Blain’s Morning Porridge Jan 29^th 2025: HSBC exits Investment Banking – The End of The City of London?

“This is the end… the end, my only friend… the end.”

The City of London as the financial centre of global markets has been in terminal decline since 2008. Over-regulation and bureaucracy has doomed it. To restore the UK’s excellence and swashbuckling success in financial markets, we need to embrace risk – not regulate it out the equation.  

I should be happy – I’m off skiing tomorrow, (no more Porridge till Feb 10^th), but yesterday’s news from HSBC left me profoundly depressed.

HSBC has announced it is done and dusted with global investment banking. The redundancy notices have been handed out. It will be exiting M&A and Equity Capital Markets business, except in Asia. I understand its well-regarded DCM team remains in place – for now, but any smart trader or salesman will be very open to head-hunter calls. HSBC’s exit is yet another nail in the coffin of London’s financial markets, which were once the epicentre of the Global Capital Markets. The bank will need even less space when HSBC exits its’ Canary Wharf Temple of Gloom next year. Tumbleweed blowing down Cabot Square sums up the outlook for London’s financial markets.

HSBC’s exit was not a shock. Its investment banking operation was always subscale for what was once the world’s largest bank. The current management are cutting costs and aim to “simplify HSBC and increase leadership in our areas of strength.”

A few weeks ago the UK Gilts market saw a blowout syndicated bond issue. It was a stunningly successful deal. What caught my eye was the lead manager group: Deutsche Bank, JP Morgan, Morgan Stanley, Nomura and RBC… Not a British name among them.

When I were a lad, you could guarantee a host of UK names competing on every single deal; BZW that became Barclays Capital, Lloyds, Hambros, Morgan Grenfell, Philips & Drew, Warburg, Midland Montague, County NatWest, and a thousand others. Back then the markets were awash in innovation – new forms of debt and equity in capital, securitisation, convertibles, hybrids, and new markets in emerging markets, junk, bank-capital and corporate bonds. Activity in the new global markets were dominated by London trading floors.

I first walked into the City of London in 1985 – a young Scotsman on the make.. fascinated by it all. I arrived at exactly the right moment. Business was exploding, and even a dismal Desmond (a 2:2 degree) got me a job with a firm I’d never heard of before – Morgan Stanley. I left my job as a trainee auditor and grabbed the opportunity.

Big Bang in 1986 saw a raft of changes that liberalised the financial markets in the City of London, triggering an explosion of market growth and jobs. Yuppies, bad suits, stripey shirts and braces… I was one of them. Old established stock market brokers and jobbers were swiftly acquired by foreign banks keen to participate in the market’s evolution and rise to become the global centre of financial markets.

For decades it worked well. The City fuelled the UK economy. The best and brightest of UK graduates were scooped up by banks doing the Milk Round of the top universities (as close to Oxford’s dreaming spires as I ever got!) The price of London housing hit the stratosphere as City bonuses were spent on ever more expensive and smaller homes.

But, inevitably the bottom fell out. Their failures to manage risk ahead of the Global Financial Crisis of 2008 saw UK banks kicked into the sin bin. While the US banks saw opportunity to grab market share by swiftly paying back bailouts  and raising capital, the UK banks were seen as an embarrassment, kept locked out of sight… hobbled by over-regulation determined to prevent a repeat of that last crisis. Only HSBC and Barclays avoided bailouts, and the latter by dint of some very dodgy deals with Middle East shareholders.

Global financial markets wait for no bank – UK banks were left behind. While the world’s financial markets became Goldman and JP Morgan’s oyster, UK banks and the London markets became smaller, domestic rather than global players.

Their problems were compounded by a regulatory mindset. The FCA made clear they expected banks to be professionally managed by qualified managerial types to control, manage and minimise risk – under no circumstances were risk takers to be given the keys to the executive washroom. The result was few investment banking stars emerged, thus the global business of finance migrated to firms willing to embrace risk – the US banks, real money accounts and hedge funds.

