Banks threaten to leave the UK…but who’d have them?

6th September 2012

The theory is that these companies bring tax revenues and employment and therefore have generally had the ability to blackmail the government into concessions. But are certain parts of the UK corporate sector losing their bargaining power?

"The banks are bluffing"

The banks are among the most guilty of employing the bargaining chip of ‘moving their business'. Naked Capitalism features a piece by Andrew Newton, a former compliance officer, pointing out that Goldman Sachs, JP Morgan, Standard Chartered, Barclays and HSBC have all threatened to leave London in response to new regulatory initiatives.

There is a case that the UK Government should be alarmed. Like it or loathe it, financial services are an important part of the UK economy and a significant employer. However, Newton argues that the banks are bluffing for a number of reasons: "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.

He believes that observers 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." He says that while moving a bank's activities is commonplace, moving a bank's main jurisdiction is rarely done.

Who would have them anyway?

The risk for the government is that they move their main jurisdiction. However, there is a significant question mark over who would have them. The banks have tended to suggest that they would move to Asia, but Newton suggests: "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."

In other words, no self-respecting jurisdiction would now reasonably allow bankers a regulatory free rein, given what they now know about bankers and the risks they may impose on a local economy. The argument that the banking giants may bring wealth to a country now looks spurious, particularly in light of Barclays' £300m tax avoidance schemes: "The Treasury rushed through legislation in the spring to close down two "aggressive" tax avoidance schemes Barclays disclosed to HMRC in an effort to avoid tax.

Ministers said the bank, which at the time they refused to name, would face a fine of £500m after it embarked on a debt buy-back that HMRC said was designed solely to save tax." Banks have proved unwilling to pay taxes, while at the same time using up government resources for bailouts. Most prudent governments have moved beyond welcoming businesses ‘at any price'.

It is interesting that a number of countries, such as France, have gone quiet over plans to establish rival international financial centres to London. This may be because of the parlous state of some of the French banks, but the Government is presumably savvy enough to recognise the risks involved.

If banks really want a favourable jurisdiction, perhaps they should look to Russia. Dmitry Medvedev has been in talks with some leading bankers, including Jamie Dimon of JP Morgan about establishing a financial centre in Moscow. However, the problems for an international banking group establishing itself in Russia are multi-faceted. Some are highlighted by Andrei Sharonov, deputy mayor in the Government of Moscow for Economic Policy: "First of all, it is a matter of the business environment. It is impossible, if you have problems with property rights, with the independent court and corruption to the extent we face in Russia, to be a reputable financial centre.

"Second, Moscow must develop specialised financial infrastructure, favourable taxation and ensure a supply of available and qualified personnel." Dubai and other Middle Eastern countries are also throwing their hats in the ring, saying they will welcome international financial groups, but they do not have the infrastructure.

Clive on the Naked Capitalism site suggests that the UK government is well aware that the banks are bluffing: "Theatre, pure theatre. The government in the UK is dumb but it is not *that* dumb. It knows that the threats of the TBTFs are simply that – threats. Yes it goes along with the ruse by pretending to be scared but nevertheless standing up to the TBTFs in classic gesture politics. It knows that the risk isn't real of the TBTFs leaving."

The banks no longer hold any cards. Attempts to weasel concessions out of governments with a threat to take their business elsewhere can no longer work. Those jurisdictions with the requisite infrastructure know too much about their activities and the risks they pose to give them any freer regulatory rein than they already hold. Those ambitious countries that might still want their business do not have the necessary infrastructure. The banks will
need to stop posturing.

 

More on Mindful Money:

Is Grexit the new Y2K?

Is Goldman Sachs to blame for everything?

Is multiculturalism bad for the FTSE?

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