tag:theconversation.com,2011:/uk/topics/hsbc-3421/articlesHSBC – The Conversation2023-07-05T15:45:23Ztag:theconversation.com,2011:article/2088882023-07-05T15:45:23Z2023-07-05T15:45:23ZWhy banks once flocked to Canary Wharf’s high-tech superstructures, but are now starting to return to the City<figure><img src="https://images.theconversation.com/files/535727/original/file-20230705-25-m26a2j.jpg?ixlib=rb-1.1.0&rect=29%2C5%2C3951%2C2757&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Canary Wharf, London.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/canary-wharf-business-banking-area-sunset-1498895684">IR Stone/Shutterstock</a></span></figcaption></figure><p>HSBC is moving its UK headquarters <a href="https://www.theguardian.com/business/2023/jun/26/hsbc-to-move-to-smaller-city-of-london-headquarters-due-to-hybrid-working">from Canary Wharf back into the City of London</a> as it adjusts to the impact of hybrid work on its office space needs. </p>
<p>This could signal the reverse of the 1990s trend of banks moving out of the City in search of buildings more suited to modern banking. The City’s “Square Mile” financial district is considered the historical centre of British banking. But space and planning restrictions on building expansions made a move to Canary Wharf very appealing as <a href="https://www.jstor.org/stable/23286646">banks navigated the new world of electronic trading</a>, starting in the 1980s.</p>
<p>HSBC’s predecessor, Midland Bank, opened grand offices at 27 Poultry, next to the Bank of England, in 1924. But after its takeover by HSBC in 1992, this office was vacated for more modern premises on Lower Thames Street. </p>
<p>A subsequent move by HSBC to Canary Wharf in 2002 came more than a decade after the first tenants moved to this new site – Morgan Stanley, Credit Suisse, First Boston and Citigroup. Barclays was the last major UK retail bank to leave the City’s Lombard Street for Canary Wharf in 2005. </p>
<p>HSBC is now heading back to the City 21 years later, possibly at the forefront of another wave of migration, as UK-based banks adjust to the world of hybrid working practices. If bank staff are working from home for two or three days in a week, space is less crucial. Indeed, <a href="https://uk.finance.yahoo.com/news/uk-office-occupancy-hits-highest-150826953.html">office vacancies in London are rising</a>, particularly in <a href="https://www.theguardian.com/business/2023/jul/05/it-has-lost-its-appeal-canary-wharf-faces-an-uncertain-future">Canary Wharf</a>. The City of London, although never down and out, appears to be in ascendance again. </p>
<p>Our <a href="https://www.cambridge.org/core/journals/enterprise-and-society/article/quiet-victory-national-provincial-gibson-hall-and-the-switch-from-comprehensive-redevelopment-to-urban-preservation-in-1960s-london/DA166BDF81D6AE1B2C5433543281DCE7">previous research</a> into the flight of banks to Canary Wharf showed it was driven by conservation movements that aimed to preserve the City’s historical buildings. In particular, National Provincial Bank (later NatWest) wanted to transform its headquarters in the 1960s from a prestigious Victorian building into a skyscraper fit for modern banking.</p>
<h2>Fighting to modernise</h2>
<p><a href="https://www.researchgate.net/figure/Exterior-view-of-Gibson-Hall-Illustrated-London-News-1866_fig4_337788669">Gibson Hall</a>, National Provincial Bank’s original home in the City of London, was built in 1865 and served as the bank’s headquarters for over a century. Victorian banks preferred large, grand, highly-decorated buildings in prime locations for their head offices. They wanted to project wealth, reliability, stability and success. In 1894, the German travel writer <a href="https://www.britannica.com/biography/Karl-Baedeker">Karl Baedeker</a>, wrote in his <a href="https://books.google.co.uk/books/about/London_und_Umgebungen.html?id=3itwcES-3UMC&redir_esc=y">guidebook to London</a> that Gibson Hall was a “beautiful, in Byzantine-Roman style, richly decorated hall with polished granite columns and polychromatic decoration”.</p>
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<img alt="An ornate stone building with arched door and window, topped by statues. Skyscrapers in the background." src="https://images.theconversation.com/files/535779/original/file-20230705-9468-m26a2j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/535779/original/file-20230705-9468-m26a2j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/535779/original/file-20230705-9468-m26a2j.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/535779/original/file-20230705-9468-m26a2j.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/535779/original/file-20230705-9468-m26a2j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/535779/original/file-20230705-9468-m26a2j.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/535779/original/file-20230705-9468-m26a2j.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Gibson Hall, Threadneedle Street, London.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/gibson-hall-sunset-1862-directors-national-169006781">Kiev.Victor/Shutterstock</a></span>
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<p>However, by the 1960s, the Victorian style of Gibson Hall appeared old-fashioned, while the building itself had become ill-suited to modern banking methods. Telephones and computers required wiring and cables that the building had not been built to accommodate. Also, when Gibson Hall was first constructed, just 100 employees worked in the London office. By 1964, this figure had grown to 1,866, excluding non-clerical staff, according to information we found in the NatWest Group archives.</p>
<p>So, National Provincial’s leaders thought replacing Gibson Hall with a new skyscraper would better reflect the needs, size and status of a large and growing modern bank. It could also escape the constraints of an historic building that was no longer fit for purpose.</p>
<p>Unfortunately for National Provincial, <a href="https://eprints.bbk.ac.uk/id/eprint/18794/">a tide of preservation sentiment</a> was building throughout Britain by the 1960s. In 1964, when a public enquiry was held into the demolition of Gibson Hall, our archival research shows attitudes were firmly in favour of preservation of historic buildings.</p>
<p>The preservation movement was fuelled by the demolitions of several London landmarks in the early 1960s, including <a href="https://www.londonremembers.com/subjects/city-of-london-coal-exchange">the Coal Exchange</a> in Lower Thames Street and the “<a href="https://www.theguardian.com/artanddesign/2017/nov/07/euston-arch-rail-london-demolished-1961">Euston Arch</a>” entrance to Euston station, both Grade II listed. This <a href="https://books.google.co.uk/books/about/A_Broken_Wave.html?id=24uwAAAAIAAJ&redir_esc=y">provoked public outcry</a>. A preservation order placed on Gibson Hall in 1964 blocked National Provincial from demolishing its Victorian home to replace it with a modern tower block.</p>
<h2>Out with the old</h2>
<p>Many banks had offices and branches in Victorian or Edwardian buildings at this time. The preservation order placed on Gibson Hall gave a clear signal that such buildings should stand. By the 1980s there was still a powerful conservation lobby. </p>
<p>But City firms’ need to expand and update their office space took on a new urgency following financial deregulation, known as the “Big Bang”, in 1986. As well as replacing face-to-face share dealing with <a href="https://www.bbc.co.uk/news/business-37751599">electronic trading</a>, the reforms allowed more banks to start trading, not just advise investors.</p>
<p>In addition to computers, banks now wanted large floor spaces for their traders. They needed more equipment and connections for computers and air conditioning to stop the tech overheating. It was more cost-efficient to house this activity in an open-plan environment where cables could be run through the space more easily. Ventilation systems would also operate better in open areas versus small, individual offices.</p>
<p>The Canary Wharf development on London’s Isle of Dogs seemed to offer everything the banks needed at this time. It had been <a href="https://www.taylorfrancis.com/books/mono/10.4324/9780203036464/property-masters-scott">designated as an Enterprise Zone</a>, which removed virtually all planning constraints. This allowed for the construction of a new financial hub unencumbered by the delays inherent in planning enquiries.</p>
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<img alt="Skyscraper with HSBC sign and logo, amid other skyscrapers, blue sky." src="https://images.theconversation.com/files/535731/original/file-20230705-28-p5ks5m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/535731/original/file-20230705-28-p5ks5m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/535731/original/file-20230705-28-p5ks5m.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/535731/original/file-20230705-28-p5ks5m.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/535731/original/file-20230705-28-p5ks5m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/535731/original/file-20230705-28-p5ks5m.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/535731/original/file-20230705-28-p5ks5m.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">HSBC head office, Canary Wharf, London.</span>
<span class="attribution"><span class="source">Chrispictures/Shutterstock</span></span>
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<p>Of course there were teething problems during the construction Canary Wharf – not least the impact of the 1989-92 property crash on <a href="https://realestate.wharton.upenn.edu/working-papers/the-crash-and-rebound-of-canary-wharf/">financing for the build</a>. But it eventually gave UK banks what they had wanted for so long: a free hand to build huge skyscrapers. These superstructures not only housed much-needed modern technology, they also served as a monument to their inhabitants’ economic power and prestige. </p>
<p>The movement of HSBC’s headquarters signals another potential shift for banks, but this time to smaller offices to accommodate changing working practices once again. While HSBC was not the first bank to move to Canary Wharf 30 years ago, other banks could follow its lead this time to head bank to the City as hybrid working affects these companies and their employees.</p><img src="https://counter.theconversation.com/content/208888/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>British banks moved to Canary Wharf in search of space and modern facilities but hybrid working needs could drive banks back to the City of London’s smaller spaces.Lucy Newton, Professor in Business History, Henley Business School, University of ReadingPeter Scott, Professor of International Business History, University of ReadingVictoria Barnes, Reader in Commercial Law, Brunel University LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2020042023-03-20T16:23:07Z2023-03-20T16:23:07ZFour ways to protect your small business from a banking crisis<figure><img src="https://images.theconversation.com/files/516010/original/file-20230317-3164-h1n8e9.jpg?ixlib=rb-1.1.0&rect=23%2C20%2C949%2C609&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/portrait-confident-black-businesswoman-all-african-1256023498">Jono Erasmus/Shutterstock</a></span></figcaption></figure><p>The banking sector is currently experiencing great strain, which has resulted in several bank bailouts – most recently UBS’ deal to buy its Swiss competitor Credit Suisse following a collapse in confidence in the latter. <a href="https://www.hsbc.com/news-and-media/media-releases/2023/hsbc-acquires-silicon-valley-bank-uk-limited">HSBC’s acquisition</a> of the UK arm of the collapsed Silicon Valley Bank the previous week brought great relief for its depositors, many of which were small tech start-ups. </p>
<p>SVB’s UK clients were lucky that the government facilitated the rescue deal so quickly – it was announced the Monday after SVB collapsed in the US – but they still endured several days of worry and uncertainty beforehand. And with financial markets now responding to continued concerns about the banking sector, particularly in Europe, it doesn’t look like all banks – or their clients – are out of the woods yet. </p>
<p>At a time like this, many small businesses will be thinking about their finances and how to make them more secure so they don’t face the same fate if there are similar situations in the future. </p>
<p>Here are four ways to shore up your small business banking in preparation for uncertain times:</p>
<h2>1. Split up your accounts</h2>
<p>As a small business, you may not have the means to diversify the range of products or services you offer right now, but you can diversify your banking portfolio. This means, rather than tying up your business needs with one bank, keeping some money and loans with a couple of different institutions.</p>
<p>Speaking of which, when opening an account with a new bank, get the full picture of its strengths and weaknesses. This means checking for any significant recent changes in its assets or its sources of finance, which will tell you if its business is concentrated in any one industry. </p>
<p>Similarly, don’t just open an account with the bank that your industry peers use. SVB’s collapse has been partly blamed on its concentration in the tech sector. Although this means a bank can develop specialist expertise and understanding, it can also leave it exposed if it’s main sector experiences a downturn. </p>
<h2>2. Be careful when banking beyond borders</h2>
<p>The ease of online communications and payments these days means even small businesses can expand overseas. But when operating in a different country you should consider the <a href="https://www.cambridge.org/core/journals/journal-of-financial-and-quantitative-analysis/article/abs/effects-of-cultural-values-on-bank-failures-around-the-world/F057EB21CA974993FA1953EDFFDEE3F7">cultural values</a> of a country because research shows this can affect a bank’s attitude to taking risk. </p>
<p>For example, in some countries, banks are allowed to operate with less easy to access money on hand in case of a problem, but governments are more reluctant to bail out failures, meaning your money will disappear if your bank fails. Before you choose a bank beyond your borders, collect information about its operational behaviour to gauge how much risk it likes to take. You can find this in published financial statements, media articles and by speaking to others in the industry.</p>
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<img alt="Small Business / Small business concept on bulletin board in office" src="https://images.theconversation.com/files/516013/original/file-20230317-16-3lpzbn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/516013/original/file-20230317-16-3lpzbn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/516013/original/file-20230317-16-3lpzbn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/516013/original/file-20230317-16-3lpzbn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/516013/original/file-20230317-16-3lpzbn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/516013/original/file-20230317-16-3lpzbn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/516013/original/file-20230317-16-3lpzbn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Small business plan.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/small-business-concept-on-bulletin-board-289889759">Aysezgicmeli/Shutterstock</a></span>
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<h2>3. Consider a range of borrowing options</h2>
<p>You might have an excellent business idea but without hard assets, it can be difficult to get a bank loan. There are plenty of other options such as R&D grants from local or national governments. </p>
<p>You could also look for investors, which is called raising equity. It essentially brings more money into your business. This can help lower your leverage ratio, which means you have to give over less of your profits to a lender and can reinvest money in your business instead.</p>
<p>In other words, consider exploring ways to hold less debt, even when you are a growing business. There is no standard debt to equity ratio, it depends on the business. Some people think that less debt indicates that the business is not growing, others believe <a href="https://link.springer.com/article/10.1007/s11187-019-00294-y">less debt makes the business stronger</a> because it has more cash on hand for daily operations, rather than relying on credit.</p>
<p>Many small firms, particularly in the tech sector, look to venture capital firms for funding. A shorter-term source of money, they usually buy a stake in a start-up idea and then exit as the company grows and becomes more valuable. </p>
<p>Venture capitalists charge management fees, which are higher for businesses seen as a risky bet. You also typically pay them a share of the profits. And as with any business deal, check credentials such as funding, other business relationships and investments before signing.</p>
<h2>4. Set up an emergency fund</h2>
<p>Try to maintain one third of your typical monthly expenses as an emergency fund – but even if you can’t manage that, set something aside. And don’t forget to top up the emergency fund if do have to dip in. </p>
<p>Also, think about where to keep your emergency fund. Popular places include high yield savings or money market accounts because they are easily accessible, especially when you need cash in hand. But remember to check the policy for how quickly you can convert any holdings to cash. And keep the relevant paperwork updated and in a safe place that you can access quickly. </p>
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<img alt="Woman with bills, calculator, working out finances" src="https://images.theconversation.com/files/516012/original/file-20230317-2480-vvx7pm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/516012/original/file-20230317-2480-vvx7pm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=402&fit=crop&dpr=1 600w, https://images.theconversation.com/files/516012/original/file-20230317-2480-vvx7pm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=402&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/516012/original/file-20230317-2480-vvx7pm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=402&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/516012/original/file-20230317-2480-vvx7pm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=505&fit=crop&dpr=1 754w, https://images.theconversation.com/files/516012/original/file-20230317-2480-vvx7pm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=505&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/516012/original/file-20230317-2480-vvx7pm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=505&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Small business finance.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/caucasian-woman-invoice-bills-1038709384">Rawpixel.com/Shutterstock</a></span>
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<p>Although you have the ultimate responsibility for your own small business finances, the regulator still plays an important role in supporting and protecting the financial system and those within it. The UK Treasury recently published a report on its <a href="https://www.fca.org.uk/publications/corporate-documents/future-regulatory-framework-review">Future Regulatory Framework Review</a>. This aims to identify any changes the government and regulators believe are needed post-Brexit to ensure the UK remains competitive.</p>
<p>Such rules should protect the sector from problems, such as the current banking sector issues in the US and now Europe, while also ensuring start-ups and small and medium sized businesses still have access to a strong financial services market.</p>
<p>The HSBC deal to rescue SVB’s UK arm was a reassuring short-term arrangement from the UK government, but the long-term objective should be be to ensure the UK’s regulatory framework protects otherwise healthy firms – of all sizes – from failing during a crisis.</p><img src="https://counter.theconversation.com/content/202004/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Small companies should think hard about their finances and how to make them more secure, particular in uncertain times.Monomita Nandy, Reader in Accounting and Finance; Director of Internationalisation, Brunel University LondonSuman Lodh, Associate Professor in Finance, Kingston UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2016972023-03-13T15:58:46Z2023-03-13T15:58:46ZSilicon Valley Bank: how interest rates helped trigger its collapse and what central bankers should do next<p>A former prime minister of Britain, Harold Wilson, is famous for remarking that <a href="https://en.wiktionary.org/wiki/a_week_is_a_long_time_in_politics">a week is a long time in politics</a>. But in the world of finance, it seems everything can change in just two days. </p>
<p>Only 48 hours elapsed between <a href="https://ir.svb.com/news-and-research/news/news-details/2023/SVB-Financial-Group-Announces-Proposed-Offerings-of-Common-Stock-and-Mandatory-Convertible-Preferred-Stock/default.aspx">a statement from US-based Silicon Valley Bank (SVB)</a> on March 8 that it was seeking to raise US$2.5 billion (£2 billion) to repair a hole in its balance sheet, and the announcement by US regulator the Federal Deposit Insurance Corporation that <a href="https://www.fdic.gov/news/press-releases/2023/pr23016.html">the bank had collapsed</a>. </p>
<p>At its peak in 2021, <a href="https://www.ft.com/content/f55df9d1-386a-4643-8194-095228741054">SVB was worth US$44 billion</a> and managed over $200 billion in assets. America’s 16th largest deposit-taking institution just a week ago, it has now become the second biggest banking failure in US history. Only <a href="https://www.reuters.com/article/us-washingtonmutual-jpmorgannews1-idUSTRE48P05I20080926">the collapse of Washington Mutual</a> during the 2008 global financial crisis was larger.</p>
<p>Although SVB had been ailing for some time, the speed of its collapse took nearly all commentators – as well as its customers, mostly from the tech sector – by surprise. Tech firms around the world have their cash locked up in SVB deposits and were concerned about how they would pay their workers and their bills until <a href="https://www.cbsnews.com/sanfrancisco/news/us-government-moves-guarantee-silicon-valley-bank-depositors-funds/">government support was announced in the US</a>, alongside <a href="https://www.bbc.co.uk/news/business-64937251">HSBC’s deal to buy SVB’s UK arm</a>. </p>
<p>And it looks like the run on SVB that heralded its collapse – by some metrics the fastest in history – is spreading to other institutions with similar characteristics. On March 12, two days after SVB’s collapse, regulators in New York closed Signature Bank, <a href="https://www.fdic.gov/news/press-releases/2023/pr23018.html">citing systemic risk</a>.</p>
<p>But was what happened to SVB unpredictable, unpreventable and unavoidable? My research suggests not. My latest <a href="https://link.springer.com/book/10.1007/978-3-031-11914-9">book about the history of financial crises</a>, Calming the Storms: the Carry Trade, the Banking School and British Financial Crises Since 1825, was coincidentally launched the day before SVB failed and describes three situations in which a banking crisis may unfold.</p>
<h2>Why SVB collapsed</h2>
<p>One potential cause is when changes in interest rates between countries cause movements in capital flows to suddenly start or stop as investors chase better rates. This affects the availability of finance. This is what happened during the 2007 credit crunch that preceded the global financial crisis, but it wasn’t behind SVB’s collapse.</p>
<p>SVB’s failure does tie in with the other two situations I describe in my book. </p>
<p>The first is when interest rates rise rapidly. The cause may be a central bank reacting to <a href="https://www.bbc.co.uk/news/business-64639662">a surge of inflation</a>, a <a href="https://theconversation.com/how-the-war-in-ukraine-will-affect-food-prices-178693">war</a> or a <a href="https://www.aljazeera.com/economy/2023/1/4/us-labour-market-remains-tight-manufacturing-slows-down">tight labour market</a>. Indeed, the Federal Reserve, alongside other central banks, has <a href="https://www.cnbc.com/2023/03/07/fed-chair-powell-says-interest-rates-are-likely-to-be-higher-than-previously-anticipated.html">raised rates</a> from a band of 0.25%-0.5% to 4.5%-4.75% over the past 12 months. </p>
<p>Higher rates tighten credit conditions. This makes it harder for financial institutions to finance themselves, while also damaging the value of their existing loans and assets. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/inflation-unemployment-the-housing-crisis-and-a-possible-recession-two-economists-forecast-whats-ahead-in-2023-195797">Inflation, unemployment, the housing crisis and a possible recession: Two economists forecast what's ahead in 2023</a>
</strong>
</em>
</p>
<hr>
<p>The second is when short-term interest rates rise above long-term rates, as has happened in America over the past few months. During the pandemic, tech startups with spare cash from funding rounds in a world of easy money placed their deposits with SVB. With little demand for loans from this sector, SVB invested most of the money in long-term bonds – mostly mortgage-backed securities and US Treasuries. </p>
<p>In short, SVB was taking funds mainly on short-term deposit and tying them up in long-term investments. Then, over the past few months, short-term rates rose higher than the returns on longer-dated bonds (see chart below). This is because interest rates were soaring, thanks to the Fed’s rate hikes. </p>
<p><strong>US interest rate changes</strong></p>
<figure class="align-center ">
<img alt="Line graph showing long- and short-term US interest rates rising over time, with short overtaking long in 2022." src="https://images.theconversation.com/files/514888/original/file-20230313-24-4ci4jq.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/514888/original/file-20230313-24-4ci4jq.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=296&fit=crop&dpr=1 600w, https://images.theconversation.com/files/514888/original/file-20230313-24-4ci4jq.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=296&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/514888/original/file-20230313-24-4ci4jq.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=296&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/514888/original/file-20230313-24-4ci4jq.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=373&fit=crop&dpr=1 754w, https://images.theconversation.com/files/514888/original/file-20230313-24-4ci4jq.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=373&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/514888/original/file-20230313-24-4ci4jq.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=373&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.oecd-ilibrary.org/finance-and-investment/interest-rates/indicator-group/english_86b91cb3-en">Author provided from OECD data</a></span>
</figcaption>
</figure>
<p>With funding rounds harder to come by in a high-interest rate environment, tech firms began to withdraw and spend their deposits. At the same time, these higher rates resulted in falling prices for the bonds in which SVB had been investing. That squeezed SVB’s profit margins and put its balance sheet on shaky ground. </p>
<p>This situation was made worse because SVB needed to sell some of its longer-dated bonds at a loss to fund the deposits its customers were withdrawing from the bank. The news of the sales made depositors withdraw more funds, which had to be funded through more sales. A doom loop ensued. </p>
<p>The March 8 announcement that SVB was looking to raise US$2.5 billion to plug the hole in its balance sheet left by these asset fire sales triggered the bank run that finished it off.</p>
<h2>Concerns about systemic risk</h2>
<p>How worried should we be about the collapse of SVB? It is not a major player in the world’s financial system. It is also almost unique in modern banking in terms of its <a href="https://www.theguardian.com/business/2023/mar/12/why-silicon-valley-bank-was-so-important-to-uk-tech-sector">dependence on one sector</a> for its client base and the vulnerability of its balance sheet to interest rate rises.</p>
<p>But even if SVB’s collapse does not trigger a wider financial crisis, it should serve as an important warning. Rapidly rising interest rates over the past year <a href="https://theconversation.com/autumn-statement-2022-this-budget-may-not-cause-truss-level-chaos-but-it-could-still-provoke-markets-192903">have made the global economy fragile</a>. </p>
<p>The world’s central bankers are treading a narrowing path of trying to combat inflation without harming financial stability. Central bankers must manage interest rates more carefully, while regulators should discourage the finance sector from borrowing short to lend long without sufficient hedging of the risks this entails. </p>
