Goldilocks and the Griffin

The UK is forcing universal banks like HSBC to ring-fence their retail operations from their global and investment banking businesses – a sort of watered-down Glass-Steagall arrangement. The ring-fence will come into force in 2019, and banks are currently working out how to implement it.

HSBC is creating a completely separate UK retail entity with its own capital, management and head office. As part of this process, it conducted a review of possible locations for the unit's new head office, and concluded that London was not ideal. In March, it announced that the new UK retail bank head office would be in Birmingham, to the delight of local politicians and media. The announcement sparked approving remarks about the UK retail bank going “back to its roots”: HSBC’s UK retail arm was formerly Midland Bank.

Prior to its acquisition by HSBC, Midland Bank had a long and at times colourful history. It was founded in 1836 as the “Midland & Birmingham Bank”, and originally served businesses and households in the Midlands region. But it had larger ambitions. From the 1880s onwards it grew rapidly, acquiring a string of smaller banks. By the end of the century it had expanded far beyond local banking in the Midlands. It became a clearing bank in 1891 through acquiring the Central Bank of London, renaming itself the “London and Midland Bank”, and in 1898 it merged with City Bank, which gave it a London head office. It continued its acquisition spree throughout the early 1900s. By the end of WWI it was one of the world’s largest banks by assets. 

After the war, the acquisition spree ended, but the bank continued to develop its UK branch network, becoming the largest deposit bank in the world by 1934, a position it held for some time. It shortened its name to Midland Bank in 1923.

But Midland Bank wanted to be much more than just a UK retail bank. It developed an extensive global presence very early. HSBC’s association with the Midland (as it became known) goes back to 1907, when the then Hong Kong & Shanghai Bank became one of the Midland’s network of 650 correspondent banks. And it was the Midland’s overseas business, not UK retail banking, that was responsible for its decline and eventual failure.

By the 1950s Midland Bank had lost its leading position in international banking. It had developed its global business through correspondent banking, while other banks had established a more direct overseas presence through branches and subsidiaries. Anxious to catch up, in 1967 Midland Bank acquired a stake in the British merchant bank Samuel Montagu & Co., becoming sole owner in 1974. And it followed this up with a series of international acquisitions. One of the banks it bought was Crocker Bank of California, which Midland Bank hoped would give it a significant position in the important US marketplace. Briefly, Midland Bank became the tenth largest bank in the world.

But it didn’t last long. Almost immediately after the acquisition, Crocker Bank started to post enormous losses: in 1984 it lost $324m, a huge amount by the standards of the time. It turned out that Crocker Bank was riddled with bad real estate loans and toxic Latin American debt. Midland itself also had substantial portfolios of Third World debt: the two combined to knock a huge hole in Midland’s profits. Midland divested Crocker in 1986, but the damage had been done. In 1987 Midland posted an operating loss of £505m. From that moment on, Midland Bank was doomed.

The eventual takeover by HSBC in 1992 was presented to the world as a friendly merger, but those (including me) who worked for Midland Bank at that time know better. There is no such thing as “friendly” when a merger is the only alternative to collapse. We all knew this was a takeover. The disappearance of the familiar “griffin” logo from UK high streets inevitably followed in 1997.

(image: Daily Telegraph)

But now, HSBC seems to be on the verge of reversing this decision. It has announced that its UK retail banking operations will not only be ring-fenced with a new head office in Birmingham, they will be given a different name. The red-and-white HSBC logo will disappear from British high streets, to be replaced by…..well, we don’t know what, yet. HSBC says it intends to “consult with staff and customers”. But there is already speculation that the Griffin is about to stage a comeback. After all, if Lloyds can spin off a resurgent TSB, and RBS can re-create the almost forgotten Williams &Glyn Bank, what could possibly be better than for HSBC to bring back the familiar name and logo of Midland Bank?

