HSBC Holdings plc is one of the largest banking and financial services organizations in the world. With its headquarters in London, HSBC has operations in over 60 countries and territories. The bank provides services to around 40 million customers worldwide. As of 2022, HSBC was the 7th largest bank in the world with $2.95 trillion in total assets.
Given its massive size and systemic importance, the collapse of a bank like HSBC could have far-reaching consequences for the global financial system. While HSBC weathered the 2008 financial crisis relatively well compared to some other major banks, its sheer scale means that its potential failure cannot be taken lightly.
We will explore the repercussions of what could happen if a massive bank like HSBC were to experience a catastrophic collapse. We will analyze the potential impact on financial markets, other large banks, economies, and consumers around the world. Factors discussed include exposure to bad debts, counterparty risks, impacts on confidence in the wider banking system, and the role government bailouts could play.
A Brief History of HSBC
To better understand the scale and importance of HSBC, it’s helpful to first review the bank’s 150+ year history and how it became a global banking powerhouse.
Founding and Early Years
The origins of HSBC trace back to 1865, when the Hong Kong and Shanghai Banking Corporation Limited was established in Hong Kong by Scottish businessman Thomas Sutherland. The bank’s initial purpose was to finance trade between Europe, India, and China.
The bank proved to be successful and resilient, surviving both World Wars, the Great Depression, and the Asian financial crisis. It established a branch in Shanghai shortly after its founding in Hong Kong, and opened its first UK office in Birmingham in 1836 before relocating its headquarters to London in 1993.
Global Expansion Through Acquisitions
Beginning in the 1950s, HSBC began its strategy of international expansion through acquisitions. It acquired a series of banks in Europe, the Americas, and Asia Pacific to establish its position as an international financial institution.
Some key acquisitions include:
- 1959: Hong Kong Bank of Canada (Now HSBC Bank Canada)
- 1965: British Bank of the Middle East This gave HSBC access to a network of banks across the Middle East.
- 1992: Midland Bank. This UK bank gave HSBC a large domestic customer base.
- 1993: Marine Midland Bank in the US, building HSBC’s presence in North America.
- 2002: Grupo Financiero Bital in Mexico, Mexico’s third-largest retail bank
By the 1990s, HSBC had established itself as one of a small number of large international banks operating across multiple continents.
Recent Challenges
While HSBC weathered earlier financial turmoil, the 2008 global financial crisis presented significant challenges. HSBC took $55 billion in writedowns on bad debts and toxic assets like subprime mortgage securities. It was also forced to raise over $17 billion in new capital to shore up its reserves.
In recent years, HSBC has faced further pressures, including money laundering compliance failures, large write-downs on acquisitions, major restructuring costs, and dividend cuts during the COVID-19 pandemic.
However, the bank’s geographical diversification has provided it with some resilience compared to banks centered in single markets. HSBC remains profitable despite facing recurring challenges over the last decade.
Scale and Importance of HSBC’s Global Business
HSBC today operates an enormous, interconnected global business across retail, commercial, and investment banking activities. This breadth and complexity introduce systemic risk.
Massive Global Footprint
With over 40 million customers worldwide and offices in 64 countries and territories, HSBC has one of the largest international footprints of any bank globally. It has a significant presence across Europe, Asia, the Middle East, North America, and Latin America.
HSBC is the largest bank in Europe, with over 14 million customers across the continent. In the US, it operates over 240 bank branches and serves around 3 million households.
Key Business Lines
HSBC operates across three major global business lines:
- Wealth and Personal Banking: Includes consumer banking, wealth management, and insurance activities focused on retail customers and affluent clients. This division accounts for about half of HSBC’s revenues and profits.
- Commercial Banking: Provides credit, lending, payments services, and other banking products to corporations and mid-market businesses globally. Also finances international trade and investment flows.
- Global Banking and Markets: HSBC’s investment banking division offers services like equities trading, credit financing, foreign exchange, derivatives, M&A advisory, and more.
HSBC is also one of the world’s largest credit card issuers and has a significant presence in areas like trade finance and securities services.
