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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

HSBC’s exposure to defaulted commercial property loans in Hong Kong surged almost sixfold to more than $3bn in the first half of this year, underscoring the risks the UK bank faces from a slump in the Chinese territory’s real estate market.

The London-headquartered bank had $3.2bn in “credit impaired” commercial real estate loans to Hong Kong clients as of June 30, up from just $576mn six months earlier, according to its financial report for the first half of this year.

Hong Kong is HSBC’s largest market for commercial real estate lending, accounting for 45 per cent of its exposure, in comparison with 18 per cent for the UK.

The bank’s total global commercial real estate lending was $79bn as of June. The $3.2bn in credit impaired loans made up 9 per cent of HSBC’s total Hong Kong commercial real estate lending.

The leap in defaults is a sign of how the commercial property downturn in Hong Kong, a financial hub that has for years been one of the world’s most expensive real estate markets, has started to hit banks. Prime office rents have fallen more than 35 per cent since 2020, according to commercial property adviser Cushman & Wakefield.

While banks have been under pressure for several years over their exposure to mainland China’s property market, the focus is now shifting to Hong Kong, said David Wong, head of North Asia bank ratings at Fitch.

“We’re a lot more comfortable saying a line has been drawn under [banks’ exposure to] China commercial real estate, versus Hong Kong,” Wong said. “I don’t think we’ve seen the bottom yet.”

Under the bank’s definition, those borrowers have breached the terms of their loan. That can include missing payments but it can also include “non-financial” measures such as the loan-to-value ratio missing an agreed target figure.

Georges Elhedery, who became HSBC’s chief executive in September, said on a call with analysts in early August when he was chief financial officer that the loans were “all performing” even though “a large number” were classed as credit impaired.

However, the bank said “certain borrowers have sought payment deferrals to accommodate debt serviceability challenges” in its financial report for the first half of this year, published on July 31.

HSBC told the Financial Times this week that “a lot” of the borrowers are still paying interest. A spokesperson for the bank declined to provide figures on how many borrowers were paying interest or to offer more detail on Elhedery’s comment.

Standard Chartered, which as with HSBC has more exposure to commercial property lending in Hong Kong than any other region, reported a rise in the proportion of lower-rated borrowers in its most recent earnings, though it did not mark any of the loans as credit impaired.

The lender has cut its unsecured exposure to Hong Kong commercial real estate borrowers by 19 per cent since the end of 2022, it said in filings in July. Standard Chartered declined to comment.

Higher interest rates have put Hong Kong borrowers under pressure at a time when demand for office and retail space has fallen, with China’s economic slowdown and Beijing’s national security crackdown hitting international investor confidence. Tough zero-Covid measures also prompted an exodus of foreign workers during the pandemic.

The HSBC figures show that Hong Kong groups accounted for 45 per cent of the bank’s total credit-impaired commercial real estate lending as of June, up from 13 per cent six months earlier.

Elhedery said on the earnings call that the bank had taken a “probably prudent approach” in reclassifying the loans and was “comfortable and confident in the medium-to-long-term outlook” for Hong Kong’s commercial real estate sector, which would benefit from any rate cuts.

The bank said in its filing that its collateral coverage was strong and “broadly stable” even as valuations fell, and it was making “relatively low” provisions for credit losses on the loans because of high collateralisation.

“I think for those of us living in Hong Kong you can see vacancy rates are higher at this point,” said Ming Lau, the bank’s Asia chief financial officer, on the analyst call. But he said that the loans were structured so that the bank had recourse to “other assets and cash” of the borrowers.

Eleven of Hong Kong’s biggest property developers have written down the value of their investment property portfolios by about $23bn since 2020, according to data compiled by UBS for the Financial Times.

Mark Leung, a property analyst at UBS, said there could be more writedowns for Hong Kong’s developers in the near future. “For offices, rent probably will continue to come down due to the inflated supply issue, and vacancies could edge up,” he said. 

Many of the territory’s property companies are controlled by tycoons and their families. Sun Hung Kai Properties is controlled by the Kwok family, Henderson Land Development by the Lee family, CK Asset by the Li family and New World Development by the Cheng family.

Gary Ng, a senior economist at Natixis, said that while the developers are expected to remain under pressure, most retained “sound financial positions” and could tap “old money” held by the tycoons and their families.

