The question for 2011: what price keeping HSBC & Standard Chartered headquartered in Britain?

HSBC is deeply concerned about political developments. Some in their home nation’s incoming political leadership have a toxic attitude to freewheeling freemarket bankers. In its own quasi-diplomatic manner, backchannels have been opened up between the Chairman and with leading politicians. But many at the bank giant are unconvinced. It could be time for a move.

The year? 1992. The country? A Hong Kong set for incorporation into mainland China by 1997. And yes, HSBC upped sticks and moved its headquarters, and tax domicile to London.

Then it was actually willing to pay hundreds of millions of pounds more in tax and buy the then struggling Midland Bank for the political security offered by adopting a UK domicile.   And so now, in 2011, we may have the same story in reverse. The Sunday Telegraph ran a story suggesting that HSBC had briefed its institutional investors on accelerating plans to move its domicile back to HK. It was sort-of denied by the bank itself. Standard Chartered have been making similar murmurings.

Park the on-the-record stuff here. This is what I would call the “Real Project Merlin”. Forget the comically overhyped nonsense around bonus pools, which were already being cut, or the availability of extra business lending, in the unlikely event that demand transpires. Right from the start of the tension between this Coalition Government and the banking sector, this has long been about one key question. Is George Osborne going to ignore Vince Cable, and Mervyn King in his response to the recommendations of the Independent Commission on Banking, or risk losing the HQs of two world-beating international banks?

Since the Autumn bankers have been telling me that this has always been the real battle. They were rather alarmed by the intent shown by the appointment of the likes of Sir John Vickers and Martin Wolf to the Banking Commission. Both are key allies of Bank of England Governor Mervyn King. As evidenced by his very rare interview on Saturday, the Governor is gunning for the banks.

Unnoticed by some, the Bank officials have over the last few months given speeches and analyses that have repeatedly chipped away at the intellectual foundations of banking in Britain. in an interim report next month and a full report in Autumn many expect the Banking Commission to give this perspective its highest profile push, if falling short of full scale break up of the so-called Universal Banks.

What a turnaround in two decades. In 1992, the Bank of England, recommended that HSBC should be allowed to takeover Midland, at least partly because Britain would benefit from having another of the world’s biggest banks headquartered in the City.  What this boils down to, is that there is a set of plausible reforms that alongside tax changes, might lead the likes of HSBC and Standard Chartered to say “Joi Wooi” this year. Does this mean that such reforms are inherently wrong? Not necessarily.

It might not make any sense for all sides for the UK to be lender of last resort to banks specialising in Asian markets that some might see as a little bubbly. Especially when the surplus capital is there and not here.   Having said that, the implicit guarantee given by taxpayers to investment banks like this might be a bargain if it puts UK PLC at the centre of a new wave of South-South capital flows that are driving the world economy. And if part of what is driving the “Good Riddance” agenda is the need for revenge against overpaid crisis-causing bankers, well I think that these two banks are not the right targets.

So the question is: what price keeping HSBC and Standard Chartered HQ’d in the City? The answer to this question threatens to divide the Bank of England Governor from the Chancellor, the Conservatives from the LibDems and important parts of the City from the pots of gold in the capital markets of the East. I can’t imagine a more important question.