<p>It is also important that central banks monitor the impact that interest rate differences and cross-border capital flows have on the credit that’s available to both banks and businesses. Even if the failures of SVB and Signature prove to be no more than “little local difficulties” (<a href="https://www.oxfordreference.com/display/10.1093/acref/9780191843730.001.0001/q-oro-ed5-00006970;jsessionid=A529BB39C9A6DDF89D7664AB3AAB4EB0#:%7E:text=little%20local%20difficulties">to quote another past UK prime minister, Harold Macmillan</a>), the systemic risks that their collapse have highlighted can no longer be ignored.</p><img src="https://counter.theconversation.com/content/201697/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Charles Read's research is funded by a British Academy postdoctoral fellowship grant.</span></em></p>The speed of SVB’s collapse was a surprise but central bankers can learn lessons from this failure.Charles Read, Fellow in Economics and History at Corpus Christi College, University of CambridgeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1596512021-04-23T14:59:48Z2021-04-23T14:59:48ZBitcoin: UK banks are getting tough on crypto, but money-laundering rules are the real problem<p>NatWest, the UK retail bank, <a href="https://www.theguardian.com/technology/2021/apr/21/natwest-will-refuse-to-serve-business-customers-who-accept-cryptocurrencies">has announced</a> it will not engage with business customers who accept payment in bitcoin or other <a href="https://www.investopedia.com/terms/c/cryptocurrency.asp">cryptocurrencies</a>. It follows recent announcements from HSBC that it <a href="https://www.thetimes.co.uk/article/bitcoin-holders-barred-from-depositing-profits-in-uk-banks-pgswbfrdz">won’t allow transfers</a> from digital wallets and <a href="https://www.finews.asia/finance/34290-hsbc-adds-coinbase-to-crypto-ban-list-bitcoin">won’t enable customers</a> to buy shares in companies associated with cryptocurrencies, such as <a href="https://theconversation.com/coinbase-is-listing-for-us-100-billion-on-nasdaq-but-you-might-be-better-buying-bitcoin-instead-158843">Coinbase</a> or MicroStrategy. </p>
<p>The feeling from both banks is that cryptocurrencies are high risk and therefore justify a cautious approach, though they note that their <a href="https://www.theguardian.com/technology/2021/apr/21/natwest-will-refuse-to-serve-business-customers-who-accept-cryptocurrencies">stance could change</a> if and when regulation evolves.</p>
<p>Interestingly, this is not a view shared by institutions across the Atlantic. Both <a href="https://www.coindesk.com/morgan-stanley-approves-bitcoin-exposure-for-handful-of-mutual-funds">Morgan Stanley</a> and <a href="https://www.forbes.com/sites/korihale/2021/04/05/goldman-sachs-cryptocurrency-endorsement-boosts-wealth-management/">Goldman Sachs</a> are now offering their wealth management clients the opportunity to invest in bitcoin. Indeed, the initial uptake has been strong, with Morgan Stanley alone drawing in nearly <a href="https://www.coindesk.com/morgan-stanley-bitcoin-fund-draws-29-4m-in-2-weeks-filings-show">US$30 million (£22 million)</a> of investment in two weeks.</p>
<h2>Why the caution?</h2>
<p>The cautious approach of NatWest and HSBC stems from the <a href="https://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF%20Recommendations%202012.pdf">2012 recommendations</a> of the <a href="https://www.fatf-gafi.org/">Financial Action Task Force</a>, a G7 initiative geared towards defeating money laundering. These recommendations mandate each member state to implement measures requiring their banks to scrutinise customers’ transactions for the purposes of money laundering and terrorist financing.</p>
<p>Under recommendation one, the anti-money laundering framework is to be applied on the basis of perceived risk. In other words, if a transaction or business activity is perceived to be more risky than usual, it needs closer scrutiny by the bank to ensure compliance with the framework. </p>
<p>This increases the strain on bank resources to verify that a transaction or business activity is safe to continue, but they also face large fines for non-compliance where there are deficiencies in their implementation of the framework or if things go wrong. </p>
<p>NatWest and HSBC are no strangers to being under the spotlight for compliance issues. HSBC was <a href="https://www.bbc.co.uk/news/business-20673466">fined US$1.9 billion</a> by US authorities in 2012, while <a href="https://www.ft.com/content/df2aea12-265e-4a71-aead-bef65eb78ec7">NatWest faces charges</a> over significant compliance breaches in the UK. While these charges relate to traditional money-laundering compliance breaches, perhaps it goes some way to explaining the caution of the two banks.</p>
<p>Banks view digital currencies <a href="https://www.fca.org.uk/consumers/cryptoassets">as risky</a> because they have the potential to be used for money laundering, they are targets for fraud and scams, and their value can be extremely unstable in the short-term. Indeed, the UK’s Financial Conduct Authority <a href="https://www.fca.org.uk/news/news-stories/fca-warns-consumers-risks-investments-advertising-high-returns-based-cryptoassets">has warned that</a> those investing and dealing with cryptocurrency are at risk of losing all their funds. Rather than face the enhanced burden of investigating businesses and individuals dealing with these assets, it is easier for banks to avoid the risk and not engage with them. </p>
<p>This situation is not unique to cryptocurrencies. For instance, it has long been a byproduct of the anti-money laundering requirements that <a href="https://www.thirdsector.co.uk/charities-de-risked-mainstream-banks-says-cfg-report/finance/article/1460805">banks have refused</a> to offer financial services to charities operating in high-risk jurisdictions. The banking sector accepts this reality, particularly given that charities tend to be relatively low-value customers. </p>
<h2>The wrong approach?</h2>
<p>On the face of it, banks are perfectly entitled not top offer financial services to businesses transacting in digital currencies. As well as anti-money laundering, banks are bound by anti-fraud measures and consumer protection. Fradulent crypto transactions are both difficult to spot and impossible to reverse, so the risks of engaging are high, at least until the market establishes itself and the business case to engage is stronger. </p>
<p>Of course, this is not to say that they have necessarily made the right call. The fact that the leading US banks have taken a different approach suggests that they think the potential rewards are worthy of the compliance burden. In defence of cryptocurrencies, they are both <a href="https://www.sciencemag.org/news/2016/03/why-criminals-cant-hide-behind-bitcoin">more traceable</a> than cash, and <a href="https://www.swift.com/sites/default/files/files/swift_bae_report_Follow-The%20Money.pdf">used less</a> for money laundering. </p>
<p>And while it is true that there is a risk of significant losses with cryptocurrency investments, there is also clear potential for big gains. Banks are profit-making businesses: the returns from crypto investments <a href="https://www.coindesk.com/price/bitcoin">in recent months</a> – notwithstanding the big sell-off in the past couple of days – plus the <a href="https://digitalik.net/btc/">very bullish forecasts</a>, ought to prompt them to at least speculate in the area, regulatory burden aside. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/396799/original/file-20210423-21-q4uwua.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Bitcoin locked up in jail" src="https://images.theconversation.com/files/396799/original/file-20210423-21-q4uwua.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/396799/original/file-20210423-21-q4uwua.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/396799/original/file-20210423-21-q4uwua.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/396799/original/file-20210423-21-q4uwua.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/396799/original/file-20210423-21-q4uwua.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/396799/original/file-20210423-21-q4uwua.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/396799/original/file-20210423-21-q4uwua.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">De-risked.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/bitcoin-bansbtc-illegal-blockchain-technology-cryptocurrency-759593668">Phanurak Rubpol</a></span>
</figcaption>
</figure>
<p>We could simplistically blame the UK banks for either being too cautious or not doing enough to help these businesses, but it overlooks the bigger design flaw in the anti-money laundering framework. Compliance measures are a significant drain on a bank’s resources where a transaction or business is considered high-risk. Banks and their workers also face criminal sanctions, including large fines, where they fail to properly implement the rules, which is particularly troublesome when it is almost impossible for a bank to identify what a suspicious crypto transaction looks like.</p>
<p>Without a guaranteed high return for the bank, it is easier to de-risk and not engage with these businesses. This represents a missed opportunity for banks, and a potentially unnecessary stifling of legitimate business growth for companies wishing to deal with cryptocurrencies. </p>
<p>Banks are portrayed as the public villain, but the bigger problem is at a much higher level. It is a political and legal issue which requires the attention and intervention of lawmakers to address the fact it is much easier for banks to de-risk than to comply with the rules and help these businesses grow.</p><img src="https://counter.theconversation.com/content/159651/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Matthew Shillito does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>NatWest and HSBC are restricting customers in their crypto-dealings.Matthew Shillito, Lecturer in Law, University of LiverpoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1537862021-02-01T18:57:48Z2021-02-01T18:57:48ZTaking care of business: the private sector is waking up to nature’s value<figure><img src="https://images.theconversation.com/files/381582/original/file-20210201-23-1gj3vjw.jpg?ixlib=rb-1.1.0&rect=11%2C0%2C2485%2C1661&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>For many businesses, climate change is an <a href="https://www.zurich.com/en/knowledge/topics/global-risks/future-proof-your-business-against-climate-change-related-risks">existential threat</a>. Extreme weather can disrupt operations and supply chains, spelling disaster for both small vendors and global corporations. It also leaves investment firms dangerously exposed.</p>
<p>Businesses <a href="https://www.theguardian.com/australia-news/2020/oct/12/net-zero-emissions-target-for-australia-could-launch-63bn-investment-boom">increasingly</a> recognise climate change as a significant financial risk. Awareness of nature-related financial risks, such as biodiversity loss, is <a href="https://impakter.com/nature-risks-are-financial-risks/">still emerging</a>. </p>
<p>My work examines the growth of private sector investment in biodiversity and natural capital. I believe now is a good time to consider questions such as: what are businesses doing, and not doing, about climate change and environmental destruction? And what role should government play?</p>
<p>Research clearly shows humanity is <a href="https://theconversation.com/worried-about-earths-future-well-the-outlook-is-worse-than-even-scientists-can-grasp-153091">severely damaging</a> Earth’s ability to support life. But there is hope, including a change in government in the United States, which has brought new momentum to tackling the world’s environmental problems.</p>
<figure class="align-center ">
<img alt="Koala lies dead after a bushfire tears through forest" src="https://images.theconversation.com/files/381583/original/file-20210201-19-7zyfzd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/381583/original/file-20210201-19-7zyfzd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/381583/original/file-20210201-19-7zyfzd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/381583/original/file-20210201-19-7zyfzd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/381583/original/file-20210201-19-7zyfzd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/381583/original/file-20210201-19-7zyfzd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/381583/original/file-20210201-19-7zyfzd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Now’s a good time to talk about how humans are wrecking the planet.</span>
<span class="attribution"><span class="source">Daniel Mariuz/AAP</span></span>
</figcaption>
</figure>
<h2>Poisoning the well</h2>
<p>An <a href="https://www.climatecollege.unimelb.edu.au/australias-paris-agreement-pathways">expert report</a> released last week warned Australia must cut emissions by 50% or more in the next decade if it’s to meet the Paris Agreement goals. Meeting this challenge will require everyone to do their bit.</p>
<p>Climate change is a <a href="https://www.climatecouncil.org.au/resources/compound-costs-how-climate-change-damages-australias-economy/">major threat</a> to Australia’s financial security, and businesses must be among those leading on emissions reduction. Unfortunately, that’s often not the case.</p>
<p>The finance sector, for example, contributes <a href="https://www.ucl.ac.uk/bartlett/public-purpose/sites/public-purpose/files/final_iipp-wp2020-09-kedward_et_al_nature-related_finance_edited_15_sept.pdf">substantially</a> to climate change and biodiversity loss. It does this by providing loans, insurance or investment for business activities that produce greenhouse gas emissions or otherwise harm nature. </p>
<p>In fact, a <a href="https://www.theguardian.com/australia-news/2020/jul/08/australian-banks-undermining-paris-agreement-with-7bn-in-fossil-fuel-loans">report last year</a> found Australia’s big four banks loaned A$7 billion to 33 fossil fuel projects in the three years to 2019. </p>
<figure class="align-center ">
<img alt="Protest banner on coal pile at terminal" src="https://images.theconversation.com/files/381588/original/file-20210201-19-zuz14s.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/381588/original/file-20210201-19-zuz14s.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/381588/original/file-20210201-19-zuz14s.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/381588/original/file-20210201-19-zuz14s.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/381588/original/file-20210201-19-zuz14s.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/381588/original/file-20210201-19-zuz14s.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/381588/original/file-20210201-19-zuz14s.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Australia’s big banks have been criticised for investing in fossil fuels.</span>
<span class="attribution"><span class="source">Dean Sewell/Greenpeace</span></span>
</figcaption>
</figure>
<h2>A pushback for nature</h2>
<p>Promisingly, there’s a <a href="https://www.unsw.adfa.edu.au/why-ignoring-biodiversity-loss-increasingly-risky-business-1">growing push</a> from some businesses, including in the finance sector, to protect the climate and nature. </p>
<p>Late last year, Australian <a href="https://www.afr.com/companies/financial-services/banks-publish-disclosure-rules-for-extreme-climate-risk-20200911-p55uoc">banks and insurers</a> published the nation’s first comprehensive climate change <a href="https://www.cmsi.org.au/reports">reporting framework</a>. And the recently launched <a href="https://climateleague.org.au/">Climate League 2030</a> initiative, representing 17 of Australia’s institutional investors with A$890 billion in combined assets, aims to act on deeper emissions reductions.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/worried-about-earths-future-well-the-outlook-is-worse-than-even-scientists-can-grasp-153091">Worried about Earth's future? Well, the outlook is worse than even scientists can grasp</a>
</strong>
</em>
</p>
<hr>
<p>Some companies are starting to put <a href="https://www.theguardian.com/australia-news/2020/aug/27/joint-venture-looks-to-invest-billions-in-natural-capital-projects-to-help-combat-climate-change">serious money on the table</a>.
In August last year, global financial services giant HSBC and climate change advisory firm Pollination announced a joint asset management venture focused on “natural capital”. The venture <a href="https://www.reuters.com/article/us-climate-change-hsbc-pollination-idUSKBN25M1IY">aims to raise</a> up to A$1 billion for its first fund.</p>
<p>Globally too, investors are starting to <a href="https://www.newstatesman.com/business/sustainability/2020/12/businesses-are-realising-huge-cost-nature-loss">wake up</a> to the cost of nature loss. Last month, investors representing <a href="https://www.bloomberg.com/news/articles/2021-01-10/hsbc-shareholders-ask-bank-to-cut-fossil-fuel-lending-exposure">US$2.4 trillion</a> (A$3.14 trillion) in assets asked HSBC to set emissions reduction targets in line with the Paris Agreement. And in September last year, investor groups worth over $US103 trillion (A$135 trillion) issued a <a href="https://igcc.org.au/investor-groups-call-on-companies-to-reflect-climate-related-risks-in-financial-reporting/">global call</a> for companies to accurately disclose climate risks in financial reporting.</p>
<figure class="align-center ">
<img alt="HSBC sign lit at night" src="https://images.theconversation.com/files/381585/original/file-20210201-23-pkhpn7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/381585/original/file-20210201-23-pkhpn7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=398&fit=crop&dpr=1 600w, https://images.theconversation.com/files/381585/original/file-20210201-23-pkhpn7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=398&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/381585/original/file-20210201-23-pkhpn7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=398&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/381585/original/file-20210201-23-pkhpn7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/381585/original/file-20210201-23-pkhpn7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/381585/original/file-20210201-23-pkhpn7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">HSBC’s investors are pushing for stronger climate action.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
</figcaption>
</figure>
<p>Climate change is not the only threat to global financial security. Nature loss – the destruction of plants, animals and ecosystems – poses another existential threat. Last year, the World Economic Forum <a href="https://www.weforum.org/press/2020/01/half-of-world-s-gdp-moderately-or-highly-dependent-on-nature-says-new-report/">reported</a> more than half of the global economy relies on goods and services nature provides such as pollination, water and disease control.</p>
<p><a href="https://tnfd.info/">Efforts</a> by the finance sector to address the risks associated with biodiversity loss are in their infancy, but will benefit from work already done on understanding <a href="https://www.fsb-tcfd.org/">climate risk</a> </p>
<p>Of course, acknowledging and disclosing climate- and nature-related financial risks is just one step. Substantial action is also needed. </p>
<p>Businesses can merely “greenwash” their image – presenting to the public as environmentally responsible while acting otherwise. For example, a <a href="https://portfolio.earth/campaigns/bankrolling-extinction/">report</a> showed in 2019, many major global banks that <a href="https://www.reuters.com/article/us-climate-change-biodiversity-banks/bank-loans-scrutinized-for-harm-to-wildlife-as-well-as-climate-idUSKBN27D001?_lrsc=7a3de703-09e2-4d22-b9d2-e46aa43ccece&cmp=sm-93">pledged action</a> on climate change and biodiversity loss were also investing in activities harmful to biodiversity.</p>
<figure class="align-center ">
<img alt="Logs felled in timber operation" src="https://images.theconversation.com/files/381587/original/file-20210201-13-1x50rt8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/381587/original/file-20210201-13-1x50rt8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/381587/original/file-20210201-13-1x50rt8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/381587/original/file-20210201-13-1x50rt8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/381587/original/file-20210201-13-1x50rt8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/381587/original/file-20210201-13-1x50rt8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/381587/original/file-20210201-13-1x50rt8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The global economy depends on the goods and services nature provides.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
</figcaption>
</figure>
<h2>Getting it right</h2>
<p>In the financial sector and beyond, there are risks to consider as the <a href="https://www.sciencedirect.com/science/article/abs/pii/S0921800917312946">private sector</a> takes a larger role in environmental action.</p>
<p>Investors will increasingly seek to <a href="https://reneweconomy.com.au/prince-charles-launches-new-natural-capital-alliance-to-mobilise-us10-billion/">direct capital</a> to projects that help to reduce their exposure to climate- and nature-related risks, such <a href="https://www.conservationfinancenetwork.org/2020/01/27/mainstreaming-blue-carbon-to-finance-coastal-resilience">ecosystem restoration</a> and <a href="https://www.philanthropy.org.au/stories-Biodiversity-and-Impact-Investing">sustainable agriculture</a>. </p>
<p>Many of these projects can help to restore biodiversity, sequester carbon and deliver <a href="https://www.qld.gov.au/environment/climate/climate-change/land-restoration-fund/co-benefits/overview">benefits</a> for local communities. But it’s crucial to remember that private sector investment is motivated, <a href="https://responsibleinvestment.org/what-is-ri/ri-explained/">at least in part</a>, by the expectation of a <a href="https://hbr.org/2020/07/impact-investing-wont-save-capitalism">positive financial return</a>. </p>
<p>Projects that are highly risky or slow to mature, such as restoring highly threatened species or ecosystems, might struggle to attract finance. For example, the federal government’s Threatened Species <a href="https://www.environment.gov.au/biodiversity/threatened/publications/threatened-species-prospectus">prospectus</a> reportedly attracted <a href="https://theconversation.com/its-not-too-late-to-save-them-5-ways-to-improve-the-governments-plan-to-protect-threatened-wildlife-147669">little</a> private sector interest. </p>
<p>That means governments and philanthropic donors still have a <a href="https://www.natureaustralia.org.au/what-we-do/our-insights/perspectives/closing-nature-funding-gap-global-biodiversity-finance/#:%7E:text=To%20reverse%20the%20decline%20in,US%24824%20billion%20per%20year.&text=We%20could%20close%20the%20nature,a%20year%2C%20or%20soft%20drinks.">crucial</a> role in the funding of research and pilot projects.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/a-major-report-excoriated-australias-environment-laws-sussan-leys-response-is-confused-and-risky-154254">A major report excoriated Australia's environment laws. Sussan Ley's response is confused and risky</a>
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<p>Governments must also better align policies to improve business and investor confidence. It is nonsensical that various Australian governments <a href="https://www.nespthreatenedspecies.edu.au/media/gtpffoch/2018_evans_effective-incentives-for-reforestation-lessons-from-australia-s-carbon-farming-policies.pdf">send competing signals</a> about whether, say, forests should be <a href="https://theconversation.com/australia-needs-better-policy-to-end-the-alarming-increase-in-land-clearing-63507">cleared</a> or <a href="https://theconversation.com/farming-carbon-can-be-a-win-for-wildlife-if-the-price-is-right-40088">restored</a>. And at the federal level, biodiversity loss and climate change come under separate portfolios, despite the issues being inextricably linked. </p>
<p>Private-sector investment could deliver huge benefits for the environment, but these outcomes must be real and clearly demonstrated. Investors want the benefits <a href="https://www.pionline.com/esg/investors-urge-development-biodiversity-metrics">measured and reported</a>, but good data is often lacking.</p>
<p>Too-simple metrics, such as the <a href="https://openlettertowaldronetal.wordpress.com/">area of land protected</a>, don’t tell the <a href="https://www.newscientist.com/article/dn26552-conservation-report-reinforces-fears-over-paper-parks/">whole story</a>. They may not reflect harm to <a href="https://www.nature.com/articles/s41893-019-0423-y">local and Indigenous communities</a>, or whether the land is well managed. </p>
<p>Finally, as the private sector becomes more aware of nature and climate-related risks, a range of approaches to addressing this will proliferate. But efforts must be <a href="https://www.globalcanopy.org/publications/the-case-for-a-tnfd">harmonised</a> to minimise confusion and complexity in the marketplace. Governments must <a href="https://www.theguardian.com/commentisfree/2020/jul/21/the-magic-of-the-market-wont-help-the-environment-unless-government-also-takes-responsibility?CMP=share_btn_tw">provide leadership</a> to make this a smooth process.</p>
<figure class="align-center ">
<img alt="Swift parrot flies through treetops" src="https://images.theconversation.com/files/381589/original/file-20210201-19-lul84o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/381589/original/file-20210201-19-lul84o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/381589/original/file-20210201-19-lul84o.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/381589/original/file-20210201-19-lul84o.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/381589/original/file-20210201-19-lul84o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/381589/original/file-20210201-19-lul84o.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/381589/original/file-20210201-19-lul84o.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Threatened species habitat restoration may struggle to attract private sector funding.</span>
<span class="attribution"><span class="source">Eric Woehler</span></span>
</figcaption>
</figure>
<h2>The power to change</h2>
<p>Last week, a <a href="https://epbcactreview.environment.gov.au/resources/final-report">major report</a> was released highlighting grave failures in Australia’s environmental laws. The government’s <a href="https://theconversation.com/a-major-report-excoriated-australias-environment-laws-sussan-leys-response-is-confused-and-risky-154254">response</a> suggested it is not taking the threat seriously. </p>
<p>Businesses and governments <a href="https://www.abc.net.au/radionational/programs/latenightlive/corporate-power-in-australia:-do-the-1-rule/11950726">hold disproportionate power</a> that can be used to either delay or accelerate transformative change.</p>
<p>And although many businesses wield <a href="https://grattan.edu.au/report/whos-in-the-room/">undue influence</a> on government decisions, it doesn’t have to be this way. </p>
<p>By working together and seizing the many opportunities that present, business and government can help arrest climate change and nature loss, and contribute to a safer, more liveable planet for all.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/you-cant-talk-about-disaster-risk-reduction-without-talking-about-inequality-153189">You can't talk about disaster risk reduction without talking about inequality</a>
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<img src="https://counter.theconversation.com/content/153786/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Megan C Evans receives funding from the Australian Research Council as part of a Discovery Early Career Research Award. Previously she has been funded by the National Environmental Science Program's Threatened Species Recovery Hub.</span></em></p>There’s a growing push among businesses, including the finance sector, to protect the climate and nature.Megan C Evans, Lecturer and ARC DECRA Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1076112018-12-04T12:47:11Z2018-12-04T12:47:11ZHow Nigeria can attract and keep the right kind of foreign direct investment<figure><img src="https://images.theconversation.com/files/247927/original/file-20181129-170238-v28vln.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Nigeria's President Muhammadu Buhari at the US-Africa Business Forum in New York in 2016. </span> <span class="attribution"><span class="source">EPA/Drew Angerer</span></span></figcaption></figure><p>Two of the largest banking and financial services institutions in the world, HSBC and UBS, have <a href="https://www.bloomberg.com/news/articles/2018-11-03/hsbc-ubs-shut-nigeria-offices-as-foreign-investment-declines">recently closed their local representative offices</a> in Nigeria. </p>
<p>There’s also trouble brewing elsewhere in Nigeria’s business world that’s prompted fears about the climate for foreign direct investment in the country. Foreign direct investment is an investment made by a firm or individual in one country into business interests located in another country.</p>
<p>For instance, Nigeria’s government in September <a href="https://www.bloomberg.com/news/articles/2018-09-17/nigeria-fires-back-at-hsbc-after-bank-criticizes-president">accused HSBC of money laundering</a> after an analyst working for the lender said a second term for President Muhammadu Buhari <a href="http://dailypost.ng/2018/09/11/2019-second-term-buhari-will-nigerias-economy-hsbc/">may stall economic recovery </a> in Africa’s biggest oil producer.</p>
<p>There are also tensions between Nigeria’s central bank and the South African telecom company MTN. In 2015, MTN was <a href="https://www.bbc.co.uk/news/world-africa-45424537">fined about $5bn</a> for failing to cut off unregistered SIM cards. This was later reduced to $1.7 billion after a long legal dispute and the intervention of South Africa’s then President Jacob Zuma.</p>