Systemic Importance as a Global Bank
Due to its enormous customer base, international reach, expansive balance sheet, and pivotal role in worldwide financial markets, HSBC is considered a globally systemically important bank (G-SIB) by international regulators.
This designation means HSBC’s financial distress or failure poses risks to the stability of the overall global financial system. The bank is deeply interconnected with other institutions and critical banking infrastructure worldwide.
Assessing the Likelihood of HSBC Failure
Given its designation as a systemically important institution, what is the actual likelihood that HSBC could fail or go bankrupt? Let’s look at some of the key risk factors and mitigating factors.
Capital Strength Provides a Buffer
HSBC maintains relatively healthy capital reserves, which offer loss-absorbing capacity and some protection against downturns.
As of June 2022, HSBC reported a common equity tier 1 (CET1) ratio of 14.2%. This exceeds the minimum regulatory requirements for large banks. The CET1 ratio measures high-quality capital as a percentage of risk-weighted assets.
HSBC also reported a total capital ratio of 17.7% as of mid-2022. So in aggregate, its capital cushions look reasonably robust currently.
Liquidity Position Appears Stable
In addition to capital reserves, HSBC appears to have a reasonably stable liquidity position presently. As of June 2022, its liquidity coverage ratio stood at 143%, indicating it holds sufficient high-quality liquid assets to fund itself for one month in a crisis scenario.
HSBC has also worked to diversify its funding sources and reduce its reliance on short-term wholesale funding. Its funding mix includes customer deposits, long-term debt issuance, interbank borrowing, and more.
Credit Risk Management Has Tightened
In the past, HSBC has incurred major losses from lax credit risk management, particularly in its overseas markets. However, oversight of credit standards has tightened over the last decade.
The bank’s ratio of non-performing loans looks reasonably healthy at this point, coming in at 2.4% as of mid-2022. HSBC also reports solid loan loss coverage ratios above 75%.
Pockets of credit risk likely remain, but on the whole, HSBC appears to have a tighter handle on underwriting and problem loans based on current metrics.
“Too Big to Fail” Status May Discourage Regulators from Allowing Collapse
Due to HSBC’s systemic importance and the adverse consequences of its failure outlined below, regulatory authorities would likely intervene to prevent a collapse, as they did with other large banks in 2008. This understanding could discourage regulators from allowing HSBC to actually fail, knowing the global financial chaos it would unleash.
However, past government bank rescues do not guarantee future bailouts. Political sentiment on taxpayer funded bailouts has shifted, so an HSBC collapse cannot be ruled out. But the systemic risk means regulators face pressure not to allow its outright failure.
Impacts of an HSBC Collapse
If HSBC did in fact fail or go bankrupt in spite of its systemic importance, what would the consequences be? The impacts would almost certainly be severe across customers, markets, and the broader economy.
Widespread Customer Disruptions
An outright HSBC collapse would be tremendously destabilizing for the bank’s tens of millions of retail, commercial, institutional, and corporate customers who rely on HSBC for deposits, transactions, credit, and other banking needs. Even routine banking business could be impossible, freezing customer access to funds. Winding down such a large, complex institution would take significant time, during which customers could not reliably access accounts and services.
Even if governments intervened to ensure continuity of basic services like deposits and ATMs, a collapse would still create headaches and financial stress for individuals and businesses dependent on the bank. HSBC has trillions in customer deposits; it would be chaotic for depositors if HSBC went under.
Contagion Through the Banking System
HSBC’s deep interconnectedness with other banks means its failure could cripple the broader financial system through contagion. HSBC is counterparty to trillions of dollars in interbank lending and derivatives transactions, which allow markets to function. If HSBC defaults on its obligations, it would undermine trust in the global banking system. Lending between banks could freeze up. This occurred, for example, with the failure of Lehman Brothers in 2008.
As other institutions incur losses on HSBC exposures, it could spark a cascading crisis as banks become unwilling to lend to each other. The collapse would remove a huge facilitator of international trade and cross-border flows, causing widespread funding problems.
Global Economic Destabilization
Due to the size and international breadth of its operations, an HSBC failure would almost certainly plunge the world into a severe global recession. Stock markets would crash as financial contagion spread. Credit markets would face a deep freeze that would leave corporations and consumers unable to access lending. Asset prices across property, commodities, equities, and more would sink dramatically.
