It's not totally clear that HSBC would benefit from moving to Hong Kong

The big meme of the weekend was this: HSBC is leaving London for Hong Kong; its shareholders want it to relocate because if it does, the share price will rise 30% (literally) overnight.

The source of the idea was the Telegraph, which claimed to have spoken to HSBC's top institutional investors. They, in turn, claimed to have been told that the forthcoming tri-annual review of HSBC's location was merely a formality and that HSBC would probably be leaving: the arguments for doing so were said to be "overwhelming."

HSBC has since denied the done-ness of the deal and says it does want to stay in London, but its shareholders (60% of whom are based outside the UK) keep asking why this is.

Although HSBC's 8,000 or so workers at Canary Wharf have an air of permanency, the bank hasn't always been based here. HSBC was headquartered in Hong Kong until 1992, at which point it bought Midland Bank and moved to London.

The case for going

The case for leaving is centred around both cost and capital. When it announced its results last month, HSBC said costs had become, "unacceptable."

In global banking and markets, the cost income ratio was 49.9%, up from 39.1% in 2009. This was partly due to the UK bonus tax (173m) and partly due to the UK banking levy ($600m). With luck the bonus tax will not be repeated. However, the banking levy could be avoided if HSBC were in Hong Kong.

The biggest push factor, however, seems to be capital requirements. The Hong Kong Monetary Authority reportedly requires banks to hold less capital than the FSA. By moving to Hong Kong, HSBC could leverage up its balance sheet, avoid cutting its return on equity target to 12-15% from 15-19%, and recover last week's 5% fall in its share price. Or so the story goes.

The case for staying

Could it really, however?

Even banks in Hong Kong are obliged to abide by Basel III, making higher capital costs unavoidable in Asia too.

By moving to Hong Kong for this reason, HSBC would expose itself to allegations of regulatory arbitrage and damage its reputation for steady solidity.

It's also unclear that shifting some of the 8,000 staff currently in Canary Wharf to a new headquarters in Hong Kong would really save money.

As HSBC revealed last week, the average person categorised as 'code staff' (risk takers and senior managers) at its offices in London now receives a bonus 30% lower than their counterparts globally. Ok, this is partly down to higher base salaries in London, but the reality is that pay in Asia is increasing fast.

Standard Chartered and UBS have both complained of the same phenomemon. As our Hong Kong site notes, local headhunters are already getting warming to the prospect of lots of poaching fees.

By moving to Asia, it's therefore quite likely that HSBC would increase staff costs, irritate the British government, create the impression of regulatory opportunism, and place itself in a challenging time zone in which it's difficult to do business with the US. It's not surprising it wants to play the prospect down.