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Suppose big banks move their HQs out of the UK

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Published: 5th September 2010 by William Webster

Now we are examining the entrails of the crisis one potential outcome is to break up the largest banks.  The Commission on Banking will take evidence and decide whether this is a "good thing". No doubt concerted lobbying will occur. This makes the veiled threats to move "offshore" by some of the largest UK banks puzzling.

Bank CEOs clearly aren't comfortable with the prospect of separating investment and retail banking apparently one can't work without the other. But if investment banking is so profitable why can't it do without the stolid retail business?

It's straight forward. Investment banking gets two huge benefits from being wrapped up with retail banking. Let's see why.

  1. The implied state guarantee. Investment banking creates risk. That risk goes on the balance sheet and creates leverage. This makes the bank more susceptible to loss and failure. This should make funding considerably more expensive and senior debt holders ought to ask for huge risk premiums. But they don't. Why not? Because they know the government will honour that debt if need be.
  2. Assess to the central bank. Since 2007 large banks have been borrowing heavily from the Bank of England through repo, special facilities and guarantees. But the rates charged are well below any market rate. In other words investment banking activities have been funded by the Bank of England at rates that are artificially low.

No wonder CEOs are rattled.

Investment banking isn't so much about risk free broking as they would like you to think. It's more plain old leverage with a tax payer guarantee. The clever bit is convincing everyone it's different.

Let's try a bit of scenario testing. Suppose a big bank did change its domicile what would happen?

Under the FSCS, UK deposits would be protected up to £50,000.  But there is no reason why the Bank of England should provide liquidity and no reason why the UK government should continue to provide an implied guarantee.

An explicit statement to this effect would help everyone understand the risks. Coincidentally it would also stop investment banking in its tracks.

And it's this which is so puzzling. If the large banks really want to play high stakes poker with the UK authorities who holds the best hand?

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