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Angela Rayner has insisted she gave “nothing” to Lord Waheed Alli in return for the wealthy Labour peer’s generous donations, including a five-day stay in a Manhattan apartment and thousands of pounds of free clothing.

The UK deputy prime minister told the BBC as Labour’s annual conference kicked off on Sunday that politicians from all parties had accepted gifts “for years” and that “all MPs do it”.

“I promised nothing and gave him nothing in return,” she said of Alli’s donations.

The media tycoon has been at the centre of a furore that has overshadowed the run-up to Labour’s first conference as a party of government in 15 years.

Alli has given thousands of pounds of gifts including free clothing to seven sitting cabinet ministers including Rayner and Prime Minister Sir Keir Starmer.

Starmer initially failed to declare clothing gifts from Alli worth £16,200 to the prime minister personally and £5,000 to his wife.

Rayner said she understood that the general public was “angry and upset” and said that the rules had to apply to everyone in politics. “If there is a national debate about how to fund politics . . . let’s do that.”

Both Rayner and chancellor Rachel Reeves declared gifts of thousands of pounds of clothing from donors in parliament’s register of interests as generic support for their political work, the Financial Times revealed.

On Friday, Labour officials finally admitted that a £3,550 donation from Alli to Rayner in June consisted of work clothing.

They also confirmed that three other donations worth £17,650 from Alli had been spent at least in part on clothes. 

In an attempt to shut down the scandal, the party pledged on Friday that Starmer, Reeves and Rayner would not take any free clothing in future.

The Sunday Times today raised fresh questions, reporting that Rayner registered a five-day stay at Alli’s luxury Manhattan apartment for the new year but did not lodge the fact that her friend Sam Tarry stayed with her.

She said on Sunday that this did not break the rules. Her team said the presence of Tarry — who was a Labour MP at the time — did not need to be reported because Alli did not know he was there. 

Asked why she stayed in the flat for free, she told the BBC: “As friends do, a friend allowed me to stay . . . people do stay at other people’s apartments.”

On Sunday morning Rayner, who is also housing secretary, will promise a package of measures to ensure “decent homes for all” when she addresses the Labour conference in Liverpool.

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Economists are rarely ever unanimous. But one matter on which they almost all agree is the need for carbon pricing. Their support is paying off. The principle that polluters should pay is in increasing force around the world. In an interview with the Financial Times last week, Ngozi Okonjo-Iweala, the head of the World Trade Organization, said that globally there were 78 different carbon pricing and taxation mechanisms. They cover close to one-quarter of international emissions, up from just 5 per cent in 2010, according to the World Bank.

The expansion of carbon pricing policies is welcome. They provide an incentive for polluters to shift to cleaner energy sources and to invest in green technology and efficiency. Emissions covered by the EU’s Emissions Trading System — which combines a cap on emissions with a mechanism to trade allowances — have fallen by close to 40 per cent since 2005. China is looking to expand its ETS; Turkey and Brazil plan to introduce one, too. But as more nations place a price on their carbon emissions, whether through taxes, trading schemes or indirectly via regulation, global trading tensions are also rising.

The EU’s carbon border adjustment mechanism, launched last year, is a case in point. Eventually it will require exporters to the bloc, who pay lower or no carbon prices at home, to pay a levy linked to the EU’s carbon price. The idea is to level the playing field for European manufacturers that pay the ETS. But it is already triggering complaints from trading partners — in particular, that it burdens poorer nations with additional costs and administration. Countries could levy equivalent carbon taxes at home, to avoid the border charges, but they struggle to do so politically, or think it is unfair they should have to.

Okonjo-Iweala says the answer is a global carbon price. That is logical. Aligning carbon price regimes would reduce trade frictions, and alleviate concerns around arbitrage, where heavy emitters move to areas with lower prices. Reaching an agreement on prices, let alone regulatory equivalence, at an international level, however, will not be easy — or fast. And given signs that the world is warming faster than expected, carbon prices swiftly need to grow wider, and higher.

There is a way forward. First, more governments should realise that hesitancy over carbon pricing is increasingly futile. The world is shifting away from fossil fuels, and green subsidies are expensive. Politicians can build support at home by using revenues from carbon taxes to cushion their impact, reduce debt, or raise public investment. Income from carbon pricing schemes globally surpassed $100bn last year, a record.

