Corporate histories have a reputation for being dutiful, detailed, dull doorstops. This one isn’t. It is well-written, clear, and of interest not just to former employees of HSBC but to any one of the legions of people now interested in and concerned about the history of banking in the past few decades.

HSBC emerged from the financial crisis in better shape than any other large international bank. It didn’t ask for any government support, and didn’t need any. Desperate Wall Street investment banks pestered it in the autumn of 2008 with invitations for collaborations of various sorts, with the transparently obvious motive of getting their hands on HSBC’s ample capital and liquidity. HSBC made mistakes of its own, but it did not allow any of them to become life-threatening.

Roberts and Kynaston have examined HSBC’s archives thoroughly and have produced a coherent and convincing account of what HSBC thought it was doing from the 1970s onwards – the period when banking generally began to be deregulated, and when HSBC itself developed global ambitions. The result is a gold mine for anyone who wants to understand how at least one group of bankers were motivated in that crucial period.

Until the 1970s, HSBC was mainly an East Asian bank. Its headquarters were in Hong Kong, where is performed many of the functions of a central bank (there was no central bank proper). It had a strong and distinctive culture, embodied above all in its cadre of international officers. These were a group of bankers recruited in their youth and trained in the virtues of prudence, pragmatism, effective management and loyalty to the bank. They could be sent to run remote branches or subsidiaries, and could be relied on to do a good job and to uphold the bank’s reputation.

In the 1970s, the bank decided on a major global expansion, intending to establish itself as a major force in both America and Europe. In effect, it wanted to capitalise on its management strengths, and the safe stream of profits from its home market. The progenitor of the plan was Michael Sandberg, who was HSBC’s chairman from 1977–1986, and he and his two successors, Willie Purves (1986–97) and John Bond (1997–2006), implemented it. HSBC’s technique with new acquisitions was to use the existing managers to run the operation as far as possible, to monitor what was happening closely, and to strengthen the grip of its own managers if things went wrong.

Thus in 1980, HSBC bought Marine Midland bank, an upstate New York bank. Things did go wrong there initially, and it took HSBC and its international officers several years to reshape the bank successfully. In 1981, it tried to buy Royal Bank of Scotland, but was prevented from doing so by the Governor of the Bank of England, Gordon Richardson, for reasons that even now are not entirely clear. Later, in 1992, HSBC made an even more spectacular acquisition in the UK when it bought Midland Bank, one of the big four London clearing banks, which had fallen on hard times. It made a great success of Midland, again with considerable help from its international officers.

Other acquisitions were less successful. HSBC was unwise to get involved in Argentina, where the government, in abandoning its currency board in 2001, effectively expropriated banks by passing a law converting bank loans into devalued pesos but requiring deposits to be paid in dollar value. And HSBC missed an opportunity to make a lot of money in central and eastern Europe in the early post-Communist years of the 1990s.

Without doubt, HSBC’s worst acquisition was Household, a retail lender in the United States, which HSBC bought in 2003. Ironically, one of HSBC’s main reasons for buying Household was that at the time HSBC, having large amounts of liquidity, was lending around $150 billion each day in the overnight inter-bank wholesale money market. Anxious about the credit risk it was running, it wanted a more diversified and perhaps more lucrative outlet for its money. Household took it out of the frying pan of the inter-bank market into the fire of U.S. sub-prime mortgages. Another of HSBC’s reasons for buying Household was to get access to its renowned credit-scoring model, so as to apply it in other countries. HSBC discovered too late that the model required as an input data that were simply not available for borrowers outside the USA; moreover, in the light of the behaviour of Household’s assets, the model cannot have been very reliable even on its home territory. In fact, acquisition by HSBC probably damaged Household, because HSBC was a source of more ample funding than the market had been before the acquisition, so that Household had the scope to make even more bad loans. Household cost HSBC a colossal amount of money and management time. The best that can be said of the episode, and it is highly significant, is that HSBC realised quite quickly that it had made an enormous mistake, and was able and willing to write off the losses and get out of the business. In doing so, it saved its shareholders from further losses that might have endangered the bank itself.

