Tuesday, August 21, 2012

HSBC to fight British regulator 'to the death' to save dividend

The Telegraph carried an interesting article that provides an insight into how banks pressure their financial regulators when it comes to the amount of capital they hold.

In this particular case, HSBC argues that the British regulator don't understand how financial markets work and that paying dividends is a necessity.

It is well known that paying dividends is not a necessity.  Just look at all those high growth non-dividend paying tech stocks.

Paying dividends does broaden the pool of eligible investors, but it is not a necessity.

HSBC is willing to “fight to the death” to prevent British regulators from attempting to force it to stop paying its dividend in order to preserve capital. 
The bold statement by group finance director Iain Mackay reflects the continuing battle between regulators – including the Financial Services Authority (FSA) and the Bank of England’s new Financial Policy Committee (FPC) – and banks over capital enhancements. 
In the statement, made to analysts earlier this month, Mr Mackay criticised certain FPC members, alleging that they did not comprehend fully the way capital markets work.... 
Explaining the challenges banks such as HSBC face, Mr Mackay said: “They [regulators] believe banks are capable of reinforcing their capital by cutting the variable compensation of their employees, by restricting dividends to their shareholders and by raising capital in the marketplace.” 
But Mr Mackay said such thinking was misplaced. “From Stuart’s [Gulliver, HSBC chief executive] and my perspective, we will fight to the death if they go after our dividends. That is not on. 
“If you expect to be able to raise capital in the marketplace at any point, you’ve got to remunerate your shareholders. So from our standpoint, pretty much everything else will go before the dividend.”...
He went on to suggest that among certain parts of the regulatory sector there is a view “that the shareholder doesn’t matter”, something that he finds “more than a little bit worrying”. 
Actually, it is not in the regulator's mandate to worry about the shareholder.  They are suppose to worry about ensuring that shareholders have access to all the useful, relevant information in an appropriate, timely manner so they can assess the risk of investing in a bank and adjust the amount and price of their investment.
Mr Mackay’s frank comments are a window into the bank’s continued difficult relationship with regulators.

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