It's official: London is the hub of banking cool. In August, Chicago-based CME Group Inc announced it was applying to open a new derivatives exchange in London's already competitive financial center in order to offer traders "regulatory choice". Back in June, in US congressional hearings on JPMorgan's $6bn trading loss, Congressman Gregory Meeks of New York reported that many banks in his jurisdiction were threatening to leave the US for Britain to profit from the "London loophole" alleged to underlie the "London Whale". Even French bankers want to leave Paris for London.
But wait. Banks noting the British regulator's "overreaction" to a string of London-based scandals are talking about leaving London. The global financial crisis prompted what to most onlookers was a long-overdue review of regulatory controls on banking, as well as use of the tax regime to redistribute profit from the banks to the taxpayers they had harmed. As a result, threats to leave London have been made by Goldman Sachs, JPMorgan, Standard Chartered and Barclays. Even HSBC, which moved to London from Hong Kong in 1994 in advance of the Chinese handover, has responded to these scandal-driven regulatory initiatives by threatening to move its domicile repeatedly through 2010 and most of 2011.
So if not to London, where will banks go? Well, strangely enough, Europe's ahead-of-the-global-regulatory-curve focus on pay reforms - specifically regarding the clawback of remuneration in the event of failure - means some European bankers including those in London are thinking of moving to - wait for it - the US, that excessively tight jurisdiction from which bankers are supposedly tempted to lax London. Barclays was apparently planning to move its headquarters there. Perhaps noting the apparent circularity of all this, Jamie Dimon, in his response to representative Carolyn Maloney berating the "London Loophole", insisted that overzealous regulation in the US would lead to an exodus of business not to London but to Singapore.
Threats to relocate based on regulatory arbitrage - the lure of a more lax jurisdiction - are far from new. In 1986 when London's 'Big Bang' financial reforms made it a more liberated place for banks to do business originating and trading securities, US banks flocked to buy up the old London partnerships. They then used their new freedom of choice to pressure the Fed to lift key restrictions on banks in the US. The Fed obliged within a year, long before the repeal of Glass-Steagall.
But whatever arbitrage manoeuvres might have made sense at the neoliberal dawn of deeply financialized capitalism, few now look plausible in the wake of late financialization's progeny, the global financial crisis.
We should distinguish between two levels of arbitrage, the location of the bank headquarters and the location of particular financial activities. The first signifies which government is on the hook for any bailout stemming from a future financial crisis, and that government sets rules for the bank's capital reserves and overall structure - so-called 'prudential' regulation - as well as tax on the financial firm's overall group-wide profits. The second determines which governments get to say whether the financial system can be put at risk by permitting particular kinds of activity and remuneration structure - known as 'conduct of business' regulation - and the taxation of particular transactions.
Moving activities around to the least onerous jurisdiction is relatively easy and a time-honored pastime. Jamie Dimon's assertion that activities will move to Singapore is plausible, up to a point. Asian financial centers other than Japan are expected to leap forward in importance over the next decade, and recent surveys appear to confirm that bankers would prefer to work in Singapore than London or New York, although that story has been getting an outing with oddly insistent regularity of late.
Noting that Asia's financial centers are growing in importance is one thing. Arguing that this presents banks with substantial opportunities for regulatory arbitrage in the conduct of business is another. After all, the recent regulatory tightening of remuneration structures and derivatives trading is born out of a demonstrable need to rein in bankers' excessive risk-taking. The consequences of that risk-taking were no more desired and just as criticized post-crisis in Asia as in the West. All the major Asian financial centers including Singapore have already demonstrated a desire over the last decade to tighten up on standards in finance and to build greater capacity to enforce them. Even if Asian financial centers would welcome an influx of Western bankers in the short-term, they will have little political appetite to indulge bankers' self-destructive excesses over the medium to long term. Whatever temporary regulatory relief Asia's financial centers might be prepared to extend the West's weary bankers surely amounts to the regulatory equivalent of predatory lending: ensnaring desperate bankers with a low regulatory bar and then raising that bar once the banks are locked in.
There is another development that could interfere with banks shopping for lax jurisdictions to conduct business. Their home country regulators increasingly recognize that a big problem occurring in an overseas unit operating under loose supervision often comes home to roost. Conduct of business issues are merely prudential business issues-in-waiting. To address this, the US Dodd Frank Act has been drafted so as to apply to overseas trading operations of US-based banks. If this becomes a trend, arbitrage could become all but impossible without moving headquarters.
So what about moving headquarters? HSBC* considers relocation of the bank's headquarters a "non-trivial matter", and yet insists on bludgeoning UK politicians and their anxious constituents with the possibility of exodus every three years. It's as if they were just talking about moving to new premises down the street. They manage to string out this three year cycle so that the threat can be wheeled out whenever the latest banking scandal cycle demands. If the political response to scandal is due in the period approaching the relocation decision then the bank delays the decision until after the political process has been resolved. If a scandal erupts mid-relocation decision cycle then the bank makes it known that political action taken now will impact the bank's next relocation decision. It is hard not to view HSBC's very public three year cycle for reconsidering domicile as anything more than a platform from which to mount continuous blackmail-based assaults against accountability, control and taxation priorities arrived at through legitimate democratic processes.
For their part, any jurisdiction that wants to attract (or, for that matter, retain) the headquarters of major banking institutions with the incentive of lower standards of prudential regulation or light taxation, however, had better have very deep pockets for the substantial public-funded bailout that indulgent regime - and the banks' current subsidized cost of capital - implies. And that jurisdiction will also need a compliant population from which to extract the bill.
Does Dubai really fit this profile? Does prudent Singapore? For its part it doesn't seem to think so.
Does Hong Kong? Hong Kong may look relatively free-wheeling now, but in the end it must look over its shoulder at China. Nothing in the 63-year history of the People's Republic indicates an inclination towards being "hands off", especially if they might be on the hook to provide a bailout.
All in all, you have to wonder why the US or UK governments would entertain these threats to an extent that makes the threat worth making. Politicians in hock to the financial sector for campaign contributions presumably love the relocation threat story because it deflects attention away from their own inaction towards those mean-but-oh-so-importantly-big banks. Banks in turn deflect attention to "a few of their biggest shareholders" who are demanding that the bank's location be put back into question.
Shareholders, of course, are never accountable for anything, so the buck stops nowhere. You have to wonder, though, why any shareholders go along with this story. While the public suffers, shareholders gain handsomely from a 'too-big-to-fail' bank's domicile in a country able and demonstrably willing to stump up bailout funds. And it cannot be assumed that shareholders are enthusiastic about all the banks' anti-regulatory positions concerning conduct of business, either, such as that relating to the claw-back of remuneration.
Clearly, if the G20 nations not only spoke with one voice on financial reform but also acted as one then we wouldn't have to listen to the threat any more. Short of that, let's at least recognize that perceived opportunities for regulatory arbitrage in the post-crisis world are deceptive, or else closing fast, and give them short shrift in the public policy debate.
*Disclosure: I worked in compliance at HSBC from 1994-1999.