Europe’s largest bank HSBC warned that regulators’ zeal to punish wrongdoing was putting its staff off taking reasonable business risks, as it reported a 12 per cent drop in first-half profit.

Lost revenue from closing businesses and a slowdown in investment banking  pushed HBSC to a 12 per cent drop in pretax profit to $12.3 billion in the six months through June, just below an average forecast of $12.5 billion from 15 analysts.

Revenue dropped nine per cent to $31.2 billion, partly due to some businesses having been sold.

Chairman Douglas Flint called on regulators to clarify what they expect of bank staff after recent record sanctions for misconduct, including a $9 billion US fine against France’s BNP Paribas, had left them fearful of retribution.

“There’s a creeping concern that staff are clearly very focused on the penalties for getting things wrong and are building risk-aversion into the way they think,” Flint said yesterday.

“We’ve got to avoid getting to the state where there’s a zero risk tolerance.”

Flint said too-harsh rules could hurt lending in areas such as commercial banking, where products can be complicated. Industry sources have warned of unintended consequences from the regulatory clampdown, including the threat that lending will be cut to people or businesses in poorer countries.

Since the action against BNP Paribas for breaching US sanctions, international banks have become hyper vigilant about following new rules, including recent moves by Washington and Brussels to freeze some Russian state-controlled firms out of western capital markets.

HSBC was fined $1.9 billion in 2012 for breaching US sanctions on money laundering in Mexico. Since then it has pulled out of business areas and countries, including Panama, to cut the risk of future problems.

The bank said it is spending about $800 million a year more than in 2011 on compliance across its operations in 74 countries as politicians and regulators demand tighter compliance and better standards across the industry.

Excessive risk-taking has been blamed as contributing to banks’ problems and regulators are forcing banks to hold more capital and liquidity to prevent a repeat of the financial crisis of 2008 and 2009.

HSBC and its rivals still face the risk of further fines and legal costs from investigations including a global probe into alleged manipulation in foreign exchange markets. The bank said any fines or penalties from the forex probe could be significant.

Under new UK rules, the bank also has to separate its UK retail operations from its riskier investment banking arm and it warned yesterday of a substantial one-off cost to do that.

Chief executive Stuart Gulliver said the split would cost hundreds of millions of pounds each year.

Profits in Latin America, where HSBC is focusing on Brazil, Argentina and Mexico, fell by a fifth to $374 million and profits in its investment bank fell 12 per cent to $5 billion, mainly due to a fall in foreign exchange trading revenue.

Replacing lost revenue is one of the biggest challenges for HSBC. - TradeArabia News Service