In the midst of the hubbub surrounding the US debt crisis talks in the media, it might have been easy to miss the small reports about HSBC’s decision to shed 30,000 staff across its global operations.
The shedding of 30,000 from a total workforce of 296,000 rides on the back of improved quarterly profits for the European giant. The cuts, announced by the erudite CEO Stuart Gulliver, are part of a broader strategy to slash the bank’s cost to income ratio to between 48 and 52 percent.
The cuts are expected to occur until the end 2013 and signal a systematic retreat by the bank from unprofitable markets, including Russia, Poland, and the US – with a number of markets earmarked for withdrawal by the bank.
HSBC’s cuts follow a number of other European and British banking powerhouses that have sought to trim costs of late. At UBS, 5000 jobs are expected to go, whilst Credit Suisse expects to wave goodbye to about 2000. Meanwhile, Lloyds Banking Group took the axe to 15,000 jobs in June – resulting in a total of 40,000 job losses since the taxpayer-funded bailout.
Much of the commentary on HSBC’s announcement has been fixated on their withdrawal from certain markets and their renewed focus on emerging markets such as Asia and South America.
However, an issue of potentially greater importance for the industry is the regulatory motivation behind some of these cuts.
All of the banks have seen major cuts in revenue that have adversely impacted their returns and the introduction of new capital adequacy requirements via Basel III will exacerbate this.
Under the Basel II framework, HSBC’s return on equity is currently at 12.3%. However, according to the bank itself, under the Basel III rules, the return would be at 10.5%.
Regulators are essentially guided by the principle of enforcing the systemic stability of the financial system to ensure we do not have another Lehman’s scenario.
However, tougher regulations aimed at ensuring stability may just be shifting the cost to frontline personal. Job reduction is always the first means that management looks to in a bid to maintain or boost returns.
It remains to be seen what impact if any, the Basel III regime will have on the local banks.
Last month, Ralph Norris blasted the regulatory burden by Australia’s authorities on the banks. Norris claimed that over half a billion dollars had been spent by banks redesigning systems and processes to ensure regulatory compliance.
When you consider the potential drop in returns for HSBC under the new capital regime, we wonder if the Basel III regime will have just as large an impact on the locals. To maintain returns, will they follow the road of HSBC?