Post-Brexit ‘frag­men­ta­tion’ plans hold risks and costs for London-based big banks branch­ing out across the EU


Banks that move some of their busi­ness and staff out of London to cities scat­tered across Europe af­ter Brexit could be tak­ing on ex­tra risks and costs with­out be­ing sure of boost­ing rev­enues. Sev­eral of the world’s big­gest banks are in the process of re­lo­cat­ing a num­ber of staff who deal di­rectly with clients and some back-of­fice func­tions as Bri­tain pre­pares to leave the Euro­pean Union next March. The banks, which in­clude JPMor­gan, Gold­man Sachs, Citi, Mor­gan Stan­ley and Bank of Amer­ica, plan to “frag­ment” their oper­a­tions by ex­pand­ing or launch­ing ser­vices in more than just one city. While beef­ing up oper­a­tions in tra­di­tional fi­nan­cial cen­tres such as Frank­furt, Lux­em­bourg and Paris, they are also seek­ing to ex­pand in cities such as Madrid, Mi­lan, Ber­lin and Dublin. Play­ing down the links with Brexit, the banks say the moves will bring them closer to clients and cut the costs of con­cen­trat­ing their oper­a­tions in ex­pen­sive London. But the rush to set up of­fices in con­ti­nen­tal Europe has been mainly trig­gered by the fear of los­ing the ben­e­fits of EU “pass­ports,” which re­move in­ter­nal bor­ders and al­low banks op­er­at­ing in London to serve clients across the bloc. “It is an en­forced change in strat­egy. If Brexit wasn’t hap­pen­ing, would we be do­ing all this? No, of course we wouldn’t. And nei­ther would any­one else,” said an in­sider at a large U.S. bank. “Does it get you closer to clients? Yes, of course it does. But peo­ple are try­ing to make a virtue out of a ne­ces­sity,” said the in­sider, who de­clined to be named be­cause of the sen­si­tiv­ity of the sub­ject. It is not clear how much the frag­men­ta­tion strat­egy will cost the in­dus­try or each in­di­vid­ual bank, partly be­cause each sub­sidiary will need its own pool of cap­i­tal, the size of which will de­pend on what busi­ness ac­tiv­i­ties and staff it needs. But re­search by Deutsche Bank sug­gested non-EU banks that un­til now have used Bri­tain as a gate­way to serve EU clients may have to al­lo­cate an ag­gre­gate €35-bil­lion to €45-bil­lion ($52-bil­lion to $67-bil­lion) of cap­i­tal to turn EU branches into sub­sidiaries. Reuters re­ported in July that Bri­tish lender Lloyds Bank­ing Group was plan­ning to op­er­ate from three sep­a­rate Euro­pean sub­sidiaries af­ter Brexit. Its de­ci­sion un­der­scores the vast re­or­ga­ni­za­tion that even banks with rel­a­tively small con­ti­nen­tal in­ter­ests are hav­ing to un­dergo. But some ex­perts ques­tion whether mov­ing out of London will have any fi­nan­cial ben­e­fits. “The eco­nom­ics will pull every­thing back here be­fore long. A lot of money could be wasted in dis­cov­er­ing that,” said Bar­ney Reynolds, head of fi­nan­cial in­sti­tu­tions at Shear­man & Ster­ling. Some bankers say splin­ter­ing com­plex busi­nesses across mul­ti­ple cities will make fi­nan­cial ser­vices such as trad­ing and debt is­suance more ex­pen­sive for Euro­pean com­pa­nies, gov­ern­ments and in­vestors. The re­gion as a whole may suf­fer, they say. “If you were a the­o­reti­cian, you would say that one cen­tre in Europe that is dom­i­nant would prob­a­bly be more ef­fec­tive than a frag­mented ap­proach,” John McFarlane, chair­man of Bar­clays and lobby group TheCi­tyUK, told Reuters. Hun­dreds of staff mem­bers could move from Bri­tain. Bar­clays is shift­ing up to 200 roles to Frank­furt and Dublin as part of its Brexit plan­ning, while HSBC is pre­par­ing to re­lo­cate up to 1,000 roles to the con­ti­nent. “Brexit, nat­u­rally, will dom­i­nate how fi­nan­cial-ser­vices firms man­age their or­ga­ni­za­tions at least for the short term, draw­ing on bud­gets and tak­ing re­sources away from other ar­eas of fo­cus,” said Shankar Mukher­jee, fi­nan­cial ser­vices part­ner at con­sul­tancy EY. “The im­pact will likely be felt on in­cre­men­tal cap­i­tal re­quire­ments, as well as the on­go­ing costs of sup­port­ing mul­ti­ple le­gal en­ti­ties. We ex­pect that this will pose ques­tions around the on­go­ing prof­itabil­ity of cer­tain busi­ness lines within Europe, par­tic­u­larly for smaller firms.” Ear­lier this year, Synechron Busi­ness Con­sult­ing Group es­ti­mated it would cost an av­er­age £50,000 ($84,000) to re­lo­cate a sin­gle em­ployee to a Euro­pean city. This ex­cluded IT ex­penses, the costs of reg­u­la­tory per­mis­sions or li­censes or the cap­i­tal­iza­tion of the new busi­ness hub. Sev­eral banks say re­dis­tribut­ing London-based staff to cheaper Euro­pean cities will help them curb costs. But new of­fices leased by Bank of Amer­ica in Paris’s fash­ion­able 8th ar­rondisse­ment or Gold­man Sachs’s in Mi­lan’s his­toric cen­tre do not look like moves made on a shoe­string bud­get. “They say they are play­ing catch-up on mov­ing ex­pen­sive back-of­fice oper­a­tions out­side London but I don’t think any­one had such a sig­nif­i­cant out­sourc­ing plan be­fore Brexit,” the bank in­sider said. Any com­pet­i­tive ad­van­tage banks hope to gain by launch­ing of­fices or ex­pand­ing in mul­ti­ple con­ti­nen­tal cities could quickly dis­ap­pear if rivals do ex­actly the same. “It is a zero-sum or slightly neg­a­tive-sum game,” said Chris Dyer, di­rec­tor of global eq­uity at Ea­ton Vance, an in­vestor in Gold­man Sachs, JPMor­gan and Mor­gan Stan­ley. “The banks may re­al­ize some ben­e­fits but at a cost. Hav­ing peo­ple in one lo­ca­tion has ben­e­fits in terms of in­for­ma­tion flow and re­la­tion­ships. The banks will have to be more thought­ful about cap­tur­ing and dis­tribut­ing in­for­ma­tion on clients, mar­kets and risks across the ex­panded em­ployee foot­print,” he said.

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