Like other banks, HSBC was unable to maintain proper standards of behaviour among its staff. It violated US sanctions, and failed to prevent its Mexican subsidiary from being used for money laundering. The U.S. Department of Justice asserted that HSBC’s anti-money-laundering programme in Mexico was not fully up to the group’s required standards until eight years after the acquisition (p. 630). There were serious problems in the UK, where its staff were for a period incentivised to rip off its customers by ‘cross-selling’ them products of little value at large prices, notably payment protection insurance.

The impressive body of evidence collected by Roberts and Kynaston provides a test-bed for the theory of bank behaviour articulated by Admati and Hellwig (The Bankers’ New Clothes, Princeton University Press, 2013), and endorsed, explicitly or implicitly, by many others. Governments cannot tolerate the disruption, dislocation and economic misery that the failure of a big bank would cause, so that some banks are too big to fail; and if they get into financial distress, they have to be rescued. According to Admati and Hellwig, that affects their behaviour profoundly. For example, they attract deposits and other forms of credit in larger amounts and on easier terms than would otherwise be the case. As a result, they can afford to take bigger risks. The shareholders might be expected to restrict the banks’ risk-taking, but do not, because they have only limited liability for losses, but they get a share of the profits, with no upper limit. Their exposure is asymmetric, and they have an incentive to welcome risk-taking. The reason why the shareholders get only a share of the profits of successful risk-taking, rather than all of the profits, is that the staff also get some of them, in the form of bonuses. Again, like the shareholders, the staff have limited downside, and they too have an incentive to welcome risk-taking. This is an explosive combination, and it is no surprise, according to believers in this theory, that an explosion occurred.

How does the theory stand up in relation to HSBC’s experience? Until 1993, HSBC was incorporated in Hong Kong, which was then a British colony. As already noted, it performed some of the functions of central bank, and its failure would certainly have caused great distress in Hong Kong. However, colonial Hong Kong was run strictly according to the principles of free markets, and if HSBC had somehow got into financial difficulties, it is nevertheless unlikely that the colonial authorities would have supported it. In fact, HSBC was conservatively managed and there is no reason to think that anyone concerned with it gave any currency to the idea that it was free to take additional risks because it was too big to fail.

HSBC relocated to the United Kingdom in 1993, as a condition of acquiring Midland Bank. The U.K. government, more pragmatic than that of Hong Kong, was unlikely to allow a big bank to fail. The Admati-Hellwig theory therefore cannot be dismissed out of hand as an explanation of HSBC’s behaviour; the predictions of the theory have to be examined against detailed evidence.

As regards depositors and creditors, HSBC always found it easy to attract funds. During the financial crisis, it became easier still, and HSBC had to develop means of deterring or otherwise dealing with unwanted deposits. All the evidence provided by Roberts and Kynaston suggests that this was because of HSBC’s intrinsic financial strength, rather than because of belief in a bail-out.

As regards shareholders, the evidence is mainly circumstantial. It is not clear how the counter-cultural behaviour of HSBC staff towards customers, particularly in the U.K., came to pass. Roberts and Kynaston provide what I believe is a clue, in the form of the ‘managing for value’ programme, initiated in the 1990s, which was intended to ensure that the bank was managed in the interests of the shareholders, as it should be. ‘Managing for value’ followed a trend set by Lloyds Bank, which had concluded that it was in the best interests of its shareholders to concentrate on domestic UK markets, where the returns were highest. Lloyds therefore largely withdrew from international operations and kept out of investment banking. 

The trend became established, but in many banks, the pursuit of shareholder value was subtly but crucially misinterpreted as the pursuit of measurable shareholder value, that which was unmeasurable being ignored or regarded as non-existent. In this way, improving short-term profits in ways that did long-term damage to the bank was entirely acceptable, provided the long-term damage was not quickly reflected in the share price. Such damage being unmeasurable in the short term, it generally wasn’t immediately reflected in the share price. Shareholders did not really understand banking and they and the directors of the banks failed to comprehend that the banks were gradually changing from being institutions which customers could trust with their money to companies which customers had to watch carefully if they wanted to look after their money. All banks had much the same group of shareholders. HSBC was perhaps less affected by all this than the other big British banks, because of its strong internal culture, but it was not immune.

