confidence will be strengthened if the Monetary Policy Committee (MPC) clearly states that interest rates are likely to stay on hold until at least early 2016.”
Some might question the logic of keeping interest rates so low, given that unemployment is falling and the economy is growing. In such cases, we would normally expect interest rates to increase, especially given how low they are and the fact that it has been 6 years since they went down. However, with oil prices down, inflation has fallen and wage growth does remain relatively weak. Furthermore, there are still some areas within the UK that are still in the recovery process.
The strength of the economy relative to Europe is also putting upward pressure on the pound, which will adversely affect the competitiveness of UK exports. These factors together mean that retaining interest rates at 0.5% received unanimous support amongst the MPC. The only disagreement was on the future direction of interest rates. It is this disagreement that is perhaps what is causing problems, as confirmation of what will happen to interest rates over the rest of 2015 would give greater certainty to an economy. The following articles consider this anniversary.
UK interest rates mark six-year anniversary at record low The Guardian, Angela Monaghan (5/3/15)
UK interest rates mark six years at record low of 0.5% BBC News (5/3/15)
Bank of England keeps interest rates on hold Financial Times, Emily Cadman (5/3/15)
Carney facing seven-year itch as BOE holds rates Bloomberg, Jennifer Ryan (5/3/15)
Bank of England rates have now been on hold six years. Here’s how it has affected you The Telegraph, Szu Ping Chan (5/3/15)
Bank of England keeps rates on hold, six years after crisis cut Reuters (5/3/15)
Bank of England keeps key rate at record low Wall Street Journal, Jason Douglas (5/3/15)
Questions
- By outlining the key components of aggregate demand, explain the mechanisms by which interest rates will affect each component.
- How can inflation rates be affected by interest rates?
- Why is there a debate amongst the MPC as to the future direction of interest rates?
- The Chief Economist at the British Chambers of Commerce has said that the strengthening pound is creating problems in the UK and higher interest rates would make matters worse. Why is this?
- Who would be helped and harmed by a rate rise?
- Consider the main macroeconomic objectives and in each case explain whether economic theory would suggest that interest rates should (a) fall , (b) remain at 0.5% or (c) rise.
‘The world is sinking under a sea of debt, private as well as public, and it is increasingly hard to see how this might end, except in some form of mass default.’ So claims the article below by Jeremy Warner. But just how much has debt grown, both public and private? And is it of concern?
The doomsday scenario is that we are heading for another financial crisis as over leveraged banks and governments could not cope with a collapse in confidence. Bank and bond interest rates would soar and debts would be hard to finance. The world could head back into recession as credit became harder and more expensive to obtain. Perhaps, in such a scenario, there would be mass default, by banks and governments alike. This could result in a plunge back into recession.
The more optimistic scenario is that private-sector debt is under control and in many countries is falling (see, for example, chart 1 in the blog Looking once again through Minsky eyes at UK credit numbers for the case of the UK). Even though private-sector debt could rise again as the world economy grows, it would be affordable provided that interest rates remain low and banks continue to build the requisite capital buffers under the Basel III banking regulations.
As far as public-sector debt is concerned, as a percentage of GDP its growth has begun to decline in advanced countries as a whole and, although gently rising in developing and emerging economies as a whole, is relatively low compared with advanced countries (see chart). Of course, there are some countries that still face much larger debts, but in most cases they are manageable and governments have plans to curb them, or at least their growth.
But there have been several warnings from various economists and institutes, as we saw in the blog post, Has the problem of excess global debt been tackled? Not according to latest figures. The question is whether countries can grow their way out of the problem, with a rapidly rising denominator in the debt/GDP ratios.
Only mass default will end the world’s addiction to debt The Telegraph, Jeremy Warner (3/3/15)
Questions
- What would be the impact of several countries defaulting on debt?
- What factors determine the likelihood of sovereign defaults?
- What factors determine the likelihood of bank defaults?
- What is meant by ‘leverage’ in the context of (a) banks; (b) nations?
- What are the Basel III regulations? What impact will they have/are they having on bank leverage?
- Expand on the arguments supporting the doomsday scenario above.
- Expand on the arguments supporting the optimistic scenario above.
- What is the relationship between economic growth and debt?
- Explain how the explosion in global credit might merely be ‘the mirror image of rising output, asset prices and wealth’.
- Is domestic inflation a good answer for a country to the problems of rising debt denominated (a) in the domestic currency; (b) in foreign currencies?
HSBC is a familiar feature of many high streets in the UK and this is hardly surprising, given that it is the largest bank in Europe. But could this be about to change? With uncertainty surrounding the UK’s in-out vote on the EU, the future of the banking levy and HSBC’s desire to reduce the size of its operations, the UK high street might start to look quite different.
However, perhaps the biggest potential shock could be the possibility of HSBC leaving the UK and moving to a new base in Hong Kong. A list of 11 criteria has been released by HSBC, outlining the factors that will influence its decision on whether to stay or go.
Leaving the EU will have big effects on consumers and businesses, given that it is the UK’s largest market, trading partner and investor. Whether or not decisions of key businesses such as HSBC will have an impact on the referendum’s outcome will only be known as we get closer to the day of the vote (which is still some way off!). It will, however, be interesting to see if other companies raise similar issues in the coming year, as the referendum on the EU draws nearer. We should also look out for any potential change in the UK’s banking levy and what impact, if any, this has on HSBC’s decision to stay or go and on the future of any other banks.