<p>Recently, the central bank has <a href="https://www.bloomberg.com/news/articles/2018-08-29/nigeria-orders-mtn-banks-to-refund-8-billion-exported-funds">ordered MTN to repatriate $8 billion</a> it said has been taken out of the country illegally. </p>
<p>Analysts are <a href="https://nextedition.com.ng/2018/11/09/analysis-hsbc-ubs-left-nigeria/">concerned</a> that the Nigerian government’s attitude towards MTN and the two banks may erode the confidence of foreign direct investors. Their fears seem to be well founded: foreign direct investment in Nigeria <a href="https://tradingeconomics.com/nigeria/foreign-direct-investment">fell to</a> <a href="https://www.ceicdata.com/en/indicator/nigeria/foreign-direct-investment">$1 billion in the first half of 2018, from $1.48 billion in the first half of 2017</a>. </p>
<p>Foreign direct investment is crucial for any economy. So how can Nigeria attract and keep the right kind of investment from global companies? Compromise will be key, both for the government and foreign firms.</p>
<h2>Why foreign direct investment?</h2>
<p>Foreign direct investment is often preferred to exporting. That’s because while exports merely involve moving goods from one country to another, foreign direct investment actually involves an investor establishing foreign business operations or acquiring foreign business assets. </p>
<p>This often includes establishing ownership or controlling interest in a foreign country (for instance an American business establishing a physical business presence in Nigeria). Many emerging economies like China, Brazil, Vietnam and India have <a href="https://www.industryweek.com/leadership/top-10-countries-receiving-foreign-direct-investment/gallery?slide=1">built their growth on FDI flows</a>.</p>
<p>The trick is to attract “quality foreign direct investment” that links foreign investors into the local host country economy. The International Growth Centre, a <a href="https://www.gov.uk/government/organisations/department-for-international-development">British-funded</a> research centre that aims to promote sustainable growth in developing countries, <a href="https://www.theigc.org/blog/attracting-quality-foreign-direct-investment-developing-countries/">characterises</a> “quality” here as contributing to:</p>
<ul>
<li><p>decent and value-adding jobs and enhancing the skill base of host economies;</p></li>
<li><p>transfer of technology, knowledge and know-how;</p></li>
<li><p>boosting competitiveness of domestic firms and enabling their access to markets.</p></li>
</ul>
<h2>What Nigeria can do</h2>
<p>There are a few things Nigeria can do to boost foreign direct investment. For starters, it must play fair. Foreign and domestic businesses should be treated equally. They should be open, transparent and dependable conditions for all kinds of firms. </p>
<p>Another area that needs attention is infrastructure. Businesses need easy access to ports, an adequate and reliable supply of energy and relative certainty that the country will be good to invest in. Good institutions <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1467-9701.2006.00758.x">also promote FDI</a>. </p>
<p>The government should encourage partnerships between foreign and local businesses. Foreign firms might be familiar with global good business practices, but local firms will be more familiar with the indigenous context. This synergy could be very beneficial.</p>
<p>It’s also critical that Nigeria gets its regional governments involved: there are many regions in Nigeria, and these regions all have unique opportunities and challenges. <a href="https://journals.aom.org/doi/abs/10.5465/AMBPP.2018.11006abstract">Our latest research</a> shows that when the central government of Nigeria ran out of ideas and foreigners wanted to exit the agricultural sector, the regional government of Kwara state stepped in to create a positive business climate based on the cooperation of local banks, community members, and the foreigners themselves culminating in the <a href="https://www.dailytrust.com.ng/learning-commercial-farming-through-shonga-farmss-approach.html">Shonga farms</a> public-private venture. </p>
<p>This has kept the firm in Nigeria. It’s also brought private investors to the table, bolstering the firm and the local economy.</p>
<p>Nigeria should also tap into its huge <a href="https://www.bbc.co.uk/news/av/business-37727761/how-can-investors-tap-in-to-nigeria-s-diaspora">diaspora</a>. There are many Nigerians living outside the country who understand its challenges. They should be encouraged to help, or asked to work with their networks to invest in the country.</p>
<h2>What foreign firms can do</h2>
<p>Foreign firms also have a role to play. They can enhance their success in Nigeria (and elsewhere on the African continent) in several ways.</p>
<p>First, they need a long term strategic plan. This means thinking carefully about what sectors or activities to target. Many foreign firms come to developing countries when things are rosy but leave when conditions change. They don’t properly consider that solving such problems will gain them a competitive advantage in the long run. </p>
<p>If they stay and follow a learning curve, foreign firms will better understand the local business context. They’ll also gain credibility among ordinary people and possibly get more customers and support that way.</p>
<p>In the same vein, foreign businesses should create local solutions that meet ordinary people’s needs. The banks leaving Nigeria have <a href="https://www.vanguardngr.com/2018/11/breaking-hsbc-ubs-close-their-offices-in-nigeria/">been accused</a> of only catering to the needs of wealthy Nigerians, who are <a href="https://www.aljazeera.com/business/2010/10/201010116251929702.html">perceived as corrupt</a>. A more diverse portfolio that catered to the needs of ordinary Nigerians would have nullified this claim.</p>
<p>Foreign firms must also work closely with credible and strategic local firms, and be willing to enter into dialogue with the Nigerian government where necessary. This is crucial especially as administrations may change or government policy may evolve. Dialogue could ensure that all parties are on the same page.</p>
<h2>Act local, think global</h2>
<p>It’s unfortunate that these banking institutions have decided to leave Nigeria. Hopefully both the Nigerian government and other foreign investors can learn from this. </p>
<p>The main takeaway for both foreign investors and governments involved in foreign direct investment is that it would be prudent for all parties to act locally but think globally.</p><img src="https://counter.theconversation.com/content/107611/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tolu Olarewaju does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There is concern that Nigeria’s attitude towards foreign direct investors may erode inward capital flows.Tolu Olarewaju, Lecturer in Economics, Staffordshire UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/619292016-07-04T16:06:29Z2016-07-04T16:06:29ZLondon banking will struggle to escape Brexit trap<figure><img src="https://images.theconversation.com/files/129214/original/image-20160704-19103-1j1vtw0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="http://www.shutterstock.com/pic-231494776/stock-photo-city-of-london-skyline-at-sunset-long-exposure-shot.html?src=csl_recent_image-3">Aliaksei Yarmolin</a></span></figcaption></figure><p>The free movement principle of the EU means that all individuals of member states receive an EU passport. They can settle in any other EU country and enjoy the same rights and benefits as any other citizen of the host country. </p>
<p>It is perhaps less obvious that the EU passport also applies to businesses, including banks. If, say, an American bank has been authorised to be in Britain, it is automatically entitled to operate in any EU country. It is this quintessential element of EU membership that has enabled London to become the banking capital of Europe. </p>
<p>Now that the UK <a href="http://www.bbc.co.uk/news/uk-politics-32810887">has voted</a> for a Brexit from the EU, we don’t yet know what kind of arrangements the two sides will agree. They may end up being more favourable than the total separation envisaged by <a href="https://theconversation.com/what-is-article-50-the-law-that-governs-exiting-the-eu-and-how-does-it-work-60262">Article 50</a> of the Treaty of the European Union. But unless the UK is still inside the single market, at least as part of the <a href="https://www.gov.uk/eu-eea">European Economic Area (EEA)</a>, this passporting right will be gone. </p>
<p>This is why there are <a href="https://next.ft.com/content/e8b14d60-3a36-11e6-9a05-82a9b15a8ee7">widespread fears</a> about how the banks are going to keep their main European headquarters in London, particularly those that are non-EU. There is likely to be a surge in requests for banking licences on the continent, even from British banks. Hence numerous international banks <a href="https://next.ft.com/content/e8b14d60-3a36-11e6-9a05-82a9b15a8ee7">are reportedly</a> considering their options. Substantial numbers of the City’s <a href="http://www.cityoflondon.gov.uk/business/economic-research-and-information/statistics/Documents/an-indispensable-idustry.pdf">circa 700,000</a> jobs might shift.</p>
<h2>Capital gains</h2>
<p>The most likely beneficiaries will be the other main European financial centres – Paris, Frankfurt, Milan and Madrid – though smaller players will seek gains, too, including Luxembourg, Amsterdam and Dublin. </p>
<p>The European Banking Authority (EBA), currently located by the River Thames, will almost certainly be among the departures. It is one of the EU’s three overseers in the financial services sector. With the insurance regulator (<a href="https://eiopa.europa.eu">EIOPA</a>) already based in Frankfurt and the financial markets regulator (<a href="https://www.esma.europa.eu">ESMA</a>) in Paris, Milan <a href="http://www.ilsole24ore.com/art/finanza-e-mercati/2016-07-03/borsa-e-sede-dell-eba-brexit-doppia-opportunita-milano-105710_PRV.shtml?uuid=ADfBzEn">has emerged</a> as the early frontrunner to provide the EBA’s new home. </p>
<p>The global investment banks will probably incline to Paris, both because of ESMA and because there is already Europe’s second-largest market for trading securities in the form of <a href="https://www.euronext.com">Euronext Paris</a>. HSBC chief executive Stuart Gulliver <a href="http://www.independent.co.uk/news/business/news/uk-banks-move-brexit-eu-referendum-paris-amsterdam-passporting-single-market-eea-sapin-hollande-a7110651.html">has indicated</a> that 20% of his 5,000 investment banking staff could be bound for Paris, for instance. In a similar way, mutual funds and pension funds would find a natural location in Frankfurt, since they come under the EIOPA. </p>
<p>There is unlikely to be one big winner from any reorganisation. The 2008 financial crisis revealed major cracks in the eurozone, broadly dividing the north and south of the continent. Where in the past the major investment banks have tended to have just one major European headquarters, they might now decide to operate out of several smaller centres on the mainland and to take different strategic approaches for different parts of the bloc. This might be a suitable move for cautious new times, given the uncertainty that Brexit has created. </p>
<p>These players will probably retain a reduced British operation for similar reasons. We might also see European banks setting up in London that were previously able to service the UK market from the mainland. This at least means we are unlikely to witness a catastrophic mass migration from the Square Mile. </p>
<p>It is also worth emphasising that we are certainly not talking about all jobs. Within investment banks, for instance, there is <a href="http://www.bloomberg.com/news/articles/2016-06-29/hollande-says-brexit-to-hurt-city-of-london-in-clearing-warning">a threat</a> to the clearing services that London houses provide for trading euro-denominated financial instruments. French president Francois Hollande has <a href="http://www.bloomberg.com/news/articles/2016-06-29/hollande-says-brexit-to-hurt-city-of-london-in-clearing-warning">already said</a> that they can’t stay in the UK. This won’t affect the clearing of financial instruments denominated in other currencies, however. </p>
<p>Equally, it may no longer be possible to directly buy and sell the shares or bonds of EU-listed companies in London post-Brexit, but it won’t affect the trading in other companies or other markets such as commodities. In some areas, such as derivatives trading, no longer having to live with EU regulations might even be an advantage – albeit potentially making the markets more volatile, too. Also potentially less affected will be other merchant banking services, such as mergers and acquisitions. </p>
<p>On the other hand, UK insurance companies will no longer be able to offer insurance within the EU without a licence within one of the member states. I should also stress that the different sub-sectors of financial services may not all be protected if the UK ends up in the EEA – instead of an automatic right to a full passport, the different areas it covers would need to be agreed. </p>
<h2>Scotland’s opportunity</h2>
<p>If Scotland does vote for independence in the next couple of years, it could be a unique opportunity for luring banks to Edinburgh or Glasgow – as has <a href="http://www.telegraph.co.uk/news/2016/06/27/brexit-may-be-scotlands-chance-to-steal-london-finance-crown/">already been</a> suggested. In particular, <a href="http://www.talentscotland.com/news/2016/05/edinburghs-financial-services">Edinburgh’s “City”</a> is presently small but not negligible, hosting the headquarters of Tesco Bank and Sainsbury’s Bank, insurance firm Standard Life and a substantial amount of fund management.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/129255/original/image-20160704-19107-12toskq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/129255/original/image-20160704-19107-12toskq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/129255/original/image-20160704-19107-12toskq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/129255/original/image-20160704-19107-12toskq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/129255/original/image-20160704-19107-12toskq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/129255/original/image-20160704-19107-12toskq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/129255/original/image-20160704-19107-12toskq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/129255/original/image-20160704-19107-12toskq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Edinburgh’s financial district.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/ross_strachan/6691794223/in/photolist-arhibw-dAi7pp-6eSdZx-bckcht">Ross G. Strachan</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>The central bank of a new independent Scotland would be entitled to authorise banks to trade across the EU <a href="https://theconversation.com/why-spain-plays-a-crucial-role-in-whether-united-kingdom-stays-together-61823">as soon as</a> the new country was granted membership. This could engender a new Scottish enlightenment, attracting banks and investment firms from all over the world. </p>
<p>It certainly sounds better than the alternative in which Scotland leaves the EU with the rest of the UK. If the likes of Tesco Bank and Sainsbury’s Bank were interested in expanding to the single market, they too would have to establish operations elsewhere in this scenario. Scotland’s financial waters could end up stagnant for decades as a result. </p>
<p>With this much at stake, the UK’s formidable banking lobby will doubtless be gearing up over the next couple of years to make the best out of a very difficult situation. At this stage, however, it looks as though the EU passport will be lost unless the UK accepts free movement of citizens.</p><img src="https://counter.theconversation.com/content/61929/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pierre Sinclair de Gioia Carabellese does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The fears about the City don’t look overcooked – here’s why.Pierre Sinclair de Gioia Carabellese, Associate Professor of Business Law, Heriot-Watt UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/547802016-02-15T19:59:31Z2016-02-15T19:59:31ZWhy HSBC decided to stay in the UK<p>HSBC’s decision to <a href="http://www.theguardian.com/business/2016/feb/15/hsbc-to-keep-hq-in-uk-what-the-experts-say">keep its headquarters in London</a> is good news for the British government. An exit would have been seen as a vote of no confidence by one of the world’s major financial institutions. But it is even better news for the British economy.</p>
<p>If HSBC had deserted the UK for Hong Kong it would have been a serious blow to the confidence of the City, perhaps leading to further departures and a slide in the position of London as the world’s financial capital. UK financial services contribute about 8% of total GDP and about 20% of London income alone. </p>
<p>In the wake of the global financial crisis the popular press – and perhaps popular opinion – is generally on the side of bashing the banks, but we have to remember that this is one of the most important sectors of the UK economy.</p>
<h2>Tax burden</h2>
<p>A key factor in HSBC’s decision to remain in the UK was Chancellor George Osborne’s decision to change the way banks are taxed. In addition to corporation tax, in 2011 the last government introduced a levy on bank’s balance sheets (basically on the total liabilities of the bank, including deposits placed with the bank), which was subsequently increased nine times until it stood at 0.21% in 2015.</p>
<p>While a 0.21% levy might not sound a lot, there are two important factors to take into account: the level of interest rates and the way the levy was calculated.</p>
<p>Given that the business of banks is to borrow and lend, when interest rates are a fraction of a percentage point, a levy on the balance sheet of a fraction of a percentage point can be a significant tax.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/111555/original/image-20160215-22587-10e6enx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/111555/original/image-20160215-22587-10e6enx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/111555/original/image-20160215-22587-10e6enx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/111555/original/image-20160215-22587-10e6enx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/111555/original/image-20160215-22587-10e6enx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/111555/original/image-20160215-22587-10e6enx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/111555/original/image-20160215-22587-10e6enx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/111555/original/image-20160215-22587-10e6enx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Hong Kong harbour. Not a safe enough port in a storm?</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/studiokanu/14392865059/in/photolist-r2a5Wh-riDdnb-dwdMbn-r2a3aA-r2h7ze-riDjtE-nVRckR-2FEXcB-6XEzcs-dZXZfi-jx7eZp-bmgdaF-aeZtwk-eMGs3y-nZyfUn-a1QHaH-6gL2jK-vqbJRJ-qyrH9Q-9eQ3N6-okpoof-qZnZn6-b5jnVi-hQq93f-sZeJhC-jSp5mZ-ej5m7M-uaokUw-oomNUi-dEsNn-qkKriw-sSDHU4-5HhN3i-dcGXBX-9LYXUa-rWJwny-ddEHfx-cbezaj-9eW1Zc-22zQuY-A8TpUS-hDMczi-qAjTVP-6hxM41-dZxNue-A8ToHy-5SFLwU-airXS-4dRu2n-oXDgot">Pasu Au Yeung</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Most importantly for HSBC, for UK banks the levy was imposed on their balance sheet worldwide, whereas overseas banks operating in the UK were charged only on their UK operations. Most of HSBC’s operations are in fact outside the UK or even Europe, with a heavy concentration in Asia (the clue is in HSBC’s original name: Hong Kong and Shanghai Banking Corporation).</p>
<p>Therefore, the levy arguably hit HSBC disproportionately and unfairly, amounting to about 6% of its pre-tax profits, and double the amount of profit that HSBC generated from its entire European operations. Relocating their headquarters outside of the UK would have dramatically reduced the amount payable by HSBC under the levy.</p>
<h2>Concessions</h2>
<p>Last year, however, Britain’s chancellor of the exchequer announced plans to <a href="http://www.theguardian.com/business/2015/jul/08/biggest-banks-welcome-budget-reduction-in-bank-levy">phase out the bank levy</a> and replace it with a corporation tax surcharge purely on banks’ UK operations, which has saved HSBC a lot of money and reduced the incentive for it to cease being a UK bank.</p>
<p>But there are other issues that would have weighed significantly in the decision-making process.</p>
<p>First, there is the quality of the financial regulator: <a href="http://www.hkma.gov.hk/eng/index.shtml">the Hong Kong Monetary Authority (HKMA)</a> is a very stable regulator, so this would have been a positive. Second, however, a key role of the monetary authority of a country is to offer loans to banks that are experiencing financial difficulty or are considered highly risky or near collapse. </p>
<p>Given that the global balance sheet of HSBC is several times the GDP of Hong Kong, the HKMA could not credibly say that it could act as a “lender of last resort” to HSBC. Third and most importantly, however, is the issue of political risk: Hong Kong is ultimately controlled by China, whose authoritarian political system is both opaque and repressive.</p>
<p>So who are the winners in this decision? There are at least three groups. The UK government doesn’t lose face, HSBC gets to retain the benefits of operating within an economically and politically stable environment with a presence in the world’s major financial centre. And the UK economy continues to benefit from having London’s pre-eminence as a financial centre remain unchallenged.</p>
<p>The next potential challenge to the City will come in the shape of the referendum on UK membership of the European Union. Despite its decision to keep its headquarters in the UK, HSBC has nevertheless indicated, along with a number of other financial institutions, that a UK exit could lead to a lot of banking jobs being relocated to <a href="http://www.heraldscotland.com/news/homenews/14277633.HSBC__could_move_1_000_jobs_to_Paris__if_Britain_leaves_UK/?ref=rss">the other side of the Channel</a>.</p><img src="https://counter.theconversation.com/content/54780/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Taylor does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The options for a move to Hong Kong were not as attractive as they might have appeared.Mark Taylor, Dean of Warwick Business School and Professor of Finance, Warwick Business School, University of WarwickLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/430342015-06-10T05:19:28Z2015-06-10T05:19:28ZHSBC restructuring shows universal banks are coming back down to earth<p>HSBC’s decision to end its operations in Brazil and Turkey, <a href="http://uk.reuters.com/article/2015/06/09/uk-hsbc-strategy-idUKKBN0OO2KQ20150609">and lay off around 10% of its workforce</a> worldwide shows just how far it has come from the days of touting itself as “the world’s local bank”. Its strategy used to be to offer any financial service everywhere in the world. Whether you were in Shanghai, Sydney, Springfield or Southampton, you could access services such as personal banking, foreign exchange business banking and investment banking.</p>
<p>This model paid off for years. The bank provided impressive returns to investors, progressively extended its footprint, and even seemed to dodge the worst effects of the financial crisis.</p>
<p>HSBC was not alone in doing well by doing everything, anywhere. Its competitors have built similar business models during the last 20 years. </p>
<h2>Merger mania wasn’t for customers</h2>
<p>In the past, different financial services were provided by different organisations. You went to one company for insurance, one for investment banking, and one for personal banking. There were co-operatives, partnerships, publicly listed companies and privately held companies. Banks in each country looked completely different. This meant there was a verdant landscape of different kinds of financial service organisation.</p>
<p>But during the 1980s, all this changed. Retails banks started to provide a whole range of services they had not before, such as insurance. Then retail and investment banks began to merge. <a href="http://www.thenews.coop/85589/news/general/big-bang-demutualisation-building-societies-failed/">Building societies demutualised</a>. Banks began to expand across the world. The result was that the world’s financial sector was dominated by a handful of gigantic players. There was also a business model mono-culture: a universal bank which provided almost every service to everyone in the world.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/84434/original/image-20150609-10701-qtjgxf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/84434/original/image-20150609-10701-qtjgxf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/84434/original/image-20150609-10701-qtjgxf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=420&fit=crop&dpr=1 600w, https://images.theconversation.com/files/84434/original/image-20150609-10701-qtjgxf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=420&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/84434/original/image-20150609-10701-qtjgxf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=420&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/84434/original/image-20150609-10701-qtjgxf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=528&fit=crop&dpr=1 754w, https://images.theconversation.com/files/84434/original/image-20150609-10701-qtjgxf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=528&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/84434/original/image-20150609-10701-qtjgxf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=528&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Broken model.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/elycefeliz/3833624039/in/photolist-83zxqq-621Ks1-7ykXNB-iGZz2-iEaDb-iE9Zn-6QLjSc-iH1Xh-8rsCQC-n3dFsN-4Xz2Fh-iE8nm-n3cg1T-qCq93b-iE8S4-iE925-iE8vu-iH1EJ-iE86F-iE9s5-iH1oW-62ovuK-rD8QCw-qJCWSH-61vuVR-iH1Ny-iH3fe-iH2A9-iH2QC-iH18m-iH2eZ-iH37o-iH11q-iH2un-iH2nJ-iH26p-iH1fW-iH2Yy-iEavY-iGZsw-iH1wE-iGZSK-iE9zQ-iE8DY-iE9Ht-iE9Qs-iEa7M-iE8eB-iE9k3-iE9cx">elycefeliz</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<p>Banks claimed to do this because their customers wanted it. There certainly were a number of sophisticated global clients looking for global banking services. But the real reason for adopting this model had nothing to do with customers. By merging retail and investment banks and continually growing the size of the bank’s balance sheet, these global giants were able to effectively use the money deposited in their retail banks to engage in risky – but highly profitable – trading and investment activities.</p>
<p>This model paid off for many years. As big banks grew, they delivered double digit returns to their shareholders. But perhaps more importantly, they created a lucrative stream of bonuses for senior managers. They also pumped out tax income for governments which hosted them. It seemed everyone was winning.</p>
<h2>Downsizing</h2>
<p>That was until 2007, when the financial crisis struck. When this happened these global giants with massive balance sheets became a liability. It quickly became obvious that they were too big to fail. If a bank went down, they could threaten the global economy. </p>
<p>And we quickly learned too that they were too big to manage. In the long aftermath of the financial crisis, we discovered that CEOs of large banks (including HSBC) had no idea what was going on in parts of their far flung empires. We also found out they were too big to trust. The ongoing stream of revelations around wrongdoing in markets like <a href="https://theconversation.com/if-you-aint-cheating-you-aint-trying-how-forex-has-changed-42198">foreign currencies</a> and LIBOR – the rate at which banks lend each other short-term money – show that bad behaviour appeared endemic in certain parts of these global giants. </p>
<p>Now shareholders are beginning to ask whether these giant universal banks are too big to succeed. With costs of bad behaviour mounting and many lines of business less profitable than before, shareholders are asking whether big banks should be trying to be everything for everyone. It seems that the universal banking model has failed.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/84440/original/image-20150609-10717-1605z31.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/84440/original/image-20150609-10717-1605z31.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/84440/original/image-20150609-10717-1605z31.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=356&fit=crop&dpr=1 600w, https://images.theconversation.com/files/84440/original/image-20150609-10717-1605z31.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=356&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/84440/original/image-20150609-10717-1605z31.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=356&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/84440/original/image-20150609-10717-1605z31.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=447&fit=crop&dpr=1 754w, https://images.theconversation.com/files/84440/original/image-20150609-10717-1605z31.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=447&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/84440/original/image-20150609-10717-1605z31.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=447&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Cashing out of Turkey.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/faceme/7888539576/in/photolist-7rPZ5g-d25PZ3-pw74Xd">FaceMePLS</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>The announcement by HSBC that it is cutting 25,000 jobs across the world, 8,000 in the UK, selling operations in Turkey and Brazil and shrinking its investment bank are an important part of moving away from this model. Underneath this is the recognition the bank can’t do everything for anyone. Instead, if banks like HSBC are to be trusted, profitable and sustainable they need to focus on a few markets where they have genuine expertise.</p>
