Monday, March 4, 2013

HSBC and the myth of surplus capital

In his Wall Street Journal Heard on the Street column, Simon Nixon looks at HSBC and observes that it will soon have "surplus" capital.

If true, it is a testament to what a bad job the US Justice Department did in settling money laundering charges for $1.9 billion.  Given that HSBC engaged in money laundering despite numerous regulatory cease and desist orders, the fine should have left HSBC capital constrained for the next decade.

However, there is no reason to believe that HSBC has or will shortly have surplus capital.


Because HSBC does not provide ultra transparency and disclose on an ongoing basis its current global asset, liability and off-balance sheet exposure details.

Without ultra transparency, HSBC is a black box and there is absolutely no reason to trust any representation it makes about its financial condition.  Would you trust a bank that engages in money laundering and tells the regulators repeatedly over the years that it has ended the practice?

As a black box, who knows what is hiding on and off HSBC's balance sheet.

Actually, presumably the financial regulators who were part of the money laundering settlement knew as a result of their access to and monopoly on all the useful, relevant information on HSBC.  That is why they agreed with the $1.9 billion fine.

The financial regulators were saying that this was as much as HSBC could afford given the losses currently hidden on and off its balance sheet.

It's a long time since a major European bank had to grapple with the problem of surplus capital. But that is the position that HSBC will soon be in. 
Despite a $1.9 billion fine from the U.S. government for money laundering and a $2.3 billion bill to compensate U.K. customers, the U.K.-based banking giant was still able to pay $8.3 billion in dividends in 2012 and report a sharply improved core Tier 1 capital ratio on a fully loaded Basel III basis of 9%. 
This is expected to rise to 10.3% in 2013, close to the top of its target.
"HSBC" and "surplus capital" are words that haven't always gone well together: 
The bank spent much of the last five years writing off a decade of earlier malinvestment. Chief Executive Stuart Gulliver insists that this time HSBC will eschew acquisitions in favor of organic growth. 
But investors may be skeptical given that the bank fell well short of its targets in 2012. The cost-income ratio actually rose in 2012 to 62.8% compared with a target of 48% to 52%, while the return on equity fell to 8.4% compared with a target of 12% to 15%.... 

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