An analyst report has renewed speculation among some investors that the British bank Barclays might leave London for New York.
The report, published by two UBS analysts on Tuesday and titled “The first to leave?”, gives a list of reasons why there apparently is “little option for Barclays but to reconsider domicile.”
Executives of large British banks, including HSBC, Standard Chartered and Barclays, had been threatening to move their headquarters abroad ever since a government-appointed banking commission here hinted it would consider splitting investment and retail banking to make Britain’s financial sector more stable.
The warnings were widely seen as a tactic by the banks to scare the government into abandoning plans for stricter financial regulation.
This is interesting on a number of levels. First of all, the report is by UBS -- not Barclays, who's CEO Bob Diamond has recently said that he is committed to keeping Barclays headquartered in the U.K. UBS is based in Switzerland, but it has major operations internationally (including the U.K.), so perhaps this report really says more about UBS's preferences than Barclays'. What do I mean by that? If the U.K. tightens up its regulations, all firms that operate in that country will have to comply, whether they are based there or not. The effectively functions as a barrier to entry for new firms, since better-established firms will have an easier time complying with stricter regulations. The net effect of this is that firms with a large market share -- like Barclays -- will be in a better competitive position relative to emerging challengers -- like UBS. This is pure speculation on my part, but remember that regulation is about competition first and foremost, and that means that regulatory structures are political creations.
Another interesting aspect is that the U.S. is not necessarily a laxer regulator than the U.K. Prior to the crisis it definitely was not: the U.S. required higher capital ratios to be considered "well-capitalized" than the U.K., which operated under a "light touch" regime. Additionally, the U.S. has already placed some limits on the extent to which commercial banks can engage in investment banking activities under the so-called "Volcker rule". To this point, neither the U.K. nor most continental European countries have similar restrictions. The U.S. has also conducted much more rigorous "stress tests" of systemically-important financial institutions than their European counterparts, and the U.S. (with the U.K.) pushed for stronger capital, liquidity, and leverage requirements in the new Basel accord revision. In other words, relocating to the U.S. isn't necessarily beneficial from the perspective of trying to evade regulations.
But this type of talk also speaks to a process that is not very well understood by political scientists: when and why some national governments regulate their financial systems more strictly than international regulations require, since that would seemingly put their firms at a competitive disadvantage vis-a-vis foreign competitors in internationalized markets. I presented some preliminary research on this question at ISA a few weeks ago. While I've still got quite a bit of work to do on the question, my tentative conclusion is that most official regulations are well below the levels of prudence that markets demand, and function primarily as a way to prevent free-riding behavior by opportunistic firms. Given that, some governments can signal credibility to markets by having stricter rules than the international minima. This can, in turn, benefit firms by reducing their cost of finance. I'll probably post a working version of that paper online pretty soon, but until then interested parties can read some similar work by Thomas Bernauer and Vally Koubi here.
Anyway, I don't think there's a snowball's chance in hell that Barclays is moving to the U.S. But then I don't think that's really the point.
ht: Felix Salmon, who somewhat surprisingly doesn't dwell long on the point.
P.S. Here's your FOTD, from the same Dealbook piece: "Barclays’ gross balance sheet is 100 percent of Britain’s gross domestic product."