<h2>A benefit for all?</h2>
<p>A more focused bank may look appealing to investors and regulators. But if we are to believe recent research, a smaller banking sector may actually <a href="http://www.ft.com/cms/s/0/64c2f03a-03a0-11e5-a70f-00144feabdc0.html">be good for the wider economy</a>. However, this focus is unlikely to appeal to staff who will lose their jobs. The UK government must be rightly nervous about losing HSBC, which is one of the country’s biggest tax payers and an important employer. Many of the other large banks are engaging in similar processes of shrinking their scope and balance sheets. </p>
<p>But the big question which remains is whether closing a few lines of business and a little restructuring will do enough to bring back diversity to the banking sector. Creating real diversity in this sector probably means not just slightly smaller global banks – it means ensuring there are a wide range of business models. The risk is that we simply end up with a small number of global giants with oversized footprints. Creating new business models to replace the universal banks is one of the biggest challenges of our time.</p><img src="https://counter.theconversation.com/content/43034/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andre Spicer does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Is the business models which large banks have relied upon for the last three decades dead?Andre Spicer, Professor of Organisational Behaviour, Cass Business School, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/430242015-06-09T15:50:49Z2015-06-09T15:50:49ZInstead of laying off thousands of staff, HSBC should focus on becoming a model bank<p>HSBC, Europe’s largest bank, is making headlines again. It wants to shed up to <a href="http://www.bbc.co.uk/news/business-33058957">25,000 jobs</a> globally, of which some 8,000 are expected to be in the UK. Why? The bank is seeking cost reduction of about US$5 billion a year and the cuts are supposed to revive the bank’s fortunes by enabling it to pay <a href="http://uk.reuters.com/article/2015/06/09/uk-hsbc-strategy-dividend-idukkbn0op0m120150609?mod=related&channelname=businessnews">higher dividends</a> to investors.</p>
<p>HSBC has not exactly been a well-run bank in recent years. Its <a href="http://www.theguardian.com/business/2015/feb/11/hsbc-files-timeline-from-swiss-bank-leak-to-fallout">operations in Switzerland</a> enabled many to avoid taxes on a vast scale – and are still subject to inquiry across the globe. In 2012, it <a href="http://www.bbc.co.uk/news/business-20673466">paid US authorities</a> US$1.9 billion to settle allegations involving drug kingpins and rogue nations. </p>
<p>The bank has been fined by the UK authorities for rigging <a href="http://www.thisismoney.co.uk/money/news/article-2830731/banks-braced-heavy-forex-fines-rbs-barclays-hsbc-expected-hit-fines-250m-each.html">foreign exchange markets</a>. It has paid a US$43m fine to the <a href="http://www.reuters.com/article/2015/06/04/us-hsbc-tax-swiss-iduskbn0ok1g220150604">Swiss authorities</a>. </p>
<p>It is also subject to tax investigations in <a href="http://www.theguardian.com/business/2015/jun/02/hsbc-expands-boardroom-ahead-of-expected-20000-job-cuts">Belgium</a>, <a href="http://www.bbc.co.uk/news/business-31799402">Argentina</a> and <a href="http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11525185/hsbc-under-french-criminal-investigation-over-swiss-tax-evasion.html">France</a>. And it is under investigation in the US for fixing prices in the <a href="http://europe.newsweek.com/hsbc-embroiled-new-price-fixing-scandal-309156">precious metal markets</a>.</p>
<p>Perhaps instead of shifting its HQ and laying off thousands of staff members (mostly in its retail banking arm), HSBC should focus on becoming a model bank.</p>
<h2>Regulation, regulation, regulation</h2>
<p>Following the 2007-2008 financial crisis, along with other banks, HSBC has been supported by the state through a variety of warranties. In return, the UK has levied additional taxes in the form of a bank levy. </p>
<p>But now HSBC is complaining about the regulatory overkill <a href="http://news.sky.com/story/1498881/uk-bank-levy-what-is-it-and-who-does-it-hit">in the shape of this levy</a>. The bank is particularly unhappy about the UK government’s proposals to <a href="http://news.sky.com/story/1487141/hsbc-hits-fresh-hurdle-over-ring-fence-plan">ringfence</a> or separate retail banking from the more risky investment banking. This is a measure put in place to reduce risky operations and possibly avoid another costly crash – but it also curtails the profits enjoyed by banks. </p>
<p>HSBC has responded by saying that it is now considering <a href="http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11560190/hsbc-launches-review-into-whether-to-leave-the-uk.html">relocating</a> its head office away from London (to Asia, which has fewer regulations). Of course, it will retain most of its retail and other business in the lucrative UK market, a major financial centre.</p>
<p>One response to HSBC’s threats of relocation is that it shows that big business has no loyalty to any place, community, nation state or customers. Its main concern is profits and little else. Leaving in pursuit of profit, HSBC is inflicting cuts on employees who have remained loyal to it through troubled times. It is now trying to hold the government to ransom by demanding lower taxes and lighter regulation, with the threat of job losses and related economic turbulence.</p>
<p>Some might even welcome HSBC’s possible departure from the UK. Of course, even if HSBC moves its HQ, its branches in the UK will still need to be regulated and depositors would continue to benefit from the state-sponsored depositor protection scheme, which safeguards £85,000 of savings by individuals.</p>
<h2>Where to next?</h2>
<p>Wherever HSBC decides to move its headquarters, its business would need to be regulated because the banking industry is regulated everywhere. As the industry has a <a href="http://www.bloomberg.com/ss/07/12/1217_bailouts/index_01.htm">habit of getting into difficulties</a>, any bank would want a lender of last resort – a regulator that has the capacity to bail it out in the event of another crisis. And contrary to popular belief, HSBC received <a href="http://www.newstatesman.com/2010/12/financial-british-money-fed">state support</a> in the 2007-2008 crisis. These considerations leave out smaller countries and tax havens as they simply do not have the required capacity to support banks in times of crisis. </p>
<p>In the post-banking crash environment, no state can afford to offer light-touch regulation. HSBC would not relocate its head office to the US because its US$1.9 billion money-laundering settlement in 2012 was made <a href="http://www.theguardian.com/business/2012/dec/11/hsbc-fine-prosecution-money-laundering">under a deferred prosecution deal</a>. As a result, US regulators would likely load the bank with extra checks and compliance costs.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/84396/original/image-20150609-10726-1pb8kk2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/84396/original/image-20150609-10726-1pb8kk2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/84396/original/image-20150609-10726-1pb8kk2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/84396/original/image-20150609-10726-1pb8kk2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/84396/original/image-20150609-10726-1pb8kk2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=504&fit=crop&dpr=1 754w, https://images.theconversation.com/files/84396/original/image-20150609-10726-1pb8kk2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=504&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/84396/original/image-20150609-10726-1pb8kk2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=504&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Moving its HQ to Hong Kong could be easier said than done.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/bluebulgaria/4358964993/in/photolist-7DbQqR-8spZX2-5FdMmX-6k1mWY-4CU65D-9DnoRa-aktesv-b8kQ6g-9DnSRc-5QjHeN-5v2tRZ-7bkGcJ-9Dnnr8-5rXDVH-4CYkef-9DqHZL-9DqGSh-9DqN9S-6g2r3b-6fXfDz-8QVNsZ-28Cij-69KMGo-4BPqpu-4aPFXP-5YXPEF-9DqMpo-6Q7avh-eqnyv-iy18Vz-6qMgiP-6qRrHh-9tc6mL-4ye5sm-5QfhRX-aCSJ5h-aCTofu-aCPwZi-aCT5j9-aCQVtp-aCTpoL-aCUNFJ-aCTr5w-aCTnT9-aCSJw1-aCPdTi-aCTmdG-aCQV6k-aCQUEM-aCQX7n">countries in colors via flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<p>There has been talk of HSBC relocating its HQ <a href="https://uk.news.yahoo.com/hsbc-cutting-staff-10-pct-more-emphasis-asia-063804418.html#sWRwETa">back to Hong Kong</a> where it was until 1993. But, now that Hong Kong is under China’s jurisdiction, HSBC would have to comply with Chinese rules and regulations. Considering banks cannot operate across borders without the assurance that local regulators will cooperate with other countries, it will have to be confident that China maintains good relations with the rest of the world. It would be interesting to know what due diligence work HSBC has done about this possibility.</p>
<p>I have an additional suggestion for HSBC executives. How about focusing on being more responsible. Considering a great deal of the bank’s profits were lost to fines for various misdemeanours, this might be a more ethical way of boosting them. </p>
<p>To facilitate this, the bank could change its governance structure, empower employees and elect directors that invigilate the bank’s operations. It could also silence its critics by making tax returns publicly available. This way HSBC could become a model of good behaviour and resurrect its reputation. In the longer run, it is cheaper than paying fines and bearing the costs of relocation.</p><img src="https://counter.theconversation.com/content/43024/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Prem Sikka is director of the Association for Accountancy and Business Affairs (AABA), a not-for-profit organisation.</span></em></p>HSBC: Instead of threatening governments try becoming a model bank.Prem Sikka, Professor of Accounting, Essex Business School, University of EssexLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/387942015-03-13T11:06:19Z2015-03-13T11:06:19ZIgnorance in HSBC top brass shows if banks are too big to fail, they’re too big to manage<p>Without going over the depressing details again, a series of past and present managers and board members at HSBC have claimed that <a href="http://www.theguardian.com/business/2015/feb/23/hsbc-chief-paid-7m-pounds-last-year-profits-slide-tax-avoidance-apology">they don’t know what all their employees actually do</a>. Given the salaries of those crying crocodile tears, and the <a href="https://theconversation.com/hsbcs-swiss-tax-scandal-is-part-of-a-global-pattern-of-avoidance-37437">huge level of tax avoidance</a> their organisation has encouraged, it’s not surprising that they have faced incredulous hostility. </p>
<p>Margaret Hodge, chair of the Public Accounts Committee, has been <a href="http://www.theguardian.com/business/2015/mar/09/hsbc-stuart-gulliver-rona-fairhead-margaret-hodge">groaning and raising her eyebrows</a>. </p>
<p>But what if they actually don’t know?</p>
<p>HSBC has around 6,600 offices in 80 countries and around quarter of a million employees. Just think about that for a minute. Imagine that everyone in Stoke-on-Trent was employed by the same company. Then imagine all those people dispersed around the world, working in different languages, legal systems, employment practices and cultures. Is it really practical to imagine that anyone at the top could know what all these people are doing?</p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/74784/original/image-20150313-7075-1xf4kv6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/74784/original/image-20150313-7075-1xf4kv6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=727&fit=crop&dpr=1 600w, https://images.theconversation.com/files/74784/original/image-20150313-7075-1xf4kv6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=727&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/74784/original/image-20150313-7075-1xf4kv6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=727&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/74784/original/image-20150313-7075-1xf4kv6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=914&fit=crop&dpr=1 754w, https://images.theconversation.com/files/74784/original/image-20150313-7075-1xf4kv6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=914&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/74784/original/image-20150313-7075-1xf4kv6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=914&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Raised eyebrows: Margaret Hodge.</span>
<span class="attribution"><span class="source">PA/PA Wire</span></span>
</figcaption>
</figure>
<h2>Small is beautiful</h2>
<p>It seems to me that one of the issues that lurks behind the carnival of banking scandals is scale. When chief executives express their insistence on changing the culture of their organisation, and blame some bad apples for what they perceive has gone wrong, we should really be asking some different questions. If banks were smaller, would they be easier to manage? Would they be easier for us to manage?</p>
<p>In 1973, Ernst Schumacher published his iconic collection of essays: <a href="http://www.theguardian.com/commentisfree/2011/nov/10/small-is-beautiful-economic-idea">Small is Beautiful</a>. His key argument is that “giganticism” – of whatever form – is a problem, and that we need to organise economies on a human scale. </p>
<p>The argument obviously applies to organisations too. We are confronted now by businesses which are colossal – the size of small countries – and which operate globally. Walmart employs 2.1m people. Foxconn, which makes Apple products, employs 1.2m. Tesco employs nearly 600,000 staff.</p>
<h2>Responsibility</h2>
<p>Large organisations like to talk about corporate social responsibility, but what does responsibility mean at that sort of scale? When we tiny humans talk about responsibility, we might refer to our families, to friends and neighbours, to people whose faces we know and whose trust we hold. For people, responsibility is a small thing, something felt in the body as we worry about letting people down, or smile when we remember someone’s thank you for something that we did.</p>
<p>But how can a corporation of a quarter of a million feel responsibilities – and if it operates in 80 countries, then who is it responsible to? At the Public Accounts Committee, the CEO of HSBC, Stuart Gulliver, the former CEO of global private banking, Chris Meares, and Rona Fairhead, an independent non-executive director, all claimed that they didn’t know – much to Hodge’s disdain. </p>
<p>But it’s hardly surprising really, given the scale of the responsibilities that they are being paid to take on. And the “heads must roll” incantation simply offers more well-compensated sacrifices to the behemoth and does nothing to actually address the underlying problem. </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/zNdu-ueG78o?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">HSBC bosses deny knowing everything that went on under their watch.</span></figcaption>
</figure>
<h2>A radical suggestion</h2>
<p>This isn’t to suggest that Hodge is wrong – and that she should let evidence of corruption and stupidity pass unremarked. But I would also like to see discussion of some much more radical suggestions for dealing with banks – and all big organisations. </p>
<p>For a start, there seems to me to be no good reason not to break up organisations into manageable chunks, and probably to insist that these parts should only operate within one tax jurisdiction. This would go along with another simple step, which would be to say that no company can hold shares in another company. That way, size will become a pathology; an evasion of responsibility, rather than an excuse to build a bigger skyscraper.</p>
<p>This might sound terribly radical – and no doubt the apologists for huge corporations will explain why efficiencies of scope and scale are achieved through size. But we can list on the other side of the scale all the problems of giganticism – including tax avoidance, a race to the bottom for wages and worker’s rights, sickening salaries for chief executives, and so on. </p>
<p>After all, if HSBC’s top dogs – Gulliver, Meares, Fairhead et al – don’t know what’s going on, then how the hell can the rest of us? Too big to fail clearly also means too big to manage.</p><img src="https://counter.theconversation.com/content/38794/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Martin Parker does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>With more than 250,000 employees, spread over 80 countries, how can HSBC’s bosses know everything going on?Martin Parker, Professor of Organisation and Culture, University of LeicesterLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/381182015-03-03T06:23:26Z2015-03-03T06:23:26ZBankers have a moral compass, it just may not look like yours<figure><img src="https://images.theconversation.com/files/73456/original/image-20150302-5232-1o5kviz.jpg?ixlib=rb-1.1.0&rect=1%2C0%2C991%2C657&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Push and pull factors. How bankers lose direction.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/daynoir/2180507211/in/photolist-btVRWn-gK19f-nU7DV5-4jFEPV-64KEwY-6eGLBQ-o5X4Ar-2ZmEjJ-6G5iTL-5n2QHe-nUJWgi-pDmGeu-De3uU-6xKyBD-dxnob7-4nVitT-2RVaF-9fYK9X-8T9tUk-9JNjcB-af6Xuw-5zSZEx-qALf6P-s2oLi-nLwSFe-pQrnr-jwfx-2biiu-aRBwLp-9FPMWK-dSZyPG-bVFeHQ-67que2-4pLmWL-7uD3a3-7muzcJ-m4C23X-6G3mMW-qACvcu-6G1dDD-7TkMGU-qQTQfG-6uXioh-pV3hWg-6xPHb3-82Uw6D-pVeWt-6ZkasQ-bPHTS-h2BVBm">dayna mason</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span></figcaption></figure><p>We’re getting rather used to revelations about sharp practice in the banking sector. The <a href="https://theconversation.com/uk/topics/hsbc">row about HSBC’s tax services</a> to rich clients has raised, yet again, crucial questions about the business culture which allows such scandals to emerge. One common idea is that those involved have <a href="http://www.telegraph.co.uk/news/uknews/9510087/Banks-have-lost-their-moral-compass-consumer-group-warns-new-industry-chief.html">lost their “moral compass”</a> and succumbed to the <a href="http://www.theguardian.com/commentisfree/2012/jul/02/bankers-greed-brain-changes">imperative of pure greed</a> as they employ subterfuge to do things which end up doing harm to the general public.</p>
<p>There is a problem with these approaches. Those who use the “greed-hypothesis” tend not to define what they mean by “greed”, as distinct from normal material interest or motivation, nor do they have empirical data to show how greed operates to cause all this turmoil in our economy. But that is for another day perhaps, as here I want to focus on the “immorality-hypothesis”; to unpack it and argue that fraud in the City does not, in fact, reveal the absence of morals, but the presence of particular moral views and preferences.</p>
<p>You and I might dislike those moral mind-sets and priorities, but exploring them is essential if we are to understand banking. </p>
<p>This poses an intriguing question: what are these morals, where do they come from and why have they apparently become dominant in some businesses and sectors?</p>
<h2>Noble pursuits</h2>
<p>First, consider this <a href="http://www.michaelmeacher.info/weblog/2015/02/establishment-bang-rights-hsbc-swiss-bank-leaks/">recent statement</a> by Labour MP Michael Meacher:</p>
<blockquote>
<p>The revelations of greed and cynical immorality … keep pouring out of this HSBC Swiss bank scandal, one of the biggest of the last few decades since this is probably only the tip of the iceberg on bank wrongdoing in this no-holds-barred era of crooked capitalism.</p>
</blockquote>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/73467/original/image-20150302-5277-12yusnp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/73467/original/image-20150302-5277-12yusnp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/73467/original/image-20150302-5277-12yusnp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/73467/original/image-20150302-5277-12yusnp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/73467/original/image-20150302-5277-12yusnp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/73467/original/image-20150302-5277-12yusnp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/73467/original/image-20150302-5277-12yusnp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/73467/original/image-20150302-5277-12yusnp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Glowing. HSBC.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/aniamendrek/15503079172/in/photolist-dArJ7p-5RAkr-St4W7-ppZEHM-aQi7Wg-pBXkju-py6vJK-22Eebj-jRdTuM-i8hBf3-j7mfCG-pgT9AQ-jRafKZ-7Lv7um-anwFFJ-6UtzrY-b3EM62-b3EMEM-b3ELr8-99af8Z-6wCWkS-oSU6K4-p6XvRk-8ecDzA-3e5Cq-9hDaY9-bxpgEo-4R9avb-8v9xZM-7YjgGe-6aNCTD-aes6ye-3c9NTJ-6wyMGZ-dAvFc7-aQi8Gk-aH91nK-aQq8UR-fvMLyY-b4JbvH-8sU81R-8HuNLJ-b3ERwn-6vbHHb-ea86tD-8KHGmV-4SwyaF-b3EGN8-b3EGh4-b3EFKH">Ania Mendrek</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>Here greed, cynicism and immorality explain “wrongdoing”. This analysis typically leads commentators to suggest that business needs to find that lost moral compass and adopt a moral business purpose. The idea is that a form of fair capitalism and just society will arise. </p>
<p>Will Hutton is a prototypical writer of this category: he suggests companies should deliver <a href="http://www.theguardian.com/business/2015/feb/11/british-capitalism-broken-how-to-fix-it">“a noble, moral business purpose”</a> which works to the service of humankind. The implicit assumption is that fraud is not what organisations and professionals with a moral purpose and compass do. </p>
<p>In 2012, Hutton made this line of argument in <a href="http://www.theguardian.com/commentisfree/2012/jun/30/will-hutton-barclays-banking-reform">a commentary about interest rate rigging</a> in the banking sector:</p>
<blockquote>
<p>Much has been said about the rotten culture in investment banking … [T]he regulators, the British government and bank managements … allowed a business model to be created in which men and women with very little skill and no moral compass could make themselves millionaires in a very short time. They contributed zero wider economic value but created immense systemic risk for the rest of the economy.</p>
</blockquote>
<p>The way forward for the likes of Hutton – including <a href="http://www.earthinstitute.columbia.edu/sitefiles/file/Sachs%20Writing/2012/FinancialTimes_2012_SelfInterestWithoutMorals_01_18_12.pdf">his academic counterpart Jeffrey Sachs</a> – looks straightforward. End out-of-hand greed and self-interest and inject morals into capitalist corporations and sectors. </p>
<h2>God’s Work</h2>
<p>However, what if the opposite is the case? Errant bankers have a moral compass too, and even banks <a href="http://www.sec.gov/spotlight/enf-actions-fc.shtml">fined and admonished by regulators</a> are organisations with moral norms, codes and priorities of one sort or another. That is to say, white-collar fraudsters will have their take on matters of right and wrong, proper and improper practice as well.</p>
<p>They have views on justice, honesty and decency too, or on what a good life and good society looks like, on how to live, earn an income and keep the job, and what all that means for matters of <a href="https://www.hofstra.edu/pdf/Academics/Colleges/HCLAS/CLD/CLD_RLR_f04_cheating.pdf">acceptable and unacceptable business practice</a> in their line of work. It’s why you get <a href="http://www.nytimes.com/2008/07/09/business/09credit.html?%0Aadxnnl=1&adxnnlx=1303412194-BNurm1fBKXFVJ7cIwkXGVg&_r=0">ratings agency staff saying</a>: “Let’s hope we are all wealthy and retired by the time this house of cards falters”. And why <a href="http://www.bbc.co.uk/news/business-26552995">Goldman banker Fabrice Tourre</a> told his girlfriend:</p>
<blockquote>
<p>[The subprime business] is totally dead and the poor little subprime borrowers will not last so long!!!… <a href="http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7626096/Goldman-fraud-charges-emails-from-Fabrice-Tourre-to-girlfriend-Marine-Serres.html">I am now considered a ?dinosaur?</a> in this business… I feel like I’m losing my mind and I’m only 28!!! OK, I’ve decided two more years of work and I’m retiring.</p>
</blockquote>
<p>There are similar tales in emails and instant messages released <a href="http://blogs.wsj.com/moneybeat/2015/01/12/bros-or-insider-traders-ex-wells-fargo-colleagues-seek-to-dismiss-sec-case/">alongside other cases</a>. We see moral views that lead people to justify their actions: “Everybody’s doing it”, “If I don’t do it somebody else will”, “I can’t afford to be nice”, “I need to do this because I need this job for my family”, “I serve the interests of our <a href="https://theconversation.com/fixing-the-hole-in-the-heart-of-corporate-capitalism-35515">shareholders</a>, including pensioners”, or even (paraphrasing <a href="http://blogs.wsj.com/marketbeat/2009/11/09/goldman-sachs-blankfein-on-banking-doing-gods-work/">Goldman Sachs CEO Lloyd Blankfein</a>) “I am doing God’s work”. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/73466/original/image-20150302-5232-7p4p17.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/73466/original/image-20150302-5232-7p4p17.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/73466/original/image-20150302-5232-7p4p17.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=405&fit=crop&dpr=1 600w, https://images.theconversation.com/files/73466/original/image-20150302-5232-7p4p17.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=405&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/73466/original/image-20150302-5232-7p4p17.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=405&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/73466/original/image-20150302-5232-7p4p17.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=509&fit=crop&dpr=1 754w, https://images.theconversation.com/files/73466/original/image-20150302-5232-7p4p17.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=509&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/73466/original/image-20150302-5232-7p4p17.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=509&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Prophet of doom? Lloyd Blankfein.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/worldeconomicforum/8412684247/in/photolist-7ZcGBY-7SQTFg-fmynxa-aVkxbp-7gekkG-aBED8q-aBEDEw-aBBYpt-asV8s8-asXKDf-asV8fH-eod1ci-bX5egc-bX5ehD-8NEcn1-dPpcw4-asSdWx-asSe8i-4nTWcL-4uW8qc-dq59Bm-dPpcW8-dPuQCm-7g91yx-dPpcNg-dPuQGJ-jsTb7M-dq59tG-dq4XUK-kg6hP4-dq4X3t-7gcVwG-pXKehg-pFjtm8-gH8BSq-gH9Cfr-7aMfXY-eR7bX3-gH8Xb7-gH8Bum-gH8RXG-dpTuph-dq4YcF-dq58tj-dq511i-dpTukU-dpTunf-bEcari-7g91wn-brhig1">World Economic Forum</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>In other words, a moral norm does not automatically prescribe a pro-social, honest practice. In a particular case, the existing dominant morals among the actors involved – notions of what constitutes acceptable practice, and how others should be treated while earning a living – can be that it is OK, proper, or crucially, necessary to defraud (and therefore harm) another human being, social group or organisation. </p>
<p>The motivation might be anything from meeting a company target, to keeping your job or defending/advancing your position and that of your family, corporation, social group, region, country, religion, and so on. Sounds familiar? </p>
<h2>Denormalising</h2>
<p>Fraudsters in banking and related industries – as well as their numerous clients – are not operating in a moral vacuum. They are also, after all, likely to operate within the dominant value system of capitalist society; they probably aspire to wealth, achievement, self-direction, or enjoyment. And if the way to combat fraud and corruption <a href="https://plutopress.wordpress.com/tag/how-corrupt-is-britain/">is to understand it better</a>, then we need to explore the entire spectrum of key existing moral rationales and dynamics in the professions, firms, organisations and sectors of concern.</p>
<p>We need to understand the systems of pressures and incentives – including the power dynamics – that facilitate fraud, and understand the values and norms that justify it. To say bankers are amoral is analytically flat and limits the enquiries and debates we should actually be having. </p>
<p>Start from the analytical position that “bankers have morals”, and the moral compass they use is located firmly in the magnetic field of late capitalism. This may not be an easy analytical move, but is essential to identify and discuss, as well as critique and de-normalise the morals of the white-collar fraudsters in high finance, and elsewhere.</p><img src="https://counter.theconversation.com/content/38118/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jörg Wiegratz receives funding from British Academy/Leverhulme Trust/Sir Ernest Cassel Educational Trust Fund.