Second, as more countries adopt their own carbon pricing, trade distortions and threats to competitiveness will ease. Indeed, the potential additional cost of trading with the EU, has jolted others into action. Given its prominence in global trade, expanding the bloc’s CBAM to more industries, will in turn help widen the scope of carbon pricing elsewhere. The US is now exploring carbon pricing on its imports, too.

Third, however fraught, efforts to synchronise global trade and climate policy should continue. Nations will want to adopt bespoke carbon measures, but over time they can be clubbed together. Multilateral institutions can champion this bottom-up process. That means providing expertise and administrative support to developing nations seeking to develop carbon regimes, and acting as a forum to nudge the biggest economies towards alignment.

Carbon pricing is just one part of the large policy arsenal needed to tackle global climate change. But failing to build on recent momentum would be a missed opportunity.

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All foreign policy is in part economic. Most economic policy is also of geostrategic import. These basic facts are well appreciated in Washington and Beijing. Not so in the capitals of Europe.

That is why, of the numerous thoughtful proposals in Mario Draghi’s report on European productivity, none is as intriguing or potentially far reaching as his call for a European “foreign economic policy”. The very realisation that none exists is a step forward.

What would it mean for the EU to have one? Most obviously, that even domestic economic policy would be made in light of geostrategic goals. Draghi explains such policy as “statecraft . . . to co-ordinate preferential trade agreements and direct investment with resource-rich nations, build up stockpiles in selected critical areas, and create industrial partnerships to secure the supply chain of key technologies”.

The need for such statecraft goes much further than Draghi’s focus on securing critical resources, to green industrial policies broadly and beyond.

For example, the EU’s new carbon tariffs have incentivised other jurisdictions to adopt carbon-pricing schemes of their own. Yet this effect, very much in the EU’s interest, is an afterthought rather than the policy’s principal purpose. (That was to prevent green European industry from being undercut by carbon-intensive imports.) It was more happy coincidence than statecraft.

New EU rulemaking on supply-chain sustainability (over deforestation, for example) has caused diplomatic frictions, with trade partners seeing it as protectionist. This caught Europeans unawares — something a foreign policy perspective could have avoided.

The point is not that such a perspective would or should have tempered the pursuit of domestic goals. On the contrary, placing geostrategic considerations at the centre of domestic economic decision-making would more often than not raise the level of ambition.

Take the European Central Bank’s work on a digital euro. It has largely focused on effects on the Eurozone’s domestic monetary system — which has led to a consensus on tight limits on the digital euro amounts anyone could hold to protect legacy banks’ business models. A foreign policy perspective would lift the euro’s international role and the strategic advantages it could bring. It would thus emphasise that letting foreign users hold ample digital euros easily would encourage euro invoicing in international trade, and tie other economies more strongly to the EU’s.

Similarly, a foreign policy perspective would inject much-needed urgency into the projects to unify EU banking and financial markets. National divisions sap Europe’s collective economic strength and increase its dependencies on other countries.

The issue of decarbonising Europe’s car fleet is where an EU foreign economic policy approach is most starkly needed. It should be obvious that EU countries need both a larger inflow of Chinese electric vehicles in the cheaper segment and also a sufficiently large domestic market for EU carmakers to confidently make the investments necessary to ramp up their own EV production capacity.

This requires a combination of policies: a managed openness to Chinese imports, a much stronger tilt of consumer subsidy and procurement policies towards EU-produced EVs, and an overall quantitative judgment of how much of each is optimal. Crucially, that judgment must be explicitly calibrated against what Beijing is willing to do in return. The obvious asks are for China to use more of its soaring EV production capacity itself and reduce its complicity in Russia’s egregious violation of Ukraine’s sovereignty.

Such joined-up policymaking is only possible if foreign policy and domestic economic and industrial policy are made as one. Simply put, that means Kaja Kallas — the EU’s incoming top foreign policy official — must be involved in decisions about taxation of corporate vehicles, and decision-making on EU’s capital markets and banking union must keep foreign ministers in the loop.

The structure of the EU discourages that. Commission president Ursula von der Leyen has tried to overcome this through an extreme centralisation of decision-making, but that is politically unsustainable outside the most acute crises. The make-up of her new commission suggests a welcome attempt to institutionalise joined-up thinking.