The situation was further muddied as UK financial institutions prioritised the culture of the compliance officer, or Risk-Prevention Officer as the increasingly thinly staffed trading rooms saw them. New rules from the Canary Wharf HQ of the FCA and Europe bureaucratised the market – MIFID sucked the last of the fun out of it.

Banking and capital markets are all about the art of risk. When the core mantras became reduce risk, increase transparency, and focus on stability, then the business was gone, seized by process rather than skill. Oh, how the other nations laughed as UK financial participants effectively wrote themselves out of the markets.  Brexit didn’t help. Over the course of just a few years, UK firms lost access to European business. There has been a steady exit of talent – which is accelerating. Only last week and Dutch chum of mine was transferred back to Holland. He’ll miss London, but there is frankly no longer any reason for him to be based here.

The role of the UK’s bank providing banking services, payments and financial advice has diminished. Fintechs and smarter new entrants are eating the big banks’ lunch.  The banks have sought to maintain dividends by shrinking branch networks through closures and exiting businesses – but its financial Fabianism. No one really wants a career in the financial markets these days.. it’s impossible for young folk to afford London rents, and even if they could, they’d have to spend hours commuting on unreliable trains. They will never be able to afford their own homes in London.

The FTSE today is a third division stock market. There are precious few UK firms in the global top 100 by market cap – new firms are snapped up cheap and early by US Venture capitalists. Why would firms list in London when the depth of capital in the US ensure much higher valuations? The UK is now top of the European third league. Without a thriving domestic market, the few remaining firms are going native.

While US investment management firms have thrived, reaching gargantuan status, and hedge funds have perfected risk taking in the new Alternative and Private Credit Markets, few UK firms have achieved similar scale or even modest success. The rules and scale has left much of the UK fund management sector bureaucratised. Even the clever ones struggle to unravel how to meet the regulatory requirements to participate in new markets. There is a simple rule in asset management – it costs the same to manage £1 bln as it costs to manage £100 bln. It’s the returns that differ. UK firms trapped at the left-hand side of the AUM curve are at an immediate scale disadvantage.

Back in 2022 the government announced a series of reforms to drive growth and competitiveness in the financial sector, the so-called Edinburgh Reforms. I’m not convinced anyone noticed – there was no discernible effect on slowing the decline in deal flow. In 2024, Chancellor Rachel Reeves warned regulatory changes to eliminate risk in financial markets had “gone too far”, a first sign that Govt understood how markets have been emasculated. “The UK has been regulating for risk, but not regulating for growth.”

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An Aside:

I joined HSBC in 2002 just before they acquired Household, the US sub-prime lender. At the time it seemed a great deal, but it all unravelled during the Global Financial Crisis in 2008. I had left the bank in 2007 after too many frustrating run-ins with the internal bureaucracy. Although HSBC stands for the Home for Scottish Bank Clerks (not Hong Kong and Shanghai Banking Corporation, as some seen to think) I was not a good fit.

I’d been head-hunted to join HSBC from Bear Stearns. The US firm was where I learnt the real business of investment banking; we fought, we battled, but we got stuff done. The HSBC crowd were lovely, charming people, but the career equivalent of being drowned in a butt of treacle. It was not a meritocracy, but an old-boys club where “international officers” (glorified banking apprentices), mistook their title for ability. I remember one of them who was foisted onto my team expected to be given control of bond market origination overnight.

Back in the early 2000s HSBC was the world’s largest bank by many measures. It had a stated vision of becoming a truly global bank – seeking to build equal market shares in Asia, North America and Europe. Household was part of that process. It hired expensive investment bankers to make it happen. I don’t believe any of them survived more than a few years. It was not the bosses were bad managers, it was the bank that was bad to manage. My time at HSBC is fondly remembered, but it was horribly frustrating. I probably upset them as much as they upset me.

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Where do we go next in the City of London….? Its anyone’s guess. I would suggest a bonfire of the regulations would be a good start. Free up banking and let risk thrive. Sure, there will be mistakes and accidents, but you can’t make an omelette without burning a few trees.

Out of time, back to the day job, and then jumping on a plane to Vancouver…

Bill Blain

Author of the Morning Porridge

www.windshift.capital

billblain@morningporridge.com