</span></em></p>If we keep saying high finance is operating in a morality vacuum, we will miss the chance to understand and fix its problems.Jörg Wiegratz, Lecturer in Political Economy of Global Development, University of LeedsLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/379902015-02-25T16:10:45Z2015-02-25T16:10:45ZWhat’s gone wrong at HSBC?<figure><img src="https://images.theconversation.com/files/72905/original/image-20150224-25702-nnml7v.jpg?ixlib=rb-1.1.0&rect=147%2C0%2C1716%2C1220&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">H is for heft.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/mattbuck007/14800779494/in/photolist-54dshe-4gbpqk-eEPTwe-eFHjA9-nBxmpU-54hARf-kceegQ-6pyGnh-eWFKMK-oxTS6m-pVgGgx-eAVvLe-3ghS4Q-6kioDz-eWFKBR-eAV8mk-f7skvP-6knzP9-2qmuPY-kcc2fF-bt48Do-4N2mmv-2NaYT-vmuZ6-eEW15s-eEVVAo-dkQNdZ-eEPNwT-e9PhkZ-85JDyW-nSVRvP-6knzqY-g1FdGa-uBKo5-dkQRZb-29BGSb-2y8np2-dkQSE1-dkQQug-eWT4Lu-evVaqb-dkQR4S-e9UXp9-eLeW3F-fuB4eE-dkRifK-2y8sXP-ojDNx-dkQRHE-4jpbEa">Matt Buck</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>As HSBC suffers under the scorching spotlight of public scrutiny once more, it seems fair to ask why the banking group so often finds itself mired in controversy.</p>
<p>The latest revelations from leaked bank files about the tax services offered by HSBC’s Swiss private banking subsidiary have caused shockwaves. Its former and current leadership have faced intense pressure and Britain’s Chancellor of the Exchequer George Osborne has <a href="http://www.theguardian.com/politics/2015/feb/23/hsbc-scandal-george-osborne-tax-measures">floated the possibility</a> of new penalties for bankers and accountants who are found to have navigated routes along and beyond the edge of legality as they seek to cut clients’ tax bills.</p>
<p>But for HSBC, it must seem awfully familiar. Details from the Swiss data leak have been pored over by tax officials and journalists for evidence of evasion or aggressive tax avoidance. It all adds to a long list of scandals which have led many commentators to reach damning conclusions about HSBC’s in-house culture. </p>
<h2>Leaving footprints</h2>
<p>Among the reputation-decimating scandals which have engulfed HSBC, we have witnessed investigations and fines over its failure to <a href="http://www.fca.org.uk/news/fca-fines-five-banks-for-fx-failings">prevent foreign exchange manipulation attempts in the UK</a>, <a href="http://uk.reuters.com/article/2012/12/11/us-hsbc-probe-idUSBRE8BA05M20121211">failure to maintain effective anti-money laundering in the US</a>, as well as <a href="http://www.independent.co.uk/news/business/news/fca-libor-probe-closes-in-on-six-banks-9787370.html">sustained international legal and regulatory investigations and action</a> over the alleged fixing of LIBOR, the rate at which banks lend each other short-term money.</p>
<p>Add to that fines for <a href="http://www.bbc.co.uk/news/business-21653131">mis-selling of payment-protection insurance</a> and interest-rate swaps in the UK, and you understand why the culture is questioned perhaps even more so than at other banks which have transgressed.</p>
<p>One explanation is a simple one: <a href="http://www.hsbc.com/about-hsbc/structure-and-network">HSBC is big</a>. As regulators and prosecutors take a more vigorous approach in the post-financial crisis era, the compliance culture within international banks has had to change, but confrontations with authorities pertain to practices, by and large, during the years preceding this culture change. And because HSBC has such a large global footprint, spanning multiple jurisdictions where these issues have been brought to light, its name is bound to come up again and again.</p>
<h2>The role of the state</h2>
<p>Another explanation begins with the observation that HSBC is headquartered in London and therefore falls under UK law, taxation and regulation. If Richard Brooks – a former UK HMRC Tax Inspector, and currently an author and journalist – <a href="http://www.theguardian.com/profile/richard-brooks">is right about the relationship</a> between UK tax authorities and large UK-based corporations, then one might conjecture a slippery slope between the facilitation of technically legal tax avoidance by UK-based companies and the emergence of an environment in which tax evasion and money laundering can take place. At face value, this is not obviously implausible. Brooks’ view is that HMRC has been acting on a narrow and technical definition of tax avoidance, and a thriving large-scale tax-avoidance industry is the result.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/72920/original/image-20150224-25670-13nj2pj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/72920/original/image-20150224-25670-13nj2pj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/72920/original/image-20150224-25670-13nj2pj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=179&fit=crop&dpr=1 600w, https://images.theconversation.com/files/72920/original/image-20150224-25670-13nj2pj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=179&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/72920/original/image-20150224-25670-13nj2pj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=179&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/72920/original/image-20150224-25670-13nj2pj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=225&fit=crop&dpr=1 754w, https://images.theconversation.com/files/72920/original/image-20150224-25670-13nj2pj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=225&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/72920/original/image-20150224-25670-13nj2pj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=225&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Another kind of offshoring. Yachts off the coast of Capri.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/ell-r-brown/7574676960/in/photolist-cxmcyC-cxmh5Q-cxo9nq-cxmi3G-cxmg35-cxmcgC-cxmMhJ-cxmbhh-cxmKbs">Elliott Brown</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>The working ingredients of this industry include off-shore corporations and trusts, as well as ready availability of banking services to facilitate the required international transfers, wealth management, withdrawals, and so on. Therefore, in terms of organisational infrastructure, distribution of footprint, knowledge and skills, it is not a great leap from excellence in supporting technically legal tax avoidance to enabling tax evasion. </p>
<h2>Peep peep</h2>
<p>Relative to other large international banks, HSBC has suffered from extremely damaging revelations made by whistleblowers. <a href="https://www.youtube.com/watch?v=MSZDV7Ckhnw">John Cruz’s revelations</a> ignited money laundering investigations in the US, <a href="http://www.spiegel.de/international/business/interview-hsbc-swiss-bank-whistleblower-herve-falciani-on-tax-evasion-a-911279.html">Hervé Falciani’s revelations</a> led to tax evasion and money laundering investigations in Luxembourg, Switzerland and finally, in the UK. But it is clear that HSBC is not alone. <a href="http://www.theguardian.com/world/2014/dec/23/prosecution-source-luxleaks-tax-scandal-letter-luxembourg-auditor-antoine-deltour">Antoine Deltour</a> revealed 28,000 pages of documents from the Luxembourg office of PricewaterhouseCoopers, exposing the details of confidential tax agreements between 340 of the world’s largest corporations and the Luxembourg tax authorities. These so-called <a href="http://www.accountancyage.com/aa/news/2390581/europe-could-investigate-sweetheart-deals-following-luxembourg-leaks">“sweetheart” agreements</a> were the final lynch pins in the corporations’ aggressive but legal tax-avoidance schemes. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/72908/original/image-20150224-25664-1a04vz0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/72908/original/image-20150224-25664-1a04vz0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/72908/original/image-20150224-25664-1a04vz0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/72908/original/image-20150224-25664-1a04vz0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/72908/original/image-20150224-25664-1a04vz0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/72908/original/image-20150224-25664-1a04vz0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/72908/original/image-20150224-25664-1a04vz0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/72908/original/image-20150224-25664-1a04vz0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Green is go for whistleblowers.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/stevendepolo/3830805160/in/photolist-6QvSUQ-6QrNLr-acwDQd-pvaPFM-7i3NGY-ntdGM-BAApg-6QvV8s-ow1cBb-4TemUA-iGhZ95-6QrNU6-2NVcHT-q5j47h-5C4B1p-CW12M-7zCYFN-dzupPA-5FgAB9-bXdPcb">Steven Depolo</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>The absence of whistleblowers from other large banks does not necessarily imply an absence of wrongdoing. The current public focus on HSBC could in fact be taking place for the want of whistleblowers from other big banks, rather than due to any asymmetry in conduct. In the US, it is not only HSBC that has struck a deferred-prosecution agreement in the wake of the Justice Department’s anti-money-laundering crackdown – <a href="http://www.wsj.com/articles/j-p-morgan-being-probed-by-justice-department-1415054825">JP Morgan Chase</a> and <a href="http://www.telegraph.co.uk/finance/newsbysector/epic/stan/11197770/US-re-opens-investigation-into-Standard-Chartered-breaking-Iran-sanctions.html">Standard Chartered</a> have been targeted by the Justice Department as well. </p>
<p>Although no longer a novel statement, it might be worth thinking more carefully about whether some banks can become “too big to regulate”. There does seem to be an issue in terms of the number and types of legal jurisdictions they span, in terms of the influence they can bring to bear upon regulators over extended periods of time, and in terms of the possible systemic effects of strict enforcement actions – for example the shockwaves that might ensue if a regulator stripped a major bank of its licence to operate.</p>
<p>From a regulatory and enforcement standpoint, it might be worth studying more carefully whether a tougher line on tax avoidance would have more than just a direct effect on this <a href="http://www.standard.co.uk/news/uk/everyone-avoids-tax-says-lord-fink-after-he-was-named-by-ed-miliband-in-commons-row-10041040.html">“vanilla” end of the industry</a>, as Lord Fink might call it. If we look at tax avoidance as the “gateway drug” for clients, one which introduces infrastructure, skills and opportunities which can lead all the way down to international money laundering, then it is crucial to institute tighter gateway controls, if not more transparency. </p>
<p>In that case, it will be measures like Osborne’s – to introduce financial and civil penalties for facilitating tax evasion and overly aggressive tax avoidance – that may achieve just the required tightening to have a significant impact, if we can avoid diluting their strength in implementation and enforcement.</p><img src="https://counter.theconversation.com/content/37990/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kim Kaivanto does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>As HSBC suffers under the scorching spotlight of public scrutiny once more, it is fair to ask why the banking group so often finds itself at the heart of the action.Kim Kaivanto, Lecturer in Economics, Lancaster UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/376632015-02-20T15:18:52Z2015-02-20T15:18:52ZWhy scandals aren’t bad for business in the long term<figure><img src="https://images.theconversation.com/files/72628/original/image-20150220-21904-17pt2of.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Too big to fail?</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/eepaul/6593764401/in/photolist-4NNfg2-c2N8v5-jRafKZ-gtX4g-eVkSuY-6DfvYr-asikbk-2YE2hH-5m8tVn-9g7u9m-9NWUfG-b3EM62-b3EMEM-b3ELr8-6kinyc-99af8Z-p6XvRk-ea86tD-5EzqbQ-ecDJuM-nTkrnk-8SKYgK-c2NvpY-cKzpoh-79tLMy-eaGygK-xH2cm-aWAhK-eaGyb8-2McoxL-aLAbSg-99cNWu-bo1PLy-ghakW-79tLqS-b3ERwn-3MmL9j-4nX7GQ-4nT44F-4nT2ck-edENxB-E5QRK-E5QRG-E5QRL-E5QRM-bnZZdL-c2NvoE-c2Nvmu-4faJJf-bt48Do">Paul Wilkinson/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>HSBC has been receiving a lot of bad press recently, but it doesn’t seem to be hurting its <a href="http://seekingalpha.com/article/2928506-should-you-be-bottom-fishing-on-hsbc">stock performance</a>. Should we be surprised by this? My research into corporate scandals shows that they tend to hurt companies in the short term, but have no long term impact. </p>
<p>The questions raised over HSBC’s Geneva subsidiary will likely affect the company in the short term. There are always investors who value ethics and they will penalise the bank for <a href="http://www.bbc.co.uk/news/business-31516416">reports of money laundering and assisting wealthy customers avoid tax</a>. Then there’s the reputational damage of having its offices searched, as a result of these charges, and the potential fines that could be incurred if found guilty. It may well have to close some businesses, refuse some customers, sell some assets and restructure the firm. All of these cost money that will adversely affect the bank’s asset base.</p>
<p>But HSBC is a “too big to fail” bank. The ripple effects of closing it would be devastating. So in the long run, this scandal is unlikely to affect it. In fact, research I’ve done into the long term effect of corporate scandals on share prices shows that they can even lead to better performance in some circumstances.</p>
<h2>Scandals in the past</h2>
<p>A paper recently <a href="http://www.tandfonline.com/doi/abs/10.1080/00036846.2014.995361#tabModule">published in the Journal of Applied Economics</a> looked specifically into the effect of improper conduct, gross misbehaviour or failings by CEOs on stock market performance. Colleagues in the US and I looked at 80 corporate scandals between 1993 and 2011 involving financial or non-financial misdemeanours – breach of contract, bribery, conflicts of interest, fraud, price fixing and other white-collar crimes, as well as personal scandals such as a CEO having an affair, lies on CVs and harassment cases.</p>
<p>While the HSBC scandal that’s taking place right now is not centred on its CEO but the company’s practices more broadly, there are some parallels in terms of the effect that scandals have on businesses – and why HSBC will probably be fine in the long term. </p>
<p>Our investigation into scandals involving CEOs showed that investors react unfavourably to the announcement of corporate scandals. We found that share prices plummeted between 6.5% and 9.5% in the month after the misconduct was made public, collectively costing shareholders an average of US$1.9 billion per scandal-hit firm.</p>
<p>Clearly, investors value ethics and they place a premium on it. Thus, when something unethical comes to light, the company loses that premium and its share price drops instantaneously to reflect that loss.</p>
<p>The point of respite for investors, however, is that the damage is confined to the short run. In the long run following a scandal, the stock price performance of the firms we studied went on to match the performance of other similar firms that were scandal free.</p>
<p>Nonetheless, it requires more than a scandal to bring down a corporation. Unethical people are replaceable and unethical practices can be reformed. Companies can carry on after these people are replaced and show that safeguards are in place to prevent similar things from happening again.</p>
<h2>Corrective actions</h2>
<p>Our study showed that the operating performance of many scandal-hit firms went on to be better than other similar but unaffected firms in the years following the scandal. The corrective actions taken by the scandal-hit firms seems to benefit investors in the long run.</p>
<p>Companies respond to scandals by putting safeguards in place. HSBC have had a head start in this. As soon as the reports of its private banking failings surfaced, the bank was <a href="http://www.theguardian.com/business/2015/feb/08/hsbc-responds-revelations-misconduct-swiss-bank">quick to inform the public</a> that it has “completely overhauled its entire private banking business” and made reforms to meet strict new standards.</p>
<p>These kinds of responses allay investor fears and avoid further drops in a company’s stock price, ensuring that they rebound to the levels of their rivals. This is what we found in our study. Three years on from scandals, the share-price performance of firms matched those that had not been affected by scandals. </p>
<p>In general, corporate scandals can act as a catalyst to implement changes that benefit investors. We found that, if anything, the 80 companies in the study – including Apple, Hewlett Packard, IBM, JP Morgan and Yahoo – actually showed an improved operating performance in the years after a scandal.</p><img src="https://counter.theconversation.com/content/37663/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Surendranath Jory has previously received funding from the British Academy.</span></em></p>HSBC has been receiving a lot of bad press recently, but it doesn’t seem to be hurting its stock performance. Should we be surprised by this? My research into corporate scandals shows that they tend to…Surendranath Jory, Lecturer in Finance, University of SussexLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/374312015-02-11T06:51:43Z2015-02-11T06:51:43ZHSBC scandal: the UK’s strict rules on bank customers were abandoned at the border<figure><img src="https://images.theconversation.com/files/71613/original/image-20150210-24664-1qpypyg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Happy to Serve the Baddest Customers!</span> <span class="attribution"><a class="source" href="http://www.shutterstock.com/pic-175256162/stock-photo-london-december-a-branch-of-hsbc-december-london-england-founded-in-in-hong.html?src=csl_recent_image-2&ws=1">Martin Good</a></span></figcaption></figure><p>The UK is no slouch when it comes to protecting against financial crime. It follows the <a href="http://www.anti-moneylaundering.org/EU_Chart.aspx">relevant European directives</a>, which require that banks have sufficient anti-money-laundering controls in place to prevent criminals opening and using accounts to launder money or fund terrorism. </p>
<p>It is also a member of the <a href="http://www.fatf-gafi.org/">Financial Action Task Force (FATF)</a>, an inter-governmental organisation that was created in 1989 to combat these kinds of criminal activity and protect the integrity of the international financial system. </p>
<p>Despite all this, the UK-based HSBC found itself at the centre of an investigation for alleged criminal activity in 2011, <a href="http://www.bloomberg.com/news/articles/2012-12-11/hsbc-agrees-to-pay-1-92-billion-in-money-laundering-settlement">culminating in</a> a fine for nearly $2bn (£1.3bn) from the US authorities. </p>
<p>The alleged activities investigated by the US authorities included laundering money for Mexican drug cartels and for sanctioned nations such as Iran and Sudan. The <a href="http://www.theguardian.com/business/2012/dec/11/hsbc-fine-prosecution-money-laundering">firm blamed</a> insufficient compliance policies and procedures in its Mexican arm for these failures and promised to get its house in order. </p>
<p>And this week, it <a href="http://www.marketwatch.com/story/hsbc-sheltered-100-billion-linked-to-dictators-arms-dealers-2015-02-09">has been revealed</a> in leaked accounts that in the years leading up to 2010, the bank’s Swiss private-banking arm also had a host of unsavoury characters on its books. They included arms dealers, dictators and their families, blood-diamond traffickers, and hundreds of other clients who were allegedly helped to shift chunks of money out of their country of employment to avoid tax liabilities. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/71614/original/image-20150210-24697-xjqci0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/71614/original/image-20150210-24697-xjqci0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/71614/original/image-20150210-24697-xjqci0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/71614/original/image-20150210-24697-xjqci0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/71614/original/image-20150210-24697-xjqci0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/71614/original/image-20150210-24697-xjqci0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/71614/original/image-20150210-24697-xjqci0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/71614/original/image-20150210-24697-xjqci0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">With so much international cooperation, how is money laundering even possible?</span>
<span class="attribution"><a class="source" href="http://www.shutterstock.com/cat.mhtml?lang=en&language=en&ref_site=photo&search_source=search_form&version=llv1&anyorall=all&safesearch=1&use_local_boost=1&search_tracking_id=NF-Cpg0FeFrllChjNFGWVA&searchterm=money%20laundering&show_color_wheel=1&orient=&commercial_ok=&media_type=images&search_cat=&searchtermx=&photographer_name=&people_gender=&people_age=&people_ethnicity=&people_number=&color=&page=1&inline=133938344">Stockdonkey</a></span>
</figcaption>
</figure>
<h2>Industry rules for opening accounts</h2>
<p>According to the UK financial services regulator, the Financial Conduct Authority (FCA), the process by which customers open bank accounts <a href="http://www.fca.org.uk/consumers/financial-services-products/banking/your-rights/opening-an-account">should be</a> “a simple and efficient” one. </p>
<p>A potential customer will be asked to provide the bank with documents verifying their identity and address <a href="http://www.fca.org.uk/firms/being-regulated/meeting-your-obligations/firm-guides/systems/aml">as part of</a> the FCA’s requirements. The bank will perform a credit check to ensure the potential customer is creditworthy (universal practice, though not actually legally required). </p>
<p>The UK’s banks <a href="http://www.fca.org.uk/firms/being-regulated/meeting-your-obligations/firm-guides/systems/aml">are also</a> required to carry out various additional checks to prevent criminal activities ranging from money laundering to terrorist financing to sanctions evasion, bribery and corruption, fraud and tax evasion. This would include identity checks, fraud database checks, and questioning on the source of funds where an account has been opened with a large amount of money. </p>
<p>And banks have to determine whether an applicant falls into the “special category of client” list, which includes non-residents, high net worth individuals, high-profile politicians, clients in high-risk countries and companies offering foreign exchange services. </p>
<p>On top of this, <a href="http://www.fca.org.uk/firms/being-regulated/meeting-your-obligations/firm-guides/systems/aml">banks must</a> monitor their customers’ business activities and report anything suspicious to the <a href="http://www.nationalcrimeagency.gov.uk/">National Crime Agency</a>. Additionally HMRC publishes a list of financial sanctions targets in the UK, which lists people and entities that have had restrictions placed on their financial activities by the government. </p>
<p>Banks will use software to carry out this monitoring, though the activities of account holders in the “special category” might be checked regularly by a dedicated relationship manager – looking for large deposits and withdrawals, to give one obvious example. </p>
<h2>Control over choice of customers</h2>
<p>A financial institution can refuse to open a bank account for a customer, and does not have to give a reason why – <a href="http://www.legislation.gov.uk/ukpga/2010/15/contents">so long as</a> it doesn’t discriminate on grounds of race, sex, religion, disability or sexuality. </p>
<p>The main reasons to decline business, other than illegality, are adverse information such as poor credit history or fraud markers; certain business sectors a bank wants to avoid for commercial reasons; and a fear that the client could end up damaging the bank’s reputation. </p>
<p>Accounts that have been opened can also be subsequently closed for the same reasons. For example in 2004, following the airing of a <a href="http://www.theguardian.com/uk/2004/jul/20/race.world2">BBC documentary</a> which showed British National Party (BNP) followers confessing to racist hate crime, <a href="http://news.bbc.co.uk/1/hi/business/3901621.stm">Barclays closed</a> a number of accounts linked to them. At the time the BNP claimed this was due to pressure from a national newspaper which threatened to run a national campaign against the firm unless the accounts were closed. </p>
<p>On the reputational question, another high-profile case has been RBS’s involvement with producing oil from Canada’s tar sands. It was the butt of a long and loud campaign from environmentalists on the subject. </p>
<p>This may be some distance from Mexican drug cartels, but RBS chairman Sir Philip Hampton <a href="http://platformlondon.org/2013/02/12/rbs-stopped-financing-tar-sands-spoiler-no/">still felt obliged</a> to make public the fact that the bank had not lent money to these projects for a number of years (albeit some campaigners disagreed over the semantics). </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/71615/original/image-20150210-24664-qh51qf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/71615/original/image-20150210-24664-qh51qf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/71615/original/image-20150210-24664-qh51qf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/71615/original/image-20150210-24664-qh51qf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/71615/original/image-20150210-24664-qh51qf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/71615/original/image-20150210-24664-qh51qf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/71615/original/image-20150210-24664-qh51qf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/71615/original/image-20150210-24664-qh51qf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">High-profile battle: RBS’s tar sands involvement.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/ricjl/4560669400/in/photolist-8ux2JV-7W28Uo-7VXUfH-7X1C83-7X1AAQ-7WXrjB-7WXpJx-7X1DJY-7WXnXD-7X1EdN-7X1BCG-7WXrU8-7X1G2Y-7WXtG4-8uA3HS-bUaaZF-7WXpm4-7X1GvL-7X1FEb-7WXuax-8zfzVW-bFeA7L">Ric Lander</a></span>
</figcaption>
</figure>
<p>Equally, banks’ reputations can be at risk for refusing or withdrawing business. HSBC itself came under fire in the summer of 2014 for closing the accounts of customers with ties to Iran and Syria, for instance. The firm <a href="http://4bitnews.com/uk/hsbc-shameless-racial-profiling-targeting-syrian-refugees/">was accused of</a> racial profiling when it undertook systematic account closures with little explanation, some of which had been open for a number of years or were held by students or refugees. But in the end, the complaints went nowhere – perhaps highlighting the wide discretion that banks have in this area. </p>
<p>In short, banks have a great deal of control over who they choose to take on as customers, and they all have scrupulous checks and balances in place to avoid people who are criminal or undesirable. </p>
<p>During my time with HSBC for example, which included a period working in branches, there was a lot of emphasis on due diligence and regular anti-money-laundering training. Front-line staff were trained to identify individuals that may pose a risk, though ultimately these were passed to a specially trained team to be dealt with. Whatever the conclusion on HSBC’s practices turns out to be, I never saw anything amiss at the front end. </p>
<p>Having said all of this, we have to bear in mind that the current HSBC case is about events that took place at the Swiss subsidiary. While the UK division is accused of facilitating (and possibly even encouraging) the hiding of money to avoid UK taxes, those seeking to open bank accounts are only subject to the rules in the country where the account is held. Switzerland notoriously permits far greater secrecy for its bank customers than most other countries. </p>
<p>So in the end this is a story about how the standards that UK companies are expected to follow at home are not necessarily followed abroad. It ends up making a mockery of all the strict rules about customer handling at home when it is possible to behave so differently in other jurisdictions nearby. HSBC is trying to counteract this with the introduction of global standards to ensure that the highest level of security compliance is followed in every jurisdiction in which it operates. All eyes will be watching closely to see if it works.</p><img src="https://counter.theconversation.com/content/37431/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Claire worked for HSBC from 2001-2014</span></em></p>The UK is no slouch when it comes to protecting against financial crime. It follows the relevant European directives, which require that banks have sufficient anti-money-laundering controls in place to…Claire McCafferty, PhD candidate, Edinburgh Napier UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/373762015-02-10T06:42:20Z2015-02-10T06:42:20ZWinston Churchill’s simple answer to the HSBC tax scandal<figure><img src="https://images.theconversation.com/files/71486/original/image-20150209-24660-x49itg.jpg?ixlib=rb-1.1.0&rect=1%2C35%2C1022%2C676&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Ringing the changes on tax avoidance</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/9731367@N02/7134294207/in/photolist-bSr87x-7gnbiN-FEBNn-7DqTEi-mMfmxi-9p7dNM-biaYZP-eebxNq-biaWZ4-7Ff4Av-9mu7MM-5vNnwp-jcktAs-4cZQaF-9VwGaa-biaMc2-axuhRV-4rjUcM-9ABqgL-bPLRLH-bz5zDq-m7rSri-cxtNp-biaH2x-7PopTc-ahxhw9-xNhig-a1w2xS-biaDRz-biaAS2-dM3ZSU-9VxbfZ-bASdkj-9VwzJV-nmKg73-bDw2PE-6UxmGp-ir8LWg-mnnL7y-e9jR4-7P8bpB-exDgp3-bgfFKc-biaW1z-bqAhJ1-9VzXJ9-5g3poz-9Vzsr7-obN1p-o5bh9S">Philip Taylor</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>The <a href="http://www.bbc.co.uk/news/business-31248913">revelation on the BBC</a> and in the Guardian that British bank, HSBC, the <a href="https://www.gfmag.com/awards-rankings/best-banks-and-financial-rankings/worlds-50-biggest-banks-2012">second biggest in the world</a> has allegedly helped UK residents sidestep taxes through a Swiss subsidiary should really come as little surprise. More of a shock might be that the solution has been with us for decades.</p>
