Factbox – HSBC must weigh up UK and Hong Kong regulatory regimes

LONDON (Reuters) – HSBC shares have rallied after the bank said it was reviewing whether to move its headquarters out of Britain and potentially back to its former home in Hong Kong.

The following are some of the regulatory issues raised if Europe’s biggest bank were to relocate to Hong Kong.

CAPITAL REQUIREMENTS

Comparing the capital costs of being located in Hong Kong or Britain will be top of HSBC’s list.

Morgan Stanley analysts say HSBC would probably have to hold more capital in Hong Kong as its balance sheet is equivalent to eight times the local economy. But some financial lawyers and former regulators dispute this, saying the bank’s subsidiary structure means consolidated capital requirements are likely to be similar to today’s.

The bank aims to have a common equity Tier 1 capital ratio of 12-13 percent in future, in line with Basel III capital rules.

Another key question is whether Hong Kong regulators would approve the internal risk models HSBC currently uses when booking trades in London. Although banks’ own models are generally more sophisticated and capital-efficient, Asian regulators sometimes prefer their own more conservative models, meaning capital requirements are higher.

GLOBAL RULES

Under rules agreed by the Group of 20 richest economies, the world’s top 30 banks, which include HSBC, must hold extra capital and have plans mapping out how they would recover from shocks or be wound down without needing taxpayers’ money .

HSBC would still be subject to these rules in Hong Kong, but would have to develop a new plan in conjunction with the Hong Kong Monetary Authority which would become its home regulator. The change in the bank’s primary regulator could also require HSBC to resubmit its existing plan to U.S. regulators.

BANKING LICENCE

A move would probably mean HSBC had to reapply for banking licences in many of the 73 countries it which it operates, which would be a time-consuming process. The bank could face new conditions not only from Hong Kong supervisors but also from Britain and other major centres it operates in.

TAX

Hong Kong’s headline corporate tax rate is 16.5 percent compared with Britain’s new 20 percent rate, making Hong Kong a more attractive corporate tax domicile.

The move could also have positive tax implications for its shareholders, as Hong Kong does not tax dividend payments.

Hong Kong has relatively few double-taxation treaties with other countries, however, meaning shareholders based in other jurisdictions may not directly benefit and could potentially pay more tax compared with dividends distributed in the UK.

DATA PRIVACY

Relocating infrastructure and customer information from one jurisdiction to another would raise issues under Europe’s data privacy rules, making an overhaul of the bank’s information technology operations a painstaking process.

HSBC might have to get explicit permission from its European customers and clients if it were to relocate servers containing information on them to Asia. The bank is also likely to remain bound by EU data privacy rules when processing EU customer data, regardless of where those servers were located.

CUSTOMER CONTRACTS

Some contracts may have to be reissued if these include clauses that refer to HSBC in London.

RING-FENCING

To maintain a retail arm in Britain, the bank would still have to ring-fence it with extra capital even if its head office was in Hong Kong. Its UK operations would still face the costs of complying with EU financial regulation.

It could choose to spin-off and sell or separately list its UK retail bank as part of any relocation.

UK BANK LEVY

The bank could cut the cost of its UK bank levy, which is expected to rise to about $1.5 (0.98 billion pounds) this year from $1.1 billion last year. If it moved, it would have to pay the levy on its UK assets, rather than its global balance sheet.

Morgan Stanley analysts estimate that a move to Hong Kong would reduce the bill for the bank’s UK balance sheet levy to about 6 percent of net income by 2017.

HSBC’s bank levy is expected to rise to $1.5 billion this year, which would represent about 7 percent of expected 2015 profits, although some analysts predict it could rise to near $2 billion in the future, towards 10 percent of profits.