The low point of crass shareholder involvement in HSBC’s management arrived, with exquisitely ill-chosen timing, in 2007, just as the credit crisis was beginning:

On 4 September, Eric Knight of Knight Vinke Asset Management (based in New York), in tandem with the California Public Employees’ Retirement System (the largest public pension fund in the USA) sent Green a trenchant ten-page letter. It claimed to detect on management’s part ‘a fundamental lack of ambition’; it criticised extensively performance in recent years in comparison with peers and market indices; and it asserted that the shift of assets since the 1990s from Hong Kong and Asia to Europe and the USA had badly damaged value, as had, ‘Poorly executed attempts at building a major investment banking and capital markets business.” In short, “The sad truth’ was that ‘HSBC has become the stock to short because it can be counted on to underperform.” (p.459. Stephen Green was the chairman of HSBC.)

This was, in effect, a complaint that HSBC had not jumped as wholeheartedly as its competitors on all the fashionable bandwagons. Fortunately, it elicited no positive response from HSBC.

By contrast, HSBC’s staff, or at least its international officer cadre, formed a bastion of conservatism and stability. They sorted out problems and, probably because they expected to remain with HSBC for their entire careers, took a long-term view of the bank’s interests. It is of course true that other staff members initiated or participated in the various abuses that took place in the noughties, perhaps mesmerised by bonus formulas and perverted assessments of shareholder value.

To summarise, the Admati-Hellwig theory cannot plausibly be used to explain the pre-1993 behaviour of HSBC. Post-1993, the theory does not provide a particularly compelling explanation of the behaviour of depositors. And while it explains some of the behaviour of the staff, it does not admit the important possibility that staff members can be an important source of stability in bank behaviour, as many of them were at HSBC. Admati and Hellwig do, however, seem to have a point about shareholders, who were perhaps the most destabilizing group at HSBC.

Despite all the problems, HSBC emerged from the crisis in a very strong position as regards both capital and liquidity. It did much better than Citibank, which it had for a long time regarded as both a role-model and a rival. Citibank was certainly a force for good in many countries where it was able to establish and entrench good banking practices, and it set up in many of those countries before HSBC did. But it suffered badly from erratic management at the top, and had to be rescued several times by action of various sorts from the U.S. financial authorities.

However, since the crisis HSBC has not exploited its relatively successful performance and its continuing financial strength by increasing the scale of its business. Its total assets have grown at an annual average rate of only 1.6% since 2007 (compared with 13.5% from 1991 – 2007). This is much slower than, for example, the average for U.S. banks. Why? There are several possible answers, not mutually exclusive:

International banking has declined disproportionately to banking generally. HSBC’s reward for its relatively good performance is that its assets have at least not contracted (as Citibank’s have), even if they haven’t grown very much.

After the travails of the crisis, HSBC’s board has become more conservative. It can be said that the programme of acquisitions stretched HSBC’s management cadre to its limits, and in any case HSBC’s ambition of becoming a global bank has been realised. Other dimensions of possible expansion have been examined and rejected: HSBC decided not to move into investment banking in the same way, as for example, Barclays did, because it was fearful of clashes of culture. It is not obvious what direction any further major expansion would take.

Official regulation and supervision has become vastly more detailed and intrusive, even for banks that needed no official support. The present chairman, Douglas Flint, has said that as a result, the staff have become more risk-averse, indeed, more risk-averse than he would really like.

The post-crisis debate on banking has been too reliant on stereotypes of bankers and their behaviour. If it is going to help the world find its way towards a more stable and useful banking system, the stereotyping needs to be replaced by realism. Roberts and Kynaston’s work can be immensely useful in this, by showing how an international bank can be run well, and how the damage from bad decisions can be contained.