<p>Tax legislation – and its enforcement in the UK over the past 30 years – has been based on the following school of thought: that the government’s fundamental economic role is to let the unchecked forces of international capital and supply and demand reign supreme. This will, according to the mainstream neo-classical economic theory, allow for the best allocation of limited capital, as well as for the lowest prices and the most efficient output of goods and services. </p>
<p>Providing the state does little except uphold free competition where it can, the theory is that all businesses will evolve to purely serve the consumer in an increasingly stable, prosperous and free society.</p>
<h2>Electoral imperatives</h2>
<p>This week’s news follows other revelations about <a href="https://theconversation.com/the-uk-should-look-closer-to-home-before-crying-foul-over-luxembourg-leaks-34180">what has been happening in Luxembourg for years</a> and the 2013 <a href="http://www.financialsecrecyindex.com/">finding by the Tax Justice Network</a> about UK dominance in the global tax evasion/tax avoidance industry. But it is only because of the desperate need by UK politicians to show that “we’re all in this together”, that this has suddenly captured so much political and public space. We are, of course, less than 100 days before the <a href="https://theconversation.com/uk/topics/uk-general-election-2015">most important election</a> in a generation.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/71488/original/image-20150209-24675-17kinra.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/71488/original/image-20150209-24675-17kinra.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/71488/original/image-20150209-24675-17kinra.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=402&fit=crop&dpr=1 600w, https://images.theconversation.com/files/71488/original/image-20150209-24675-17kinra.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=402&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/71488/original/image-20150209-24675-17kinra.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=402&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/71488/original/image-20150209-24675-17kinra.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=505&fit=crop&dpr=1 754w, https://images.theconversation.com/files/71488/original/image-20150209-24675-17kinra.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=505&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/71488/original/image-20150209-24675-17kinra.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=505&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Towering example.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/singapor3/2262599353/in/photolist-4rWpXF-6UX5en-7awNPi-oZ3VpC-S6Qw7-75ivJn-3fwmC-asikbk-9JzjU8-5yQ1gb-s6ptt-5Hdic-75NGY9-ppZEHM-pj8UkN-6DfvYr-7wvTof-79FKyn-8J5WSY-4q6G65-6Bm34W-6VwJ9M-kBHNLB-5m8tVn-7cR1zd-c2N8v5-eaGygK-2YE2hH-ed18BC-aQi7Wg-usFkP-eaGyb8-acVcQf-XGWKt-4hhmXc-acVe73-7ZzaR-7pPca1-7pPbXu-7pKi5n-7pKhRn-7pKhDR-agQPCP-qzwAjv-9g7u9m-ozSYk-6q9rzY-kS3zvg-qzyjAF-4duG2X">Gyver Chang</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>What continues to be the real and unresolved issue facing UK PLC is that, regardless of tax havens and other tax avoidance opportunities – and even though <a href="http://www.telegraph.co.uk/finance/budget/9944515/Corporation-tax-falls-to-20-per-cent-in-fourth-consecutive-Budget-cut.html">UK corporate tax rates have fallen</a> three times since 2010, private and public debt and income inequality continues to rise across the country. The political parties might argue the toss about whether <a href="http://www.ft.com/cms/s/0/fefd56d2-a152-11e4-8d19-00144feab7de.html#axzz3RGgA7aW9">wages are edging higher</a>, but this should be only be viewed against the <a href="http://www.pieria.co.uk/articles/the_risk_of_deflation_in_2015?utm_source=Pieria+Subscribers&utm_campaign=9ffb4c72b9-Newsletter_15_23_2013&utm_medium=email&utm_term=0_deda1ba8c1-9ffb4c72b9-70891289">looming risk of deflation</a> to add to our financial concerns. </p>
<p>It all seems very different from the <a href="http://lyceumbooks.com/pdf/PeoplesBritishIslesIII_Chapter_11.pdf">political maturity and consensus</a> ushered in by World War II. Why have the most prominent UK politicians seemingly refused to learn from the way that approach fed a rapid and sustained increase in economic growth, income equality and social progress in the UK between 1945 and the mid-1970s?</p>
<h2>Churchill’s plan</h2>
<p>Perhaps one of the principal leaders of the post-war UK consensus offers a time-honoured solution to improve the tax take from Britain’s richest individuals and public companies and to finally destroy the notion that tax is <a href="http://www.theguardian.com/business/2007/aug/21/usnews">“only for little people”</a>. In 1909, Winston Churchill, during the first <a href="http://www.etsu.edu/cas/tahg/pictures/Industrial/documents/Capitalism%20in%20the%20Gilded%20Age.ppt">“Gilded Age” of monopoly capitalism</a> and plutocratic socialism, saw the need for a simpler, fairer and easier tax system to avoid the following blight on social progress. </p>
<p>As <a href="http://www.landvaluetax.org/current-affairs-comment/winston-churchill-said-it-all-better-then-we-can.html">he explained</a>:</p>
<blockquote>
<p>Land monopoly is not the only monopoly, but it is by far the greatest of monopolies – it is a perpetual monopoly, and it is the mother of all other forms of monopoly. Unearned increments in land are not the only form of unearned or undeserved profit, but they are the principal form of unearned increment, and they are derived from processes which are not merely not beneficial, but positively detrimental to the general public.</p>
</blockquote>
<p>As Churchill, Adam Smith, John Stuart Mill and many others have pointed out time and time again, those who own the land skim precious limited capital from everyone else, without any effort or skill. A simple-to-administer land value tax, achieved in Taiwan as part of socially progressive economic policy to <a href="http://www.tax.taichung.gov.tw/webpad/webpad.aspx?EpfJdId9UuCPR1RnYsHaJXhVTBOSTNUs">transform a broken people in a few years</a>, is today’s solution to recoup this levy on every form of wealth and enterprise in the UK.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/71507/original/image-20150209-24691-1tpzm1h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/71507/original/image-20150209-24691-1tpzm1h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/71507/original/image-20150209-24691-1tpzm1h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=323&fit=crop&dpr=1 600w, https://images.theconversation.com/files/71507/original/image-20150209-24691-1tpzm1h.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=323&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/71507/original/image-20150209-24691-1tpzm1h.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=323&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/71507/original/image-20150209-24691-1tpzm1h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=406&fit=crop&dpr=1 754w, https://images.theconversation.com/files/71507/original/image-20150209-24691-1tpzm1h.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=406&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/71507/original/image-20150209-24691-1tpzm1h.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=406&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Churchill in the shadows.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/patersor/2873651548/in/photolist-L67jg-L65xk-L67Gx-L5Phw-L66QV-L63VV-L5MQU-L5Qbs-L63sM-L64Lk-L5QSd-8N1kd2-4gQAnp-GnPwr-sv6Wp-6RWHw9-6eWdeu-KbEmr-5nWdum-mJAbYr-mJAeuP-b4KD9R-7L5h9h-ghPK4S-HypzZ-dH6d5M-dQZmSf-dQTNda-dQZn2d-9zY72R-6Mq52N-9hvgsc-8NwESx-8NKEPz-pcSXwp-6cKyXE-6cKyDN-8Y1s75-6LkXdq-mcHEa-2b4Gc-nwW8D-eoFHrs-3cdUW-31u8e5-7SBXYA-enVSAt-eovyhm-6eD5qj-tnBWp">Richard Paterson</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span>
</figcaption>
</figure>
<p>Land value tax remains the simplest, fairest, least avoidable and easiest to administer tax on unearned income and wealth, one which the major UK parties will now not even discuss. Surely a better political consensus is needed for a modern Britain than discredited neo-liberalism built on protecting the wealth of the few. </p>
<p>Even the largest banks, such as HSBC, have to compete in a global tax avoidance industry. They are just one of many international financial institutions that have a legal responsibility to <a href="https://theconversation.com/fixing-the-hole-in-the-heart-of-corporate-capitalism-35515">maximise profits for their shareholders</a>. One way to make this fairer and to honour the sovereignty of the UK parliament to levy national taxes is land value tax. But where is the voice of Churchill in today’s “Gilded Age”?</p><img src="https://counter.theconversation.com/content/37376/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jonathan Winship does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The revelation on the BBC and in the Guardian that British bank, HSBC, the second biggest in the world has allegedly helped UK residents sidestep taxes through a Swiss subsidiary should really come as…Jonathan Winship, Lecturer in Accounting and Finance, The Open UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/341502014-11-16T09:19:21Z2014-11-16T09:19:21ZCommon currency: a forex scandal that epitomises the blindness in the banking crisis<figure><img src="https://images.theconversation.com/files/64378/original/8wr7x79v-1415791257.jpg?ixlib=rb-1.1.0&rect=1021%2C185%2C1015%2C729&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Small beer? Bank fines and the culture they punish.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/steeljam/7905918216/in/photolist-abf5rZ-yAMP6-apffX7-5fSSJY-hLB1Fy-4KRfQM-63WV9y-ndMZLg-88DRkc-ciTw1-52pdwk-7yKbFf-azeaxk-azeaTv-azgNSL-azeaEt-azgPzA-azgNZ9-azgPVw-azgPdq-azgPP3-azeajX-axVP51-d3BU3L-p5EoGp-5DoeZS-bUoNoY-6JiY8D-7bvtg1-dr4HgS-dr4vJi-7yFrhv-7yFqDi-7yKcjb-49ipy1-45p7W4-45tqNm-8WREzW-79965G-aSMdnp-3ibsRr-6NHuud-A7osB-i6fr4X-i6eQTo-7376c8-6dJU9s-6dEfKB-6dEetP-6dEgGV">Steve James</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>The biggest open secret in the financial world has been confirmed. Regulators in the UK, the US and Switzerland <a href="http://uk.reuters.com/article/2014/11/12/uk-banks-forex-investigation-idUKKCN0IW0H120141112">have announced massive fines</a> for some of the world’s largest banks for a manipulation of global currency markets that in its callous ubiquity says so much about the banking behaviours that sparked the global financial crisis. </p>
<p>Fines levied by the UK regulator add up to £1.1 billion. The US regulator announced fines of $1.4 billion. Banks hit by these fines include UBS, Citi, JP Morgan, HSBC and RBS. Barclays is yet to come to a settlement on the back of the investigations. </p>
<p>The probe uncovered individuals traders within large banks who were working together in trading clubs which had names you would expect from the “ruthless narcissists” on <a href="https://theconversation.com/ruthless-narcissists-churned-out-by-the-apprentice-arent-fit-for-the-real-business-world-32971">BBC TV show, The Apprentice</a>. These included “the players”, “the 3 musketeers” and “1 team, 1 dream”. </p>
<p>These clubs worked together to influence the WM Reuters 4pm fix – essentially the official number used to fix currency rates. It shapes everything from how much we pay for currency when we go overseas to how much our pension fund pays when it wants to buy into an offshore investment. This is one of the core numbers in global finance. </p>
<h2>Monopolies; commission</h2>
<p>So, it sounds important, but why should we actually care? Well global currency markets are worth over £5 trillion a day. They are the world’s biggest financial market. More than 40% of the trade takes place in London, and more than half of this trade is dominated by just four players: Citi, Deutsche Bank, UBS and Barclays. </p>
<p>A small percentage of the trade relates to buying actual things (such as a shipment of coffee or oil). Most of it is either purely speculative or part of the process buying other speculative financial instruments. According to one piece in the Financial Times, there are really only a hundred or so people who really matter in this market. About 30 of them have been either placed on gardening leave or have been fired from their position in the last year.</p>
<p>The various documents released reveal a world where people talk in a mix of financial jargon, and the salty slang of an Cockney street trader. <a href="http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/hsbcmisconduct111114.pdf">The traders say things like</a> “you getting betty on the mumble still” or “have that my son” and refer to “other numptys” in the market. The documents also reveal strategies used to manipulate the markets. </p>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/64388/original/3bzdqnnm-1415803398.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/64388/original/3bzdqnnm-1415803398.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/64388/original/3bzdqnnm-1415803398.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/64388/original/3bzdqnnm-1415803398.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/64388/original/3bzdqnnm-1415803398.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/64388/original/3bzdqnnm-1415803398.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/64388/original/3bzdqnnm-1415803398.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/64388/original/3bzdqnnm-1415803398.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Taken down a peg or two. RBS.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/0olong/3236846175/in/photolist-5W2FAF-9MZWKS-9MZKwQ-9z4gti-9z7ibj-9z4gjv-9z7i47-arM9aK-9z7hih-9z7haC-9z7gUE-9z7gLJ-9z4fED-9PhvBK-9MXadi-9PkkAh-9N17Uw-9MXgeV-9MXgor-9MX2yT-9MZUJN-9MZKQ3-6bZruX-9MX71P-9MX4JF-9MZQ6N-9MZNy7-9MZUSU-9MWXrT-9MZKnm-9MX3v2-9N13F3-9MZMvQ-9MZK1L-9MX4Be-9MWZUk-9MWXAi-9MWZqa-9MWWN6-9MZRKG-9MZQfJ-9MX284-9MZW9A-9N14j1-9MZPKh-9MX9xe-9MZR8U-9MZRrd-9MXbb8-9MX4sz">Fergus Ray Murray</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>In one, based on records of traders activities at RBS, we find traders <a href="http://www.fca.org.uk/static/documents/final-notices/final-notice-rbs.pdf">using three techniques</a> to get the fix to move the way they wanted it to. They might conduct deals outside of the accepted channels, skew their trades to one buyer in an effort to consolidate influence or simply go hell for leather on trades in one direction as the fix approached. Such methods were given descriptions such as “taking out the filth” or “leaving you with ammo”.</p>
<p>Perhaps most worrying was the institutional failures of process at work. Various reports show that the large banks did not have systems in place to understand what was going on. They did not monitor the chat rooms where traders co-ordinated market fixing. When concerns were spotted, they were not elevated. <a href="http://www.bankofengland.co.uk/publications/Pages/news/2014/146.aspx">One official at the Bank of England</a> who was aware of irregular behaviour in the market did not push this information upwards in the organization. When whistleblowers did speak out about practices they were concerned about, their <a href="http://www.fca.org.uk/your-fca/documents/final-notices">concerns were largely overlooked</a>. </p>
<h2>Major failings</h2>
<p>The investigations reveal a number of serious failings in the world’s biggest financial market. These include significant shortcomings in the way markets are designed, the way firms function, and the over-arching culture at play. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/64385/original/shx4kvjh-1415802756.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/64385/original/shx4kvjh-1415802756.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/64385/original/shx4kvjh-1415802756.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/64385/original/shx4kvjh-1415802756.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/64385/original/shx4kvjh-1415802756.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/64385/original/shx4kvjh-1415802756.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/64385/original/shx4kvjh-1415802756.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/64385/original/shx4kvjh-1415802756.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Putting on a facade. The Bank of England.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/bankofengland/14842338124/in/photolist-oByS2s-kWZQrx-hHFUYi-g4B8Cm-g4AQn9-g4APaj-g4AQcv-6SHuNG-g4ANJa-g4AWvS-g4ATHj-8PY4BV-fFHJpA-6cfAbw-ojzqsC-kZXpon-nEiLh8-6c78xC-6o8nSq-4j1Qd5-6bZZBP-6c1J5X-dir1RR-6c2frx-6c2cjV-5qwmXd-6c1GeM-6c1Fbk-9L3jzs-6c4Gom-dd81yF-6c5Ehw-6c1XCp-9cgr4Q-6c2mJR-6bZyCc-69M9m4-oDxi1r-4C6eGg-oY4Xck-4pA8Po-4cryQP-sQTEw-oBKDcA-g4Bype-g4BmgB-6c4eYS-6cbmN2-6bU8sc-9cgNDH">www.bankofengland.co.uk</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>There are big problems with the design of the global currency market which make it a hot-house for growing bad behaviour. It has almost no rules, meaning activities like sharing insider information, collusion or trading on your personal account at work – illegal or banned elsewhere – are perfectly legal in the currency market. There has been little in the way of oversight or policing. The main body involved in regulating the market based at the Bank of England is made up of a group of senior traders (some of whom have <a href="http://www.theguardian.com/business/2014/mar/05/bank-of-england-suspends-employee-forex-investigation">subsequently been suspended</a> for bad behaviour). </p>
<p>There is little or no transparency about what is actually going on in the market. Because it is an “over the counter” market there is no centralised record of what price people are actually making trades at or any indication of the number of buy and sell orders on the market. The only people who have a reasonable idea of this are traders working for the biggest banks. </p>
<p>Finally, the market remains highly concentrated – the position of the four banks that run the market is increasingly entrenched due to their ability to deal with large scale orders, their tight client relationships and their electronic trading platforms.</p>
<p>There are also significant problems with the way currency trading has been managed within the banks. The various reports paint a picture of a business division which was allowed plenty of autonomy – as long as it returned juicy profits. There was little in the way of internal oversight with control and risk functions weak or non-existent. </p>
<p>Rules that applied in other parts of the bank’s trading operations – such as not trading ahead of your client or not trading on your personal account – did not apply. What is perhaps most striking is that the currency trading divisions seemed to be immune from learning from other scandals. The furore following LIBOR did not mean currency traders stopped manipulating their own market. </p>
<h2>Culture club</h2>
<p>Underlying all this was a culture of collusion in the world’s biggest market. Currency traders identified more with each other than they did with their employer or their clients. They formed a frat-house sensibility, bonded by a shared salty language, dense and ongoing interactions and shared experiences working on the same trading desk. </p>
<p>Investigations by journalists at Bloomberg also <a href="http://www.bloomberg.com/news/2013-12-19/how-secret-currency-traders-club-devised-biggest-market-s-rates.html">suggest they frequently socialised</a> with one another, and many London-based traders lived close to each other in Essex. They shared an unofficial code of ethics. </p>
<p>It was based on keeping the market liquid, responding to each other almost instantly and in some cases being loyal to their own clique. If you didn’t follow these rules, you could be frozen out.</p>
<h2>The fix</h2>
<p>The question of how to fix the market is complex. <a href="http://www.reuters.com/article/2014/06/12/fx-investigation-osborne-idUSL5N0OT20N20140612">There are already initiatives underway</a> by the Bank of England to address the structure of the market and conduct issues. </p>
<p>Unfortunately many radical reforms in this market have already been taken off the table. The idea of moving away from an over the counter market towards a centralised market structure has been rejected. Questions of providing more transparency – such as information around order flow are still on the agenda. There is a nervousness around adding rules of regulations to this ultra-light touch market. And the question of creating meaningful competition remains somewhere in the background. </p>
<p>There has been more progress in addressing dynamics within banks. Each of the banks has undertaken significant reforms in its currency trading divisions. Many senior people have left. Those who remain are under a great deal of scrutiny. They have banned chat rooms and stopped trader operating their own personal accounts at work (though some have found ingenious work arounds). They have also beefed up their risk and compliance function. Much of the trading activities has disappeared into automated algorithms, leaving less space for “human interference”. </p>
<p>The big question that remains hanging is what to do with the market culture that systematically encouraged collusion. Some initial steps might be for the forex community to take a serious look at its own moral code. They need to ask what the line is between collusion and hedging risks. </p>
<p>There also need to be clearer forums – both within organizations and beyond – for people to speak out when things go wrong. Some degree of external oversight would probably help and a degree of diversity would help break up a homogeneous culture which encourages collusion. The goal must be to give traders a sense of what the outer limits are of acceptable behaviour and a better sense of where their ethical duties lie.</p><img src="https://counter.theconversation.com/content/34150/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andre Spicer does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The biggest open secret in the financial world has been confirmed. Regulators in the UK, the US and Switzerland have announced massive fines for some of the world’s largest banks for a manipulation of…Andre Spicer, Professor of Organisational Behaviour, Cass Business School, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/124612013-03-01T03:02:21Z2013-03-01T03:02:21ZLondon’s bad bankers thrown into the lion’s den<figure><img src="https://images.theconversation.com/files/20677/original/8mmbnn42-1361920832.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Another day, another banking scandal: the UK Parliamentary Commission on Banking Standards has exposed the follies of the City's badly behaved bankers. </span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Though it rarely rates a mention in the Australian financial press, there is a spectacle in London at the moment that rivals even the most ferocious games at the Roman Colosseum. Almost every day, a bunch of bankers (playing the Christians) are thrown into a cage with ferocious lions. The lions are the members of the UK Parliamentary Commission on <a href="http://www.parliament.uk/bankingstandards">Banking Standards</a>, ably assisted by a sabre-toothed tiger (Rory Phillips, QC).</p>
<p>Each session, a sorry load of Lords, Knights and just plain knaves turn up to be savaged by the Committee. If animals were involved, the RSPCA would have intervened by now. But it goes on nonetheless because, although unsavoury, Schadenfreude is deliciously filling, especially if you are a British taxpayer with an empty belly.</p>
<p>The Commission’s remit is very wide. There are enough banking scandals to keep them busy for a very long time, including the LIBOR scandal [<a href="http://www.cftc.gov/PressRoom/PressReleases/pr6289-12">Barclays</a> and <a href="http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfrbsorder020613.pdf">RBS</a>], money laundering [<a href="http://www.reuters.com/article/2012/12/11/us-hsbc-probe-idUSBRE8BA05M20121211">HSBC</a>], mis-selling of Payment Protection Policies (PPI) to consumers [<a href="http://www.guardian.co.uk/business/2012/nov/01/lloyds-ppi-mis-selling-5bn">Lloyds</a>], and mis-selling of interest rate hedging products (IRHP) to small businesses [<a href="http://www.fsa.gov.uk/static/pubs/other/interest-rate-hedging-products.pdf">all of the above</a>]. The field is so large that the Commission has had to break itself up into smaller panels, currently running at 11 separate sub-committees — and growing.</p>
<p>When questioned by the Commission members, the responses of the Chairmen (all men), CEOs (again, all men) and various senior managers (almost all men) of major banks were all very similar: “Yes, we agree, what happened was awful”, followed by “Yes We were indeed in charge at the time”; then, “Yes, we are very sorry about what happened”, trumped by “But No, we didn’t see it coming”. Clearly, a case of “see no evil”.</p>
<p>If it were an isolated event, such a response would be hard to believe, but benefits of the doubt may have been given. When it is all banks, all boards, and all management across a series of financial scandals, the “dog ate my homework” excuse runs a little thin.</p>
<p>The question that jumps out is: what is the state of corporate governance in UK banks if their boards are unaware of such scandals?</p>
<p>Three “wise” bankers illustrate the shambles that is corporate governance in the UK banking industry.</p>
<p>First, <a href="http://www.jbs.cam.ac.uk/research/associates/stevensond.html">Lord Stevenson of Coddenham</a>, the hapless chairman of Halifax Bank of Scotland (HBOS) when it managed to run up debts of some ₤25 billion dabbling in commercial property before the GFC. The good Lord was <a href="http://www.publications.parliament.uk/pa/jt201213/jtselect/jtpcbs/c606-xvii/c60601.htm">not behind</a> in pushing himself forward. “I am legally responsible for the business and, with the modesty for which I am not famous, regard myself as being knowledgeable and well briefed”, he told the Commission.</p>
<p>But blow me if the Baron didn’t see it coming. “Beyond peradventure, I take very seriously the fact that we failed to foresee the outcome of events. It is not missing a trick; it is missing a huge avalanche, and I deeply regret it”. (The use of the word “peradventure” is very fitting of an Oxbridge man.)</p>
<p>After a tussle with Commission members as to whether he was in fact in a “non-executive” or “part time” role at HBOS, Lord Stevenson insisted that “as a part-time chairman, there is no possibility that I would have known the detail of what was going on in the corporate division”. In a nutshell, Lord Stevenson’s defence was, even though he was paid some “£600,000 of basic pay a year”, he didn’t have enough time, as a part-time chairman, to do the job properly.</p>
<p>Baron Stevenson then threw Peter Cummings, ex-head of the HBOS corporate division (and the only person to be officially sanctioned in the UK banking fiasco) to the wolves, with faint praise: “A man of huge integrity and, despite everything that happened, of great ability, was in charge of it. I can see, given their view, why they [regulators] enforced against him”. </p>
<p>The next wise banker is Douglas Flint CBE, who had the good fortune to replace the <a href="http://www.channel4.com/news/what-did-lord-green-know-about-hsbc-money-laundering">accident-prone</a> Sir Stephen Green as group chairman of HSBC. Flint is the quintessential numbers man, a grandee of accounting, and has been on the board of HSBC (mainly as chief financial officer) since 1995.</p>
<p>In <a href="http://www.publications.parliament.uk/pa/jt201213/jtselect/jtpcbs/uc606-xxxiv/uc60601.htm">his meeting</a> with the Commission, he was asked: “Given that the [US] Senate reported that HSBC had ‘long-standing, severe, anti-money laundering deficiencies’, what does that failure tell you about the culture and the organisational weakness in HSBC?”</p>
<p>In true Yes, Minister style, Flint obfuscated. “Certain of the matters that should have been shared and escalated were not being shared and escalated as well as they should have been”. He then threw the new CEO to the wolves. “I would like to ask Mr Gulliver to comment on how we have dealt with the operational side of dealing with these issues that arose”. If Mr Flint has been on the Board for over 18 years, surely he would know more about a long-standing problem than someone who has only been on the board for four years? But obviously Flint had not been told, or did he hear no evil?</p>
<p>There is a cast of pantomime characters who have appeared before the Commission but one, <a href="http://www.publications.parliament.uk/pa/jt201213/jtselect/jtpcbs/uc606-xxxvi/uc60601.htm">Eric Daniels</a>, ex-CEO of Lloyds Bank, stands out as an exemplar of bad corporate governance. As befits a native of the Wild West, Mr Daniels was suitably combative, denying everything. When asked whether he would so anything different as regards the PPI disaster that developed on his watch, Mr Daniels replied: “In those cases where there were mis-sold products — the customer did not understand what they were receiving, or it was not appropriate for them — that clearly is wrong, but that is not the majority, in my view”. In other words: I see no evil?</p>
<p>Given that PPI has <a href="http://www.guardian.co.uk/business/2012/nov/01/lloyds-ppi-mis-selling-5bn">already cost</a> Lloyds about ₤5 billion in compensation claims, that is a hard argument to sustain. Nevertheless, Mr Daniels did his best Gladiator impression, amid outbursts of laughter from the Commission. It’s all the fault of the regulator [laughter]. “I think that by and large the British banking system is one that serves its customers well … so I believe that while the controls could continue to evolve and always should, they were certainly the best in class at the time”[more laughter].</p>
<p>On the other hand, one can feel a tad sorry for Mr Daniels, who “did not receive a bonus for 2011, 2012 or 2013, nor did I receive one for 2008 or 2009”. But Daniels, who resigned in 2010, had been CEO of Lloyds TSB since 2003, when selling shonky PPI policies started to grow. Save your tears. </p>