With a giant counterparty like HSBC unable to fund transactions and maintain operations, international trade flows would grind to a halt. This constitutes a huge headwind for global commerce. Currency and foreign exchange markets would likely face massively destabilizing volatility as well.
Long, Complex Resolution Process
Due to HSBC’s vast scale and geographical scope, forcibly winding down the failed institution would take many years and national coordination between regulatory bodies. It would likely be messier and more complex than resolutions of past failures like Lehman Brothers. Customer access to deposits could be restricted for extended periods as authorities figure out how to separate out and maintain vital banking functions.
Responses and Resolution in the Event of Collapse
Regulatory and governmental authorities would be forced to take drastic, unprecedented action to try to limit the damage from an HSBC failure. Although the precise response can’t be predicted with certainty, some potential actions include:
Bank Bailouts and Backstops
To stabilize markets and the financial system, governments may have little choice but to orchestrate a bailout of HSBC using taxpayer funds. This could involve injecting fresh capital into the bank to recapitalize it and honor its obligations. Authorities could also provide funding backstops to facilitate vital transactions. Bailouts proved necessary across dozens of banks in 2008. Governments would face political backlash, but financial Armageddon may leave bailouts as the only viable option.
Temporary Nationalization
Governments could decide to temporarily take over HSBC operations to ensure continuity of deposits, transactions, payments, and other critical banking services on which the real economy depends. This nationalization of services could help avoid even deeper economic scarring while resolving the sprawling institution.
Spin-offs and Foreign Subsidiary Ring-fencing
Regulators may attempt to salvage viable parts of HSBC’s business by spinning off distinct operations domestically and internationally into new standalone banks. This could limit contagion and ensure the continuity of services regionally. As an example, HSBC’s Canadian subsidiary could be separated and protected from the failing parent company.
Targeted Asset Purchases
Central banks and regulatory bodies could selectively purchase assets from HSBC’s portfolio to provide liquidity to markets and stabilize asset valuations. This prevents firesales of assets that could further depress prices across multiple asset classes.
Strict Capital Controls
Imposing strict limits on cross-border capital flows could help emerging markets protect themselves from liquidity issues and economic impacts. This helps reduce financial contagion across borders. However, global coordination challenges and unintended consequences mean this is an imperfect solution.
Suspension of Regulations or Standards
To facilitate a less disruptive wind-down, regulators may suspend certain rules, oversight standards, or capital requirements as they intervene in an HSBC failure. This could smooth the crisis response, but also introduce moral hazard into the financial system over the long run.
Conclusion:
While an outright collapse of HSBC in the near term seems unlikely, the risk remains and would have severe implications across the globe. Due to its systemic importance as the world’s seventh largest bank with a presence in 64 countries, an HSBC failure would resonate through the financial system and broader economy. It would necessitate unprecedented intervention by central banks and governments worldwide to resolve the complex institution and mitigate catastrophic impacts on trade, employment, asset values, and everyday banking customers.
FAQs:
How likely is an HSBC collapse actually?
In the near term, an outright collapse remains unlikely, but risks have climbed given the challenging economic environment. HSBC’s strong capital position and liquidity provide some buffer, but its vast scale means an unexpected shock cannot be ruled out.
Would HSBC customers lose their deposits if it failed?
Governments would make every effort to protect insured consumer deposits in an HSBC collapse. However, even with intervention, customers would likely lose access to accounts and transactions, causing significant hardship for individuals and businesses.
What are the early warning signs of an impending HSBC failure?
Deteriorating capital and liquidity ratios, spiking loan defaults, credit rating downgrades, falling stock valuations, customer deposit withdrawals, and regulatory penalties may indicate HSBC is in danger of failing.
Could HSBC be allowed to fail without a taxpayer bailout?
While governments have become less willing to fund bank bailouts since 2008, the systemic importance of HSBC means that letting it fail completely would likely prompt another taxpayer rescue.
Which country would be most impacted by an HSBC collapse?
The acute impacts would be most severe in the UK, where HSBC’s investment banking and headquarters operations are based. But the broader economic fallout would quickly become global.