Banks bounce back but warn of troubles to come

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The Independent Online

Excessive regulation in response to the financial crisis could create a second credit crunch, the chief executive of HSBC warned yesterday.

Michael Geoghegan also said the shift in economic power from West to East was "clearer than ever". Many analysts expect HSBC to eventually make that shift itself by relocating its headquarters from London to Hong Kong, where Mr Geoghegan is based.

The chief executive was speaking as the bank said its performance in the first quarter was "well ahead" of the same period last year, with even its previously troubled US business showing a profit for the first time since the second quarter of 2007. It benefited from a sharp reduction in loan losses, rising savings and growing confidence in the country's housing market.

However, Mr Geoghegan said growth in developed Western economies would remain "challenging" for some time, in contrast to emerging markets whose recovery he said was proving "solid".

He added: "It is in everyone's interest that we have a stronger regulatory framework, with more responsible banks and more effective regulation which doesn't restrict real economic growth. We agree that aggregate levels of capital and liquidity in the financial system must be increased.

"But we are concerned that, if increased too quickly, these measures could constrain banks from lending to customers when they need it most. The risk is that this could drive a new credit crunch, and stall recovery."

Asked about Britain – the only European economy to which HSBC has a significant exposure – the banking group's finance director, Douglas Flint, said that the UK was "structurally very different" from Greece or the other troubled eurozone economies with benefits such as "a good tax base, a flexible economy [and] a well capitalised banking system".

However, he called on the political parties to provide "clarity" on cutting Britain's budget deficit. "The big thing about the budget deficit is that the market wants to see clarity on how to address it and over what timescale," he said, adding that the incoming administration needed to address the issue to "create confidence".

While HSBC's shares ended the day lower, they fell far less than the wider market, in contrast to Royal Bank of Scotland, whose results were viewed as disappointing by analysts despite it reporting the first quarterly operating profit since the first quarter of last year.

At the close, the taxpayers' 84 per cent stake in the bank was again below 50p, the price above which the state's holding shows a profit. RBS reported a first-quarter operating profit of £713m against a £1.4bn loss in the previous three months.

The bank was helped by a fall in impairments as a result of bad loans, which fell from £2.9bn to £2.7bn, and a 35 per cent rise in income in its investment banking division.

But its operating profits from investment banking more than halved to £1.5bn from £3.5bn a year ago, while overall staff costs increased by £300m to £2.6bn. Restructuring and other non-operating costs meant that RBS lost £21m before tax.