<p>For the real aficionados of banking regulation and blood sports, UK Chancellor of the Exchequer George Osborne was, as reporters put it, <a href="http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9892708/George-Osborne-grilled-on-banking-standards-as-it-happened-February-25-2013.html">“grilled”</a> by the Commission this week. </p>
<p>We await further testimony and the corrected transcript of the exchanges but, in the week that the UK lost its prized <a href="http://www.guardian.co.uk/money/2013/feb/25/loss-triple-a-credit-rating-consumers">triple-A</a> credit rating, the Chancellor was clearly in garage-sale mode: “a load of RBS branches up for sale, and Lloyds branches as well”. A case of throwing bank staff as well as bankers to the wolves.</p>
<p>For those who are missing their <a href="http://www.guardian.co.uk/tv-and-radio/series/the-killing-episode-by-episode+european-television">weekly diet</a> of European bloodletting, the Commission on Banking Standards is worth watching out for. There’s a lot more to come.</p><img src="https://counter.theconversation.com/content/12461/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pat McConnell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Though it rarely rates a mention in the Australian financial press, there is a spectacle in London at the moment that rivals even the most ferocious games at the Roman Colosseum. Almost every day, a bunch…Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/113582012-12-19T23:24:10Z2012-12-19T23:24:10ZWatching the dominos fall in the LIBOR crisis<figure><img src="https://images.theconversation.com/files/18759/original/rpw72t4t-1355715056.jpg?ixlib=rb-1.1.0&rect=46%2C55%2C3002%2C2210&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The UK's LIBOR system was designed to be transparent but difficult to game: so what happened?</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Imagine if we discovered that the monthly setting of the Reserve Bank of Australia’s cash rate was rigged.</p>
<p>There would quite rightly be outrage. We trust the RBA Board to make these calls, month after month, impartially, for the general good of the Australian economy.</p>
<p>Such a breach of trust is precisely what happened in the UK’s LIBOR scandal.</p>
<p>It is now clear that Barclays Bank, which was fined a total of $450 million earlier this year, wasn’t alone. Overnight the news has broken that UBS has been fined $1.5 billion for LIBOR rigging over several years and involving dozens of staff. </p>
<p>Last week, a former Citigroup trader was arrested by police as a result of the scandal and the UK Serious Fraud Office (SFO) has taken charge of investigations. In the same truly terrible week for one of the world’s largest banks, <a href="http://www.ibtimes.co.uk/articles/368151/20120730/hsbc-libor-fixing-scandal-euribor-money-laundering.htm">HSBC</a> (which was hit by a separate $1.9 billion fine for money laundering by US regulators) has set aside millions to cover the costs of the LIBOR scandal. </p>
<p>Elsewhere it has been <a href="http://www.bloomberg.com/news/2012-08-15/jpmorgan-barclays-said-among-banks-to-get-libor-subpoenas.html">reported</a> that JPMorgan, Royal Bank of Scotland have been subpoenaed by US authorities. </p>
<h2>What is LIBOR?</h2>
<p>Like the Official Cash Rate, LIBOR (London Inter-Bank Offer Rate), is not an actual rate at which banks borrow or lend but a “reference” or “benchmark” rate against which borrowing or lending rates are set, often in a form such as LIBOR + 1.5%. LIBOR is meant to represent the borrowing rates between banks in the London Money Markets.</p>
<p>Unlike the RBA cash rate, however, LIBOR is not set by an official body such as the Bank of England, but by the industry itself in a process coordinated by the British Bankers Association (BBA), giving rise to the correct terminology <a href="http://www.bbalibor.com/bbalibor-explained">bbalibor</a>.</p>
<p>There is not one LIBOR rate but 150 different rates, covering 10 currencies (including the Australian dollar) at 15 different “maturities”. Maturity here refers to the period covered by a specific <a href="http://www.global-rates.com/interest-rates/libor/libor.aspx">LIBOR rate</a>, ranging from “overnight” to one week, two weeks, one month, two months and so on up to 12 months. </p>
<p>The genesis of LIBOR can be traced back to the mid-1980s, when trading in so-called Forward Rate Agreements (FRA) started to grow. Interest Rate Derivatives (IRD), such as FRAs, are very powerful tools allowing businesses to “lock in” future interest rates. The rapid growth of this market prompted banks to standardise the rates and terms of these contracts, giving rise to LIBOR as we know it today.</p>
<p>In theory the process is designed to be a relatively transparent process that should be difficult to game.</p>
<p>For a particular currency and maturity LIBOR is set by a “contributing panel” of banks, each of which is asked each day to answer the same question: “At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?”</p>
<p>Their answers, which are confidential, are collated by Thomson Reuters, and averaged (after “trimming” the highest and lowest 25% of contributions) to arrive at the official rate for each maturity, which is then published on the BBA LIBOR market page at 11am each day. (There is a different panel for each currency although the major international banks, such as JP Morgan, appear on many panels).</p>
<h2>Who uses LIBOR?</h2>
<p>While many business loans and even some floating rate mortgages in the UK and USA use LIBOR as the reference rate, the market for Interest Rate Derivatives based on LIBOR is estimated at $300 trillion. (Compare this to the <a href="https://www.google.com.au/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_cd&tdim=true&dl=en&hl=en&q=global%20gdp">annual global GDP</a> estimated by the World Bank at $70 trillion.) However, it should be noted this is the “notional” or face value of such transactions and does not (because of netting or offsetting) represent the market value, but is nonetheless staggering.</p>
<h2>So what went wrong?</h2>
<p>Earlier this year, as a result of a UK parliamentary inquiry, it was revealed that in 2008, <a href="http://www.guardian.co.uk/business/2012/jul/13/tim-geithner-mervyn-king-libor">US and UK regulators suspected</a> Barclays Bank had been submitting lower values than would be expected for its estimates of LIBOR during the height of the Bear Stearns crisis in August 2007. Why would Barclays do that? Always remembering that LIBOR represents what a bank thinks it’s own likely borrowing costs will be, by low-balling the bank will give the impression that it is safer that it may actually be. It is an act of bravado! Barclays denied any wrongdoing.</p>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/18761/original/kmmd9n4n-1355715362.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/18761/original/kmmd9n4n-1355715362.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=853&fit=crop&dpr=1 600w, https://images.theconversation.com/files/18761/original/kmmd9n4n-1355715362.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=853&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/18761/original/kmmd9n4n-1355715362.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=853&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/18761/original/kmmd9n4n-1355715362.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1072&fit=crop&dpr=1 754w, https://images.theconversation.com/files/18761/original/kmmd9n4n-1355715362.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1072&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/18761/original/kmmd9n4n-1355715362.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1072&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Former Barclays chief Bob Diamond denied wrongdoing but had to resign.</span>
</figcaption>
</figure>
<p>Believing that rates are being manipulated is one thing, proving it is another. In 2008, the Bank for International Settlements (BIS) published the results of a <a href="http://www.bis.org/publ/qtrpdf/r_qt0803g.pdf">study</a> into questions around interbank rate fixing. The regulator’s study concluded while there was a wider range of estimates between banks than would be expected, LIBOR “worked as intended”. Though disputed by some experts, in particular the Wall Street Journal, the BIS view was <a href="http://www.imf.org/external/pubs/ft/gfsr/2008/02/pdf/text.pdf">endorsed</a> by no less than the IMF.</p>
<h2>Enter the whistleblower</h2>
<p>In an <a href="http://www.independent.co.uk/news/business/news/whistleblower-the-culture-ultimately-comes-from-the-top-7920812.html">interview</a> with the Independent newspaper, an anonymous whistleblower stated borrowing rates had been manipulated in 2008 and that senior management, including Bob Diamond, the abrasive boss of Barclays, would have known. </p>
<p>Coupled with the <a href="http://www.fsa.gov.uk/static/pubs/final/barclays-jun12.pdf">announcement of a fine from the Financial Services Authority (FSA) </a> for inappropriate LIBOR submissions, this was curtains for Diamond, who having fronted a parliamentary committee claiming no knowledge of the practice of fixing LIBOR, was forced to resign.</p>
<p>Barclays Chairman Marcus Agius also resigned, preceded by Chief Operating Officer, Jerry del Missier, who had admitted to the parliamentary inquiry that manipulation had taken place but, in a novel defence, claimed Paul Tucker, the Deputy Governor of the Bank of England, had encouraged him to do it. Tucker denied this, but the controversy subsequently stymied his chances of replacing Sir Mervyn King as the Governor.</p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/18765/original/zrcy77fb-1355716358.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/18765/original/zrcy77fb-1355716358.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=413&fit=crop&dpr=1 600w, https://images.theconversation.com/files/18765/original/zrcy77fb-1355716358.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=413&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/18765/original/zrcy77fb-1355716358.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=413&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/18765/original/zrcy77fb-1355716358.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=520&fit=crop&dpr=1 754w, https://images.theconversation.com/files/18765/original/zrcy77fb-1355716358.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=520&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/18765/original/zrcy77fb-1355716358.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=520&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Deputy BoE Governor Paul Tucker denied telling Diamond to rig the LIBOR.</span>
</figcaption>
</figure>
<h2>Enter the emails</h2>
<p>In reporting its fine for Barclays, the FSA documented numerous emails and phone calls from Barclays traders to submitters requesting low or high submissions should be made (depending on the need to raise or lower rates).</p>
<p>One egregious example sums up the casual way that business was conducted. In 2006, a Barclays trader received an email from an external trader requesting a lower submission on 3 months USD LIBOR, “If it comes in unchanged I’m a dead man”. Later in the day, obviously happy, the external trader emailed, “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger”.</p>
<p>Potentially many hundreds of thousands of loans were made at rates that were too high and as a result businesses and borrowers may have paid millions - even billions - <a href="http://www.huffingtonpost.com/2012/07/13/gary-gensler-libor_n_1672197.html">too much for their loans</a>. All the while, the banks involved reported billions in profits and gave millions in bonuses to individual traders.</p>
<h2>What next?</h2>
<p>In September this year, Martin Wheatley, soon to be head of the new UK Financial Conduct Authority (FCA) published a report into the LIBOR scandal. The report concluded the current system should remain substantially unchanged but with additional regulations put in place and new criminal sanctions be introduced for market manipulation. The report also recommended the LIBOR process be taken away from the BBA.</p>
<p>Along with the GFC, <a href="http://www.guardian.co.uk/business/2011/may/05/how-ppi-scandal-unfolded">PPI scandal</a> and money laundering outrages, the LIBOR scandal is yet another example of the banking industry breaching the trust placed in it by its customers and the general public. The Economist - not usually known for biting the financial hand that feeds it - calls the LIBOR scandal the “<a href="http://www.economist.com/node/21558281">rotten heart of finance</a>”.</p>
<p>When the trust we hold in our banks breaks down, we have no option but to ask our politicians to reinstitute the integrity of the banking system. We await their response.</p><img src="https://counter.theconversation.com/content/11358/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pat McConnell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Imagine if we discovered that the monthly setting of the Reserve Bank of Australia’s cash rate was rigged. There would quite rightly be outrage. We trust the RBA Board to make these calls, month after…Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/113492012-12-14T04:46:27Z2012-12-14T04:46:27ZBanks on alert as regulators step up pressure on HSBC<figure><img src="https://images.theconversation.com/files/18689/original/grs7nmm6-1355459445.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">As part of its settlement with the Department of Justice, an external monitor will be appointed to oversee HSBC's corporate compliance processes.</span> </figcaption></figure><p>This week, two different approaches to embedding restraint began to take shape as London-headquartered banks reflected on the exceptional power of the United States Department of Justice to shift cultural mores through the flexing of its prosecutorial discretion. </p>
<p>Both provide tangible evidence of the Department’s renewed interest in the financial sector. This interest will increase dramatically in coming months with negotiated settlements in relation to the London Interbank Offered Rate (Libor) manipulation scandal expected.</p>
<p>HSBC is in the process of submitting a pool of three suitably qualified candidates to the position of independent compliance monitor to the Department of Justice, a pool that the Department can unilaterally reject as part of the bank’s <a href="http://lib.law.virginia.edu/Garrett/prosecution_agreements/pdf/HSBC.pdf">$1.92 billion settlement</a> in relation to the bank’s violation of Anti-Money Laundering and Counter-Terrorism Financing legislation. Meanwhile, Barclays — which reached a financial settlement in relation to its role in the Libor scandal — <a href="http://group.barclays.com/about-barclays/news/press-release-item/navigation-1329924296988?releaseID=2471">announced</a> that it had recruited Hector Sants, the former chief executive of the Financial Services Authority, as group head of Compliance and Government and Regulatory Relations. Given Sants’ previous support for the necessity of <a href="http://www.fsa.gov.uk/library/communication/speeches/2010/1004_hs.shtml">regulating culture</a>, the appointment serves as a litmus test for both the bank and his own credibility.</p>
<p>The critical but unresolved question for banks and regulatory authorities on both sides of the Atlantic — as well as here in Australia — is to what extent the imposition of an external monitor rather than recruiting through the revolving door of regulatory authority and industry reflects “the new normal”.</p>
<p>At its core, this involves an adjudication of what constitutes the appropriate level of external oversight over ongoing corporate practice. It extends far beyond narrow issues of capitalisation. Instead, it focuses attention on how to ensure warranted trust in the operation of free markets while balancing more intrusive supervision with expertise and accountability.</p>
<p>ASIC chairman Greg Medcraft, who takes over the leadership of IOSCO next March, has noted that free markets can only operate with “appropriate regulation”, meaning an emphasis on “working with industry to see if they can better self-regulate or co-regulate”. As with the media industry in the aftermath of the Leveson inquiry, however, the banking sector is drinking in the last chance saloon, with existing regulators increasingly marginalised.</p>
<p>The terms governing the appointment of a corporate compliance monitor for HSBC are exceptionally revealing of the level of distrust. Notwithstanding the fulsome approval of the remedial actions taken by the bank, it is abundantly clear that the Department of Justice is, at best, sceptical of self-regulation. That scepticism has an explicit extra-territorial dimension and extends beyond the bank to the global markets in which it operates.</p>
<p>“To the extent that HSBC Holdings’ compliance with obligations as set forth below requires it, HSBC Holdings agrees to require that its wholly-owned subsidiaries comply with the requirements and obligations set forth below, to the extent permissible under locally applicable laws and regulations, and the instructions of local regulatory agencies,” runs the opening paragraph of the job description for the position of Corporate Compliance Monitor (Attachment B).</p>
<p>The position is a fixed term for five years, at the end of which HSBC must sever ties with the monitor for at least one year. The role is to evaluate the effectiveness of the internal controls, policies and procedures of the holding company and its subsidiaries in relation to both anti-money laundering legislation and the remedial action taken in response to the identified failures.</p>
<p>An initial report is required within 90 calendar days of the appointment, which itself is mandated within 60 days of the agreement. Four additional reviews are to be conducted on an annual basis, unless the agreement is either terminated or rendered moot because a further material breach triggers immediate indictment.</p>
<p>The reports are to be contemporaneously submitted to the board of directors of HSBC Holdings and the chief of the Asset Forfeiture and Anti-Money Laundering Section of the Criminal Division, the address of which is helpfully provided, as well as to the Federal Reserve and the FSA in London. Interestingly, the FSA is not given any defined right to engage with the monitor, nor is any of the other parties to the agreement. This is the Department of Justice’s show. (To be fair to the FSA, it has <a href="http://www.fsa.gov.uk/library/communication/pr/2012/111.shtml">separately agreed </a>that HSBC should establish an AML/sanctions compliance board level committee, review policies and procedures and notes the employment of an independent monitor who is to communicate to regulators.)</p>
<p>Although HSBC can identify and propose the candidate, the Department of Justice retains a veto over the appointment and the procedures governing the production of her reports.</p>
<p>The arms-length terms are underscored by giving the monitor the right to report any difficulties associated with gaining access to sensitive material, with the Department having the right to make a final determination on what should be disclosed without reference to further external adjudication.</p>
<p>The monitor, although ostensibly independent, is unquestionably an agent of the Department.The work plan for conducting the evaluations must be submitted to and approved in advance by the Department. Moreover, “any disputes between HSBC Holdings and the monitor with respect to the work plan shall be decided by the Department in its sole discretion”.</p>
<p>Although the monitor is encouraged to work closely with HSBC in the preparation of the reports, the bank itself lacks the discretion on whether to implement any recommendation unless considered “unduly burdensome, inconsistent with local or other applicable law or regulation, impractical, costly or otherwise inadvisable”.</p>
<p>In such an event, the bank has to provide reasons for the objections “and shall propose in writing an alternative policy, procedure or system designed to achieve the same objective or purpose”. The parties are then given thirty days to reach an agreement.</p>
<p>“In the event HSBC Holdings and the monitor are unable to agree on an acceptable alternative proposal, HSBC Holdings shall promptly consult with the Department, which will make a determination as to whether HSBC Holdings should adopt the Monitor’s recommendation or an alternative proposal, and HSBC Holdings shall abide by that determination.”</p>
<p>Moreover, the Department is to be informed of improper conduct or a material violation uncovered in the course of the monitor’s investigation. It will also report such activity directly to the bank’s chief legal officer, but this can be bypassed if deemed appropriate by the monitor. The whistle-blowing protection is further embedded in the contractual terms as “HSBC Holdings shall not take any action to retaliate against the Monitor for any such disclosures or any other reason”.</p>
<p>The Department of Justice has agreed, in principle, to keep the reports classified, recognising that the information contained in the compliance monitors reports may include “proprietary, financial, confidential, and business information”. Public disclosure “could discourage cooperation, impede impending or potential government investigations and thus undermine the objectives of the monitorship”.</p>
<p>Even here however, the Department can override the commitment to confidentiality if it “determines in its sole discretion that disclosure would be in furtherance of the Department’s discharge of its duties and responsibilities or is otherwise required by law”.</p>
<p>Taken together, the provisions governing the appointment and ongoing work of the Monitor reflect an unparallelled extension of external oversight. Just as significantly, they transfer knowledge directly to the Criminal Division of the Department of Justice, whose remit is governed by very different imperatives than prudential or market conduct regulators.</p>
<p>A new cop is on the beat and making its presence felt. Those drinking in the last chance saloon are on notice that anti-social behaviour orders have been written and will be applied in the event of further infractions. It is not before time. The challenge for the Department of Justice, however, is to exercise its enhanced power with restraint and within accountable boundaries. If not, the cycle will turn once more.</p>
<p><em>Justin O'Brien writes a column for The Conversation, <a href="https://theconversation.com/columns/justin-obrien-4470">The ethical deal</a>, and is director of the <a href="http://www.clmr.unsw.edu.au/">UNSW Centre for Law, Markets and Regulation portal</a>, where this story also appears.</em></p><img src="https://counter.theconversation.com/content/11349/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Justin O'Brien receives funding from the Australian Research Council for three grants related to corporate governance, financial regulation and accountable governance. This opinion is simultaneously published on an online portal that maps and tracks regulatory reform in the aftermath of the GFC - <a href="http://www.clmr.unsw.edu.au">www.clmr.unsw.edu.au</a></span></em></p>This week, two different approaches to embedding restraint began to take shape as London-headquartered banks reflected on the exceptional power of the United States Department of Justice to shift cultural…Justin O'Brien, Professor of Law, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/113002012-12-12T05:52:40Z2012-12-12T05:52:40ZIn the Libor scandal, where were the regulators?<figure><img src="https://images.theconversation.com/files/18598/original/jpnkfgfh-1355287321.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">As regulators finally move on the Libor scandal, are they asking themselves the right questions?</span> </figcaption></figure><p><em>Welcome to the third and final part of Back to the Future.</em></p>
<p><em>AS HSBC is fined US$1.9 billion for “egregious” money laundering and the first arrests are made in the Libor scandal, the need for the public interest to be considered foremost in the reform of our global financial systems has never seemed greater.</em></p>
<p><em>Professor of Law at the University of New South Wales, Justin O'Brien argues a culture of restraint, with accountability and integrity at its heart, must be what reform aims for.</em></p>
<p><em>This is an edited extract of the article, which is available in full <a href="http://www.clmr.unsw.edu.au/article/accountability/history-of-securities-regulation/back-future-reinventing-rationale-intervention-capital-markets-part-three">here</a>.</em></p>
<hr>
<p>We are living at a moment of potentially huge change. The dominant conception of corporate governance and financial regulation — based on rational actors operating within efficient markets — is losing coherence, legitimacy and authority. </p>
<p>Effective government control through dominant shareholdings in major banks has forced unresolved reflection on what should constitute optimal corporate governance and regulatory oversight. The global financial crisis has unleashed an avalanche of reform initiatives. But more often than not, these same initiatives tend to privilege the politics of symbolism. </p>
<p>Two accounts from notable insiders highlight the extent of the groupthink. The first comes from Claudio Borio, the chief economist at the Bank for International Settlements. He used a G20 forum in Mumbai to explain why policymakers were incapable of exercising ex-ante restraint.</p>
<blockquote>
<p>To varying degrees, policymakers, just like everyone else, underestimated the threat. They were caught up in what, in retrospect, has partly turned out to be a Great Illusion. And even had the threat been fully recognized — and some no doubt did — the political economy pressures not to change policies would have been enormous. </p>
<p>On the face of it, the regimes in place had proved to be extremely successful… And not even the often more critical academic community provided any support for change. Indeed, as regards macroeconomic policy, that community turned out to be part of the problem, not of the solution.</p>
</blockquote>
<p>The second comes from Raghuram Rajan. Professor Rajan gave a paper at the influential Jackson Hole retreat organised by the Federal Reserve Bank of Kansas in August 2005 at which he warned of the inevitability of collapse. He later recounted the audience reaction:</p>
<blockquote>
<p>I exaggerate only a bit when I say I felt like an early Christian who had wandered into a convention of half-starved lions. As I walked away from the podium after being roundly criticized by a number of luminaries (with a few notable exceptions), I felt some unease. It was not caused by the criticism itself, for one develops a thick skin after years of lively debate in faculty seminars: if you took everything the audience said to heart, you would never publish anything. Rather it was because the critics seemed to be ignoring what was going on before their eyes.</p>
</blockquote>
<p>But the testimony provided by Alan Greenspan in 2008 of a flaw in his “ideological reasoning” punctured the self-referential belief in the power of free-markets to self-correct - as did the following bail outs to large swathes of the financial sector.</p>
<p>Following the implosion of the securitisation market, the individual corporate and societal consequences of this myopia became clear. </p>
<p>Investment losses triggered an enormous erosion of private wealth. Housing and capital markets went into a downward spiral and credit stopped flowing. Emergency funding to the banking and financial services sector solved neither the underlying liquidity nor solvency problems. It merely transferred the risk. Sloganeering about the inherent unfairness of “privatized profits and socialized losses” became more than a worn-out cliché. </p>
<p>Throughout the crisis and beyond, senior bankers expressed carefully couched regret. At no stage did they accept responsibility. Instead a narrow technical defence was proffered. </p>
<p>As the immediate crisis facing the banks receded, the strategies were framed even more aggressively. To preserve the sanctity of contract, there was a stated need to uphold terms entered into freely (if misguidedly). Moreover, a similar rationale justified the payments of market-determined bonuses to executives then working in de facto nationalized institutions. Second, the privileging of caveat emptor facilitated the transference of responsibility. Equally understandably, both sets of strategies fuelled public resentment. This prompted, in turn, political recognition of the need for substantive reform to safeguard legitimacy. </p>
<p>Into this toxic environment has emerged the Libor scandal. The $US450 million regulatory fine is just the beginning for Barclays, which is a defendant in some of the 24 interrelated Libor lawsuits that have been aggregated before a Manhattan federal court. US liabilities may be higher because US plaintiffs are permitted to request punitive damages, while UK plaintiffs are limited to compensatory awards. </p>
<p><a href="http://www.ft.com/intl/cms/s/0/814cafd2-4388-11e2-a68c-00144feabdc0.html">Criminal liability</a>could be added to those regulatory fines and civil lawsuits. Further, the Barclays settlement is just the first in the joint trans-Atlantic investigation. On August 3, 2012, the Royal Bank of Scotland confirmed that it had retrenched staff in relation to the Libor scandal, with chief executive Stephen Hester stating that “it is a stark reminder of the damage that individual wrongdoing and inadequate systems and controls can have in terms of financial and reputational impact”.</p>
<p>On August 16, 2012, Bloomberg reported that subpoenas have now been sent to JPMorgan, Deutsche Bank, Royal Bank of Scotland Group, HSBC (which has been hit with a <a href="http://www.guardian.co.uk/business/2012/dec/11/banking-libor-fine-hsbc">record-breaking US$1.9 billion fine</a> for money laundering by US regulators), Citigroup and UBS, all of which are being investigated with respect to Libor manipulation. Media outlets are reporting the <a href="http://www.guardian.co.uk/business/2012/dec/11/libor-investigation-three-arrested">first arrests</a> from the Libor scandal. </p>