But that leaves national leaders who ultimately hold the most power in the EU. Realising an EU foreign economic policy requires enough national leaders to jointly make economic policy with collective strategic goals in mind. Europe will become strong in national capitals or not at all.

martin.sandbu@ft.com

US banks made a $1tn windfall from the Federal Reserve’s two-and-a-half-year era of high interest rates, an analysis of official data by the Financial Times has found.

Lenders got higher yields for their deposits at the Fed but kept rates lower for many savers, the review of Federal Deposit Insurance Corporation data showed. The boost to the US’s more than 4,000 banks has helped pad out profit margins.

While rates on some savings accounts were raised in line with the Fed’s target of more than 5 per cent, the vast majority of depositors, especially those at the largest banks, such as JPMorgan Chase and Bank of America, got far less.

At the end of the second quarter, the average US bank was paying its depositors interest at the annual rate of just 2.2 per cent, according to regulatory data that includes accounts that do not pay interest at all. This is higher than the 0.2 per cent they paid two years ago but far lower than the Fed’s 5.5 per cent overnight rate that the banks themselves can get.

At JPMorgan and Bank of America, annual deposit costs were 1.5 per cent and 1.7 per cent, respectively, according to this data.

Those lower payments to depositors generated $1.1tn in excess interest revenue for the banks, or about half of the total dollars banks brought in during that time, according to the FT’s calculations.

This is in sharp contrast to Europe, where some governments imposed windfall taxes on banks which benefited from higher interest rates.

The Fed tightened its main policy rate this week, cutting by half a percentage point. Some US banks sought to pass the cuts on to depositors as quickly as possible, a move that would shore up their margins.

Hours before the Fed rate cut on Wednesday, Citi told its employees at its private bank, whose wealthy clients typically receive preferential rates, that if the US central bank were to cut rates by half a percentage point the bank would do the same to its rate on accounts paying 5 per cent or more, according to a person familiar with the matter.

At JPMorgan, bankers have been told that clients with $10mn in cash or above would see their savings rates cut by 50bp and future cuts would move in lockstep with the Fed’s actions, people familiar with the matter said.

Because of the Fed’s rate cut, banks will “certainly” have “the ability to reduce deposit costs”, said Chris McGratty, head of US bank research at KBW. “The degree of aggressiveness will, I think, vary bank to bank.”

JPMorgan said the bank aimed to ensure a fair and competitive rate. Citi declined to comment. Bank of America declined to comment.

A report earlier this year from the Risk Management Association compared banks to petrol stations, which are typically quick to raise prices and slow to cut them. Banks, by contrast, are slow to raise the rates they offer on deposits and savings accounts but quick to cut them.

When the Fed began to tighten monetary policy in March 2022 many analysts predicted that competition from new financial technology companies and the growing ease with which consumers can move cash would force banks to dole out a greater share of the higher rates to their depositors.

But the FT’s calculations show that they were able to hold on to much of the benefit — although slightly less than in previous Fed tightening cycles.

The failure of Silicon Valley Bank and others in early 2023 forced many mid-sized and smaller banks to raise their rates in order to keep depositors from fleeing. Larger banks saw an influx of cash during the flight for safety, allowing them to delay the need to match higher rates elsewhere.

Overall US banks captured about two-thirds of the benefit of the Fed’s higher interest rates from March 2022 until the middle of this year, according to the FT’s calculations based on the latest data available. They paid depositors nearly $600bn in interest.

The last time the Fed raised interest rates, from early 2016 to until early 2019, US banks captured 77 per cent of the benefit.

Although the Fed has now begun to loosen monetary policy, bank stocks reacted positively on Thursday as investors bet that lower rates and a relatively healthy economy would create more demand for borrowing and boost investment banking dealmaking activity.

Nonetheless, the highest interest rates in more than a generation have pushed more money than ever, nearly $3tn, into certificates of deposit, which typically pay the highest rate of any bank deposits and also cannot be changed overnight.

As that money becomes unlocked, banks will be able to adjust their rates down, but not before, analysts said.

“It will be a slow grind down,” said Scott Hildenbrand, chief balance sheet strategist at Piper Sandler.