Hong Kong & Shanghai Banking Corporation (HSBC)
1. The HSBC Group
The HSBC Group is named after its founding member, The Hong Kong and Shanghai Banking Corporation Limited, which was established in 1865 to finance the growing trade between Europe, India and China. -
Is based in Hong Kong, where the bank’s business has been physically conducted, and with a large network of branches in Asia, a very large London branch office, and several US branches, plus a subsidiary bank in California and a representative office in New York. -
HSBC carries its business in Hong Kong dollars, US dollars, European currencies and Japanese yen. -
Some of HSBC activities: receives deposits from local (Chinese) individuals and companies; loaned the money to both local borrowers and international banks in the Eurocurrency market; finances exports and imports with firms in the countries of the British Commonwealth (Great Britain and its former colonies) -
HSBC has been operating in the United States since 1875 when it first opened an agency in San Francisco. -
In the 1960s HSBC acquired the Republic Bank of California (with 11 branches in the state). -
A second agency was opened in New York in 1880 which converted into a branch in the 1970s as a result of a change in NY’s banking laws. -
By the 1970s the bank had firmly developed a policy of expansion by acquisition or formation of subsidiaries with their own identities and expertise. -
Other branches were established in Chicago, Seattle, and Portland and another subsidiary in was set up in Houston. -
During the 1980s HSBC concentrated on moving into those markets where it was not yet fully represented.
1.2. Brief description of the case.
Type of case:
Foreign Market entry
In 1980, the bank’s top management wanted to diversify its assets and activities across the world, placing about one-third of the total in Hong Kong, Europe and the United States. Michael Sandberg, chairman of HSBC in Hong Kong, was considering the alternatives for expanding in the US market.
Reasons to enter into the US market:
HSBC dealings in the Eurocurrency market had led to large deposits of US dollars, British pounds and other currencies, which the bank needed to lend to borrowers somewhere. -
HSBC had been already operating in the United States since 1875. -
Although HSBC had over a century of experience in international banking, it had never considered a major move into the US domestic market. -
In the late 1970’s, at a time where their British pounds, deutsche marks, and Japanese yen could buy far more dollars than in the 1950’s and 1960’s, many of the bank’s clients were establishing offices, factories, and other investments in the United States. -
Move into the US market as a hedge against the substantial risk of nationalization by the Chinese government. -
Interest on establishing domestic activities in the US, who was generally viewed as the least politically risky environment in the world. -
HSBC had a competitive strength: its large staff of experiences bankers who knew about both lending and borrowing opportunities in Asia that were little known to potential US clients.
2. The alternatives:
Setting up an agency in New York where over 90% of the international banking in the United States takes place. Advantages:
This would minimize the capital needed to enter the US market, since foreign bank agencies could use all of the capital of the parent bank as a base for their US lending. -
The agency would allow HSBC to lend to local clients as well as Chinese or other foreign borrowers. -
No major financial costs.
Deposits were restricted to foreign depositors.
US banking laws forbid agencies from taking local deposits. -
It would limit HSBC’s business primarily to dealing with foreign clients. -
Edge Act Corporations (International banking Act of 1978)
A wholly owned subsidiary incorporated as a normal US bank. Advantages:
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