<p>While the method by which Libor is set largely contributed to such widespread collusion, it could not have persisted without negligent oversight and the failure to enforce by regulators. </p>
<p>In the aftermath of the scandal, the New York Federal Reserve has played defence, stating that it although in 2008 it was aware of the structural flaws in setting Libor, it lacked the jurisdictional power to effect any meaningful change other than provide written recommendations to the Bank of England. </p>
<p>For its part, the Bank of England claimed that the recommendations lacked the substance to either start an investigation or even set off alarm bells. The tortured justifications, while self-serving and deeply problematic, could also equally apply to US regulators who are faced with equally serious questions of competence. </p>
<p>In the United Kingdom itself, the Libor scandal has had a deep impact on regulatory authority. The Treasury Select Committee provides a devastating critique of past, current and future trajectories, accusing the FSA of being blinded to the initial and ongoing systemic failure of compliance at Barclays. </p>
<blockquote>
<p>“The FSA has concentrated too much on ensuring narrow rule-based compliance, often leading to the collection of data of little value and to box ticking, and too little on making judgments about what will cause serious problems for consumers and the financial system”. </p>
</blockquote>
<p>The Committee found that “naivety” and inaction underscored the “the dysfunctional relationship between the Bank of England and the FSA which existed at that time to the detriment of the public interest.” </p>
<p>The erroneous calculation by the bank and the FSA as well as the Bank of England was that early cooperation would pay dividends. The settlement did not place the blame on any individual executive; nor was there initially any expectation from UK or US regulators that resignations were required or appropriate. </p>
<p>Each was taken aback by the ferocity of political criticism of the deal and the perceived lack of accountability for infractions that point to widespread collusion. FSA chairman Lord Adair Turner belatedly acknowledged this, saying the activities of Barclays revealed “a degree of cynicism and greed which is really quite shocking… and that does suggest that there are some very wide cultural issues that need to be strongly addressed”. </p>
<p><strong>Regulating culture</strong></p>
<p>The disjuncture between stated and lived values, linked to the failure of internal compliance or disclosure to counteract it, underpins political demands for an oversight design that better institutionalises restraint. </p>
<p>The crisis and its aftermath demonstrate much more holistic approaches to risk management are required that link private rights to public duties. If defective disclosure was not the cause of the myopia, a better articulation of risk is unlikely, in itself, to be effective. </p>
<p>Satisfactory answers require an evaluation of how a reform agenda addresses not just objective efficiency (i.e. lower transaction costs). Three additional distinct but overlapping criteria must be applied. First, permissibility (i.e. whether a particular product can be sold and if so to whom and on what basis); second, responsibility (i.e. who carries the risk if the investment sours and on what terms); and third, legitimacy (i.e. does the product serve a legitimate purpose and who should determine it). </p>
<p>The danger is that an ill-thought-out structure will exacerbate rather than resolve conflicts within the industry. It risks creating another layer of formal restraint that does little to change either corporate practice or facilitate voluntary progression towards higher ethical standards. It is also clear, however, that the construction of accountability mechanisms cannot rely on self-certification alone. It demands external validation. </p>
<p>The framework to measure and evaluate culture was <a href="http://www.complinet.com/global-rulebooks/display/display.html?rbid=12&element_id=47484">outlined</a> by the then chief executive of the FSA, Hector Sants. </p>
<p>Starting from the premise that society has the right to expect ethical behaviour and warranted commitment to stated values, he maintained that regulators cannot avoid judging culture, a term he judged less problematic and more amenable to measurement than ethics. </p>
<p>Accountability and integrity, as Sants pointed out are, in essence, design issues. It is time to get to work. A necessary starting point would be virtual attendance at the imaginary inaugural lecture <a href="https://theconversation.com/reinventing-the-rationale-for-market-intervention-11191">James M. Landis</a> offered in 1930. It is time to go back to the seminar room. </p>
<p><strong>Final thoughts</strong></p>
<p>As I write this conclusion the news emanating out of both London and New York is unremittingly bleak. Attempts by business today to limit the remit of the Securities and Exchange Commission mirror the charged atmosphere facing Landis as he drew up the legislation that established the agency.</p>
<p>Writing in 1934 just before the bill was debated in Congress, Landis complained: “The Stock Exchange Bill is receiving a terrific beating. All the corporate wealth of this country has gone into the attack and carried it all the way to the White House.” </p>
<p>Although the bill was passed and the SEC established, its remit and authority waned incrementally at first and then dramatically in the 1990s. The reduction in power has consistently failed to ignite public controversy.</p>
<p>Paradoxically, periodic successes, such as the insider trading investigations and high-profile individual prosecutions, enhanced the visibility of the SEC but not necessarily its authority. In the absence of the kind of catastrophic crisis witnessed in the Great Crash of 1929 or the extent of corporate scandal revisited at the cusp of the millennium or again in 2008, battles over financial regulation take piecemeal form through refinements to individual legislative clauses. </p>
<p>Landis told the New York Times in 1937, somewhat optimistically, that brokers “are beginning to realize more clearly that their interest is tied up with the public interest. They are beginning more often to subordinate their own interest to the larger interest. People are beginning also to look upon the exchanges not so much as private institutions as public utilities”. </p>
<p>The tragedy here is not Landis’ misplaced optimism but the misplaced trust that the financial services sector has recognised its obligations. In this sense the failure to deliver on the pledge for restraint by the erstwhile chairman of Barclays to the Financial Times is talismanic of the sector’s bad faith. Society has a right to expect better. </p>
<p>Regulators have a duty to ensure protection is offered and political actors have an obligation to ensure the lessons of history are learnt, not repeated. </p>
<p><em>The author is writing a biography of James M. Landis, which will be published in 2014.</em></p>
<p><strong>Read more:</strong></p>
<p>Part One: <a href="https://theconversation.com/back-to-the-future-how-global-financial-regulation-has-failed-11168">Back to the Future: how global financial regulation has failed</a></p>
<p>Part two: <a href="Reinventing%20the%20rationale%20for%20market%20intervention">Reinventing the rationale for market intervention</a></p><img src="https://counter.theconversation.com/content/11300/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Justin O'Brien receives funding from the Australian Research Council for four grants related to corporate governance, financial regulation and accountable governance, including an ARC Future Fellowship. This opinion is simultaneously published on an online portal that maps and tracks regulatory reform in the aftermath of the GFC - <a href="http://www.clmr.unsw.edu.au">www.clmr.unsw.edu.au</a>.</span></em></p>Welcome to the third and final part of Back to the Future. AS HSBC is fined US$1.9 billion for “egregious” money laundering and the first arrests are made in the Libor scandal, the need for the public…Justin O'Brien, Professor of Law, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/113042012-12-12T04:19:15Z2012-12-12T04:19:15ZBanks behaving badly: HSBC settles in money laundering probe<figure><img src="https://images.theconversation.com/files/18593/original/3jg9vknm-1355284937.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Institutionalising restraint is business practice will prove challenging for HSBC and regulators alike. </span> </figcaption></figure><p>The <a href="http://www.reuters.com/article/2012/12/11/us-hsbc-probe-idUSBRE8BA05M20121211">$1.92 billion deferred prosecution</a> entered into by HSBC with US regulators is one of the most significant financial penalties imposed on a global bank.</p>
<p>On Tuesday in a Federal Court in Brooklyn, HSBC agreed to a legally binding settlement in which it accepted responsibility for systematic sanctions violations and the facilitation of money laundering on an industrial scale. It was also held accountable for threatening national security by providing financing facilities to a Saudi Arabian bank with links to terrorist groups.</p>
<p>“HSBC is being held accountable for stunning failures of oversight – and worse – that led the bank to permit narcotics traffickers and others to launder hundreds of millions of dollars through HSBC subsidiaries, and to facilitate hundreds of millions more in transactions with sanctioned countries,” noted the head of the Criminal Division at the Department of Justice, <a href="http://dealbook.nytimes.com/2012/12/11/hsbc-to-pay-record-fine-to-settle-money-laundering-charges/?ref=business">Lanny Breuer</a>.</p>
<p>As with a separate deferred prosecution agreement with the New York District Attorney, Cyrus Vance, HSBC was required to admit the charges. Should further violations be uncovered, it faces immediate indictment. </p>
<p>The settlements come as Standard Chartered, another UK-domiciled bank, <a href="http://www.fbi.gov/newyork/press-releases/2012/standard-chartered-bank-agrees-to-forfeit-227-million-for-illegal-transactions-with-iran-sudan-libya-and-burma">agreed</a> to an overarching settlement of $327 million to bring closure to charges brought by a range of regulatory agencies, including the Federal Reserve and the Department of Justice along with the Manhattan District Attorney. This, in turn, follows the success by New York Department of Financial Services in securing a $340 million settlement with Standard Chartered in August this year, a trailblazing investigation in which the head of the DFS described Standard Chartered as a rogue organisation.</p>
<p>Both announcements reflect the growing centrality of deferred prosecutions as the prosecutorial tool of choice in the battle to ensure substantive compliance to violations of anti-money laundering, anti-terrorist legislation and sanctions imposed on regimes regarded as rogue state by the United States. </p>
<p>The expansion of the measure reflects both its strengths and limitations. On the one hand, it avoids the very real possibility of broader collateral damage. A criminal conviction would automatically trigger licence revocation, which would have devastating consequences for both the individual institutions and, given their systemic importance, the stability of the global financial system.</p>
<p>The limitation is that in absence of substantive requirements to change not only compliance practice but also broader risk and corporate governance reporting frameworks, the financial penalties could be written off as part of the cost of doing business.</p>
<p>In this regard, the scale of the HSBC fine sends an unambiguous message that materiality is increasing. As the <a href="http://www.ft.com/intl/cms/s/0/7e97873a-43a1-11e2-a48c-00144feabdc0.html">Financial Times</a> noted this morning, “a billion here, a billion there and pretty soon you are talking about serious money”.</p>
<p>HSBC has done much to improve the quality of its internal governance, including recruiting former heavyweights from the Department of Justice and the Department of Homeland Security to pivotal management positions. The Department of Justice has praised the bank’s level of cooperation.</p>
<p>But in sharp contrast to the Securities and Exchange Commission’s non-prosecution deal with Goldman Sachs, the Department of Justice has not taken HSBC’s word for it. It has forced the bank to impose an external monitor for the duration of the five-year period in which the deal is operational.</p>
<p>The external monitor holds what <a href="http://www.guardian.co.uk/business/2012/dec/11/hsbc-fine-prosecution-money-laundering">Lenny Breuer describes as a “Sword of Damocles”</a> over the bank. It also applies to the various banking regulators who negotiated the deal. Future violations will automatically trigger the criminal conviction and produce the very outcome the settlement is designed to avoid.</p>
<p>In the aftermath of the settlement, HSBC’s share price rose marginally, reflecting a degree of closure. If anything, however, the sword is even more delicately poised. Global banking is on a precipice. A misstep could prove fatal. Governance, Risk and Compliance is likely to become a proto-profession in greater short-term demand.</p>
<p>The challenge, for both the professionals and regulators, is to ensure they institutionalise restraint. If not, the price of compliance failure will be too high to pay.</p>
<p><em>Justin O'Brien writes a column for The Conversation, The ethical deal, and is director of the U<a href="http://www.clmr.unsw.edu.au/">NSW Centre for Law, Markets and Regulation portal</a>, where this story also appears.</em></p><img src="https://counter.theconversation.com/content/11304/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Justin O'Brien receives funding from the Australian Research Council for four grants related to corporate governance, financial regulation and accountable governance, including an ARC Future Fellowship. This opinion is simultaneously published on an online portal that maps and tracks regulatory reform in the aftermath of the GFC - <a href="http://www.clmr.unsw.edu.au">www.clmr.unsw.edu.au</a>.</span></em></p>The $1.92 billion deferred prosecution entered into by HSBC with US regulators is one of the most significant financial penalties imposed on a global bank. On Tuesday in a Federal Court in Brooklyn, HSBC…Justin O'Brien, Professor of Law, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/85232012-08-06T20:37:37Z2012-08-06T20:37:37ZTo be good corporate citizens, banks must improve their sustainability reporting<figure><img src="https://images.theconversation.com/files/13821/original/dbmtchsh-1343968559.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Banks behaving badly: ensuring banks' sustainability reports are accurate and credible will go some way in restoring public confidence.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>“Events over the past couple of years have raised profound questions about the ways in which banks and businesses contribute to society. For both to play their full part, they must restore trust and become better citizens in a publicly demonstrable way.” So writes disgraced Barclay’s CEO Bob Diamond in his opening to the Bank’s most recent <a href="http://reports.barclays.com/cr11/overview.html">‘Corporate Citizenship’ report</a>. A report released several weeks before the LIBOR scandal broke and which carries the hefty weight of <a href="http://reports.barclays.com/cr11/howwereport/assurancestatement.html?cat=m">Ernst & Young’s stamp of assurance</a>.</p>
<p>And therein lies the irony. And the concern. If the reputable E&Y ‘audited’ Barclay’s environment, social and governance (ESG) performance, how could they miss out corruption to the tune of $US360 trillion in interest rate-fixing? </p>
<p>Equally puzzling is how <a href="http://www.hsbc.com/1/2/sustainability/2009-reports/pwc-assurance">PricewaterhouseCoopers could sign off</a> <a href="http://www.hsbc.com/1/2/sustainabilityreport">HSBC’s “Sustainability Report”</a> shortly before the bank was dragged before US Congress for allegations better suited to a renegade playboy than a major financial institution. </p>
<p>It’s hard to believe that some of the world’s best auditors, dogged detectives of misplaced decimal points, didn’t discover <a href="http://www.guardian.co.uk/business/2012/jul/17/hsbc-executive-resigns-senate">money laundering to Mexican drug lords</a> or matey interest-rate fixing. </p>
<p>While the same questions could be asked of the financial report auditors, it is the particular promise of sustainability reports to reveal the values and ethics underpinning corporate decision-making which makes them especially important in these instances. </p>
<p><strong>Corporate uptake of sustainability reporting</strong></p>
<p>Since 2006, the numbers of companies publicly reporting on their ESG performance through ‘sustainability reports’ has grown globally and exponentially. <a href="http://www.globalreporting.org/">The Global Reporting Initiative</a> (GRI), the world’s leading sustainability reporting framework, reports that 95% of the top 250 global companies now produce an annual sustainability report, with more than 70% of those companies having their reports audited by one of the Big Four accounting firms. Ninety-four of the ASX100 produce some form of sustainability disclosure.</p>
<p>It is critical that the information provided in sustainability reports is accurate, reliable and truthful - especially when such information bears the imprimatur of a respectable auditing firm.</p>
<p><strong>Sustainability reports inform decision-making</strong></p>
<p>Financial analysts use these reports to make investment recommendations. Governments read them to inform regulatory decisions. Everyday consumers reference them for information about issues like climate change, fair trade and labour practices concerning products they buy.</p>
<p>Sustainability reports also inform the inclusion of publicly listed firms on market indices, like the <a href="http://www.sustainability-indexes.com/">Dow Jones Sustainability Index</a> (DJSI) or the <a href="http://www.ftse.com/Indices/FTSE4Good_Index_Series/index.jsp">FTSE4GOOD</a>. A tick of approval from these indices signals to investors that all is well within a firm even beyond its financial figures. </p>
<p><strong>Improving auditing to assure report quality</strong></p>
<p>All of the Big Four UK banks feature on the FTSE4GOOD. All are embroiled in the Libor scandal. Even our own <a href="http://www.theage.com.au/business/nab-facing-new-headache-with-british-banks-under-investigation-20120718-22aks.html">DJSI-listed National Australia Bank now faces investigation</a> of its British banking arm. </p>
<p>So how did certain bank’s sustainability reports achieve Shakespearean levels of tragic irony? </p>
<p>Because current sustainability report auditing processes disempower the auditors.</p>
<p>As E&Y’s “assurance statement” for Barclay’s states: “Our responsibility, in accordance with management’s instructions, is to provide a limited assurance engagement. …Any reliance any such third party may place on the Report is entirely at its own risk.”</p>
<p>It is common practice for firms to set the boundaries of information covered in sustainability report audits, and to what level of detail. Report data is provided to auditors by management and, for the most part, must be taken at face value. Current auditing procedures make it exceptionally difficult for auditors to fully deploy their investigative skills. Rarely are they afforded their <a href="http://en.wikipedia.org/wiki/Columbo">Columbo</a> moment when, standing to leave the CEO’s office, they turn and ask, “I’m sorry, Bob, but I just have one more question….” If only.</p>
<p><strong>Don’t lose faith just yet</strong></p>
<p>So should we lose faith in sustainability reporting altogether? </p>
<p>Absolutely not. </p>
<p>Decades of work and the expertise of hundreds have gone into the creation and spread of sustainability reporting frameworks. It is a practice vital to healthily functioning market economies. But it must be improved - and respected.</p>
<p>Improvement begins by empowering the auditors. Only through provision of powers similar to those afforded to financial auditors can auditing firms truly scrutinise corporate ESG behaviours.</p>
<p>Proper training and certification of sustainability report auditors must also occur. Currently, anyone can “assure” a sustainability report. And while efforts are made to assign specialist auditors, it is not always the case that auditors hold the social and environmental measurement knowledge required to uncover sham data. </p>
<p>While improvements are being made in this area, certification - for example, through systems similar to the <a href="http://www.accountability.org/standards/aa1000as/index.html">AccountAbility1000 Assurance Standard</a> - would ensure that ticks of assurance are provided only by qualified professionals.</p>
<p>Sustainability reporting frameworks must be tightened to ensure more robust reporting. Next year, the <a href="https://www.globalreporting.org/reporting/latest-guidelines/g4-developments/Pages/default.aspx">GRI rolls out the fourth</a> (and greatly improved) version of its reporting guidelines. More detailed performance indicators, better instructions and strengthened requirements concerning reporting of management approaches to key sustainability issues are all steps in the right direction.</p>
<p>Better auditing of sustainability reports - and for that matter, financial reports - will not of itself prevent management from concealing what it wants to conceal. But it does help to foster a culture of disclosure and transparency within organisations.</p>
<p>Companies are now beginning to produce “integrated reports” - a holistic company report showing financial figures alongside ESG data - and this practice may result in greater scrutiny of both ESG and financial claims. </p>
<p>Regulation of integrated reporting marks the final (and perhaps most important) step in ensuring that analysts, governments and the public receive clear, accurate and trustworthy information on all aspects of corporate performance. The work of the <a href="http://www.theiirc.org/">International Integrated Reporting Council</a> and <a href="http://www.unepfi.org/fileadmin/events/2012/Rio20/Press_release_Rio_outcome_document.pdf">regulatory initiatives in countries including South Africa and Denmark</a> suggest this will happen. One day.</p>
<p>Until that time, sustainability reports will continue to provide a wealth of corporate information unavailable elsewhere. </p>
<p>But in the now ironic words of Bob Diamond: “Restoring people’s trust may take longer”.</p><img src="https://counter.theconversation.com/content/8523/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sara Bice is a Senior Consultant with the Australian Centre for Corporate Social Responsibility, a private consulting firm. ACCSR has current and past clients in the banking industry. Sara is a Global Reporting Initiative Certified Trainer and assists firms to write sustainability reports. Further information about ACCSR and its current and past clients is available at: <a href="http://www.accsr.com.au">www.accsr.com.au</a></span></em></p>“Events over the past couple of years have raised profound questions about the ways in which banks and businesses contribute to society. For both to play their full part, they must restore trust and become…Sara Bice, Research Fellow, Centre for Public Policy, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/83092012-07-19T04:23:57Z2012-07-19T04:23:57ZHSBC’s money laundering scandal is more than just risky business practice<figure><img src="https://images.theconversation.com/files/13111/original/5w7hqm4f-1342590780.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">HSBC chief executive officer Irene Dorner testifies before the US Senate about allegations of money laundering within HSBC.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Recent news that HSBC executives admitted to allowing <a href="http://www.google.com/hostednews/afp/article/ALeqM5imyYQBhYh7Nv0KiVEalT5iUz3Neg?docId=CNG.05bcf360069da618c56a2fe713588aff.b61">Iran, terrorists and drug dealers to launder nearly USD$16 billion</a> over a six-year period would make earth underneath you shake.</p>
<p>How is that the bank’s risk management system could not detect such sensitive transactions? Was the bank’s risk management system inadequate, or did the bank’s management knowingly turn a <a href="http://www.bbc.co.uk/history/british/empire_seapower/nelson_01.shtml">Nelson’s eye</a>? What were the regulators doing? Were appropriate laws/mechanisms in place to detect and deter such activities? These and other questions would cloud the mind of ordinary tax payers the world over.</p>
<p>Interestingly, the above scandal has taken place although elaborate arrangements exist at national and international levels to detect and deter money laundering and terrorism financing activities.</p>
<p>In 1989, the Financial Action Task Force (FATF), an international body, was set up not only to define standards for combating money laundering and terrorist financing (MLTF) but also to carry out mutual evaluation studies to ensure that the legislative arrangements made by a country comply with the standards. Over 180 countries around the world are members of FATF and follow the global standards. All member countries have passed suitable legislation to counter money laundering and terrorism financing.</p>
<p>Specialised financial intelligence units (such as AUSTRAC in Australia) have been set and detailed reporting and compliance standards have been prescribed. One can’t say standards / legislations were not in place.</p>
<p>Did HSBC break the law?</p>
<p>Yes.</p>
<p>Interestingly, the FATF particularly warned about doing transactions with countries that pose high money laundering and terrorism financing risk such as “Uzbekistan, Iran, Pakistan, Turkmenistan and São Tomé and Principe, and the northern part of Cyprus”.</p>
<p>Yet the HSBC not only threw all caution overboard and allowed transactions from high-risk countries such as Iran to flow through its system, but engaged in fraudulent conduct (hiding the country name) as transactions were passing through the system.</p>
<p>As though this was not enough, as stated in the US Senate Committee on Homeland Security Report, it engaged in transactions with Al Rajhi – the Saudi Arabian bank – <a href="http://www.businessinsider.com/hsbc-ties-to-al-rajhi-bank-2012-7">which had links with al Qaeda</a>.</p>
<p>Top executives of HSBC also over-ruled warnings from its own officers that the bank should severe links with Al Rajhi.</p>
<p>Why was all this done? Obviously, greed underpinned the behaviour.</p>
<p>The HSBC have now issued a statement that it will apologise, acknowledge these mistakes, answer for actions and give absolute commitment to fixing what went wrong.</p>
<p>But will it provide solace to ordinary law-abiding citizens across the world?</p>
<p>One can see a repeat of behaviour on the part of banks. The US Financial Crisis Inquiry Commission (FCIC), for example, stated: “we clearly believe the crisis was a result of human mistakes, misjudgements, and misdeeds that resulted in systemic failures for which our nation has paid dearly”.</p>
<p>When the misdeeds get detected, outright denials are first made as a matter of routine. Similarly, when responsibilities get pinned down, the buck gets passed on. And when everything fails, apologies are issued with a promise that systems would be put in place so that this doesn’t happen again. It is common pattern. It was seen when the USD$7 billion <a href="http://www.nytimes.com/2010/06/09/business/global/09socgen.html">Societe Generale scandal</a> broke, or when the recent USD$2 billion <a href="http://blogs.wsj.com/deals/2011/09/15/meet-the-ubs-rogue-trader-kweku-adoboli/">Adoboli scandal</a> came to light. Someone down the line is made a scapegoat. <a href="http://news.bbc.co.uk/1/hi/business/375259.stm">Nick Leeson</a>, who brought the century-old Barings Bank down, wrote: “I completely recognise my fault in what happened, but it was clear Barings were incompetent, and their lack of oversight was appalling”.</p>
<p>In the case of HSBC, the difference is that it is not oversight or incompetence, but wilful negligence. </p>
<p>What were the regulators doing?</p>
<p>As found by the FCIC, once again regulators were sleeping at the wheel.</p>
<p>What do we need to do?</p>
<p>The actions of HSBC are beyond negligent. The bank appears to be knowingly involved in assisting MLTF activities. One would expect that criminal proceedings be brought against HSBC board and CEO, with whom the buck stops. In the early 1990s, the Bank of Credit and Commerce International, started by a Pakistani financier, was found guilty of involvement in money laundering activities and was closed down.</p>
<p>Simultaneously, the US authorities need to take the regulators to task.</p>
<p>Could we expect the authorities to show the required responsibility? Or do we expect a repeat of the Indian epic <a href="http://en.wikipedia.org/wiki/Mah%C4%81bh%C4%81rata">Mahabharata</a> (400 BCE) where the Druapadi, the princess, was disrobed in public eye and the King and the court were sitting with blindfolds over their eyes?</p>
<p>In his book, The Difficulty of Being Good: The Subtle Art of Dharma, Gurcharan Das writes: “there will always be nasty types - Shakuni, Duryodhana, Duhshasana — but good institutions are designed to punish them and to reward decent behaviour”.</p>
<p>It remains to be seen if this hope is rooted in reality. </p><img src="https://counter.theconversation.com/content/8309/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Milind Sathye does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Recent news that HSBC executives admitted to allowing Iran, terrorists and drug dealers to launder nearly USD$16 billion over a six-year period would make earth underneath you shake. How is that the bank’s…Milind Sathye, Professor of Accounting, Banking and Finance, University of CanberraLicensed as Creative Commons – attribution, no derivatives.