Changing Paradigms

Enduring a mortgage crisis followed by global recession and an ongoing credit crunch, Western nations extended emergency funding to major banks and also tightened regulations to prevent future crises. Now those same banks are expanding, even relocating operations to Asia’s substantial markets, offering rapid growth and business development. “The fact that one of America’s largest banks and one that has to be saved by taxpayers at home, looks abroad for growth, sums up the conundrum of globalised financial institutions,” explains YaleGlobal Editor Nayan Chanda in his regular column for Businessworld. “Where your shareholders are may not be where the money is.” Banks earn more profits from South America or Asia than in the US. Shareholders remain allegiant to corporations that deliver big profits, not to nations. China restricts foreign banking for now, but the industry undoubtedly anticipates the lure of jobs, technology and financial leverage to open doors. – YaleGlobal

Changing Paradigms

As banking norms become tougher, US and European banks focus on business in China
Nayan Chanda
Monday, September 13, 2010

Appearing before a Congressional Oversight Panel – created to oversee the expenditure of the Troubled Asset Recovery Program (TARP) – in March, Citigroup’s CEO Vikram Pandit was duly thankful. “Citi,” he said, “owes a large debt of gratitude to American taxpayers.” It was, after all, the $45-billion bailout fund offered by TARP that saved the bank from collapse in 2008. Thus, the recent announcement that Citigroup is planning to expand its operations in China and hire 12,000 people there has raised critics’ hackles. The government should have set a condition that the recipients of bailout funds would create jobs in America, groused one blogger. Others complained that Citigroup should be lending to businesses in the US and not in China.

The fact that one of America’s largest banks and one that has to be saved by taxpayers at home, looks abroad for growth, sums up the conundrum of globalised financial institutions. Where your shareholders are may not be where the money is. The home country regulations that seek to prevent future crises and bailout seem only to encourage firms to seek their fortunes overseas.

Even while seeking government rescue funds, Pandit has not been shy to describe Citigroup as “America’s global bank”. That is, of course, a statement of fact. With a presence in over 140 countries, it can legitimately claim to be the only US bank with such a global presence. The bailout helped it avoid collapse, but its financial turnaround came about as a result of its foreign operations. Compared with the previous year, its second quarter consumer banking revenues in Latin America and Asia rose 9 and 10 per cent, respectively, while North American turnover fell by 3 per cent. Now Citigroup wants to expand in China, where foreign banks are jostling to gain a toehold. It wants to add 10 more outlets to its existing 29 and triple its workforce to 12,000 people within three years. Citigroup’s problem will be to obtain the approvals to open more branches and find capable recruits to staff its expansion plan.

If high earnings attract the likes of Citigroup to emerging markets, then the tightening of regulations in reaction to recent financial misdeeds act as a further spur. Executives like Pandit may put on a brave face and claim they welcome the regulations, but it is clear that income from banking fees will take a hit. A deep recession and fears that US consumers will not soon return to the shopping malls, makes fast-growing Asia, especially China, all the more attractive. In years to come, earning growth that will gladden the hearts of shareholders may only come from countries other than the US. In short, the jobs may be created in China, but the profits will flow to its shareholders, who are, of course, not just Americans. Saudi Prince Alwaleed bin-Talal is a major owner of Citi stock. The state investment arms of Singapore, Kuwait and Abu Dhabi are also among the largest individual shareholders.

An even more acute problem is brewing in the UK. The Independent Commission on Banking led by Sir John Vickers is rumoured to be preparing recommendations that call for a formal separation of retail and investment banking operations. Such rules may be even tougher than US banking regulations, which impose higher costs for operations, but still allow banks to carry out both retail and investment banking activities.

Worried, banks such as Barclays and Standard Chartered have hinted about taking their headquarters elsewhere. The clearest warning came recently when a senior HSBC executive raised the possibility of moving the bank’s main office out of London if the government sought to split high street banking from its riskier investment banking activities. HSBC already indicated its centre of gravity was shifting when it relocated its chief executive’s office to Hong Kong earlier this year.

The move is not surprising as China has been the principal source of HSBC’s growth in recent years.

Amidst the worldwide slump, HSBC earned over a billion dollars in profit in 2009 from its operations in China. However, despite opportunities for growth, the Chinese banking scene still remains a very restrictive one – with foreign banks representing barely 2 per cent of total assets.  If more of the assets of western banks were invested in China, it would give Beijing even more leverage than it now has.

The author is director of publications at the Yale Center for the Study of Globalisation and editor of YaleGlobal Online.
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