To be sure, there are alternatives. HSBC’s First Direct online bank is popular and highly-rated: it was originally created by Midland Bank as an ancillary to its high street brand, not to replace it, but as all banks are becoming online banks now, perhaps the time is right for an online brand to become a premier High Street bank. But I don’t know. First Direct’s stark black-and-white branding works well for its marketplace, but would it translate to a high street environment where the principal customers are elderly people, families and local businesses? The Griffin is a lot cuddlier, and has a nostalgic appeal that First Direct probably lacks.

Personally, I would like to see the return of the Griffin. Midland Bank was the first bank that I worked for: the disappearance of the Midland brand was a loss to me even though I left HSBC not long after the takeover. 

The re-branding announcement has increased speculation about HSBC’s intentions regarding its UK presence. Is HSBC – which was originally based in Hong Kong - planning to spin off its UK retail arm and move back to the Far East? I think this is unlikely, at least at the moment, though HSBC is currently conducting a review into the best location for its head office and will announce its decision at the end of the year. But if bringing back the Griffin means that HSBC eventually leaves these shores, so be it. The UK will continue to be a premier financial centre even if it is no longer home to a giant bank whose main business is on the other side of the world. And it would be far better for the UK if its own banks were smaller. There aren't many of them - the UK has a pretty concentrated financial marketplace - and yet their combined assets are four and a half times the UK's GDP. That is far too high.  

I am no fan of small banks, and I don't want to see the UK attempt to replicate the overladen, expensive and technologically outdated German retail bank network. For me, it is the disappearance of what we might call the “middle layer” from the UK marketplace that is the real tragedy. We bail out large banks because we daren't let them fail, and we rescue smaller banks by merging them with large ones. I include building societies in this: Nationwide, now the UK's fifth largest lender, took over three smaller building societies in the aftermath of the financial crisis. The result is that a small number of banks become ever larger and more powerful, crowding out the rest, and we gradually lose our distinctive middle-sized high street banks and building societies. 

The EU has done us a favour by forcing the spin-off of TSB and Williams & Glyns. And we have new challengers such as Metrobank. But we need more. So let’s have Midland Bank back, not as it became in its latter days – a huge, sprawling conglomerate with no clear identity – but as it was in its salad days, a middle-sized retail bank centred in the Midlands and providing services to households and commercial businesses in England & Wales. Goldilocks had the right idea. Bring back banks that are neither too large nor too small, but just right for the UK. 

Related reading (courtesy of Daniela Gabor):

On being the right size - Haldane, Bank of England, 2012


  1. There was a huge political & regulatory failure in the 1990s with the 'carpet baggers' when the building societies demutualised and mergers were approved. This despite every other basic economics textbook at the time saying that allowing such mergers are inherently anti-competitive. The result was a small number of very large banks that were too big to fail and too big to jail.

    A classic case of 'regulatory capture' by large financial interests who captured not only the political party but also part of academia who really should have been far more vociferous in speaking out against the mergers at the time? As Ann Pettifor said on Channel 4 News earlier this evening, all of the horses from all of the stables have bolted. I won't be holding my breath for politicians & regulators to order the break up of the megabanks into their former component parts though.

    1. Yes, it was in the 1990s that the mid-size layer started to disappear - to our eventual cost.

      I don't think anyone is going to order the big banks to break themselves up. But they seem to be doing it anyway for reasons of costs and profitability.

    2. Is it not true that every demutualised building society has now gone bust?

    3. I signed up with the Midland, tugging the forelock before the Manager, some sixty years ago. It would be great to have it back, if it was anything like the same, alas that cannot be. If our local branch of Shanghai Lil's is typical there is a long way to go. Anyone straying there is given a thorough working over by the sales team. So that leaves online and that means getting the software right. Don't bet on it.

  2. As I suppose trade and tariffs, then political convergence, then an informal currency union, then a single currency.

  3. Super Mario is now the king of Europe. He can decide how will be poor and how rich... Obviously banks and funds...


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