U.S. banks’ ‘stop gap’ Brexit plans set to re­tain Lon­don jobs

Tehran Times - - ECONOMY -

Big US banks are draw­ing up “stop gap” Brexit plans in an at­tempt to avoid mov­ing hun­dreds of jobs out of Lon­don once the UK leaves the EU and be­fore they have had time to re­cruit spe­cial­ist staff in the Euro­pean bloc.

Mor­gan Stan­ley, Cit­i­group and Bank of Amer­ica are among the banks plan­ning to use Lon­don branches of their EU sub­sidiaries to smooth the process of build­ing new head­quar­ters on the con­ti­nent, ac­cord­ing to five peo­ple briefed on the plans.

One banker in­volved said the op­tion — dubbed “branch-back” by lawyers — was “the sim­plest ar­range­ment” avail­able that of­fered “less costs, less dis­rup­tion and move­ment”. Branch-back is es­sen­tially a re­ver­sal of the cur­rent set-up, where US banks tend to use their Lon­don op­er­a­tions to “pass­port” their ser­vices across the rest of the EU.

A sec­ond banker said us­ing Lon­don branches of EU di­vi­sions was “a re­flec­tion of the fact that hir­ing [back of­fice] staff is tight in the EU in the in­vest­ment bank­ing mar­ket; it’s eas­ier in re­tail, sales and trad­ing”.

How­ever, the plans risk an­tag­o­nis­ing Euro­pean reg­u­la­tors, who may re­sist moves by banks to keep staff who are han­dling trans­ac­tions with EU clients in the UK along with much of the cap­i­tal as­so­ci­ated with the ac­tiv­i­ties.

For the plans to work, UK au­thor­i­ties would also need to al­low in­vest­ment banks based in the rest of the EU to con­tinue op­er­at­ing in Bri­tain through more lightly reg­u­lated branch struc­tures.

“All of us aren’t quite sure yet where the UK reg­u­la­tors will come out in terms of how they treat branches of EU en­ti­ties,” said the first banker. Banks would ar­gue for newly cre­ated branches to re­ceive the same treat­ment as ex­ist­ing ones, like the big Lon­don branch that Deutsche Bank uses for its Euro­pean in­vest­ment bank, the banker added.

BofA is in the process of merg­ing its UK bank into its Ir­ish op­er­a­tion to make it a branch of its Dublin-based sub­sidiary and es­tab­lish­ing a sim­i­lar struc­ture for its Euro­pean bro­ker-dealer. One banker in­volved in the move said the merger was part of worst-case sce­nario plan­ning. It is set to be com­pleted by July next year.

Citi al­ready has a UK branch of its Dublin­based bank Citibank Europe, and a UK branch of the Ger­man en­tity that it is re­pur­pos­ing as its EU bro­ker-dealer. Both branches will be more ex­ten­sively used af­ter Brexit, sub­ject to reg­u­la­tory per­mis­sions, a per­son fa­mil­iar with Citi’s plans said.

All of the banks de­clined to com­ment. If suc­cess­ful, the plans could pro­vide a boost to the City of Lon­don, fol­low­ing warn­ings that, as Europe’s cur­rent fi­nan­cial heart­land, it faces an ex­o­dus of tal­ent. A re­port by Oliver Wyman con­sul­tancy es­ti­mated that Brexit could cost up to 75,000 jobs in the UK’s fi­nan­cial ser­vices sec­tor while the Bank of Eng­land ex­pects 10,000 im­me­di­ate job losses in the event of a hard Brexit. Rep­re­sen­ta­tives from Frank­furt, Paris and other con­ti­nen­tal cities have been ea­gerly court­ing banks in an at­tempt to snag some of those jobs.

The strate­gies by the US banks have emerged af­ter they con­fided in Wil­bur Ross, their US com­merce sec­re­tary, while he was in Lon­don over their dis­may at the state of Brexit talks. They warned that the “point of no re­turn” — where they will have to de­ploy their worst-case contin­gency plans in or­der to be ready for the March 2019 Brexit dead­line — was fast ap­proach­ing un­less there was clar­ity over what a tran­si­tional deal might look like.

But there has been some eas­ing of those fears of late. By Wed­nes­day, JPMor­gan — one of the banks that at­tended the meet­ing with Mr Ross last Fri­day — said it had gained “bet­ter clar­ity” on Brexit at a meet­ing be­tween Jamie Di­mon, its chief ex­ec­u­tive, and Theresa May, the UK prime min­is­ter.

Many global banks have their main Euro­pean head­quar­ters in Lon­don, from which they sell prod­ucts and ser­vices to clients across the EU. How­ever, the loss of the abil­ity to “pass­port” across Europe as a re­sult of Brexit means that many banks plan to es­tab­lish new sub­sidiaries or beef up their ex­ist­ing struc­tures in the 27 other EU coun­tries.

Reg­u­la­tors in both the UK and the rest of Europe have warned banks that they will be watch­ful of any at­tempts at reg­u­la­tory ar­bi­trage. The Bank of Eng­land is telling for­eign banks this year that they should draw up contin­gency plans to sub­sidiarise their UK op­er­a­tions, which would re­quire far more cap­i­tal.

“A lot de­pends on what the ECB will re­quire of en­ti­ties they su­per­vise,” said one banker in­volved in the US bank­ing plans. “While traders can sit in Lon­don — at least for an interim pe­riod — and pos­si­bly for­ever, it is quite brave to as­sume that cov­er­age bankers and sales­peo­ple can con­tinue to op­er­ate on a pass­port­ing basis out of Lon­don.”

Reg­u­la­tors have told banks these sub­sidiaries must be suf­fi­ciently cap­i­talised and staffed with enough se­nior em­ploy­ees in func­tions such as gov­er­nance, fi­nance and risk to be able to stand alone and to com­plete the ECB’s reg­u­lar stress tests.

The Euro­pean Bank­ing Author­ity warned last month that Lon­don can­not re­tain ac­cess to the sin­gle mar­ket af­ter Brexit by us­ing “shell com­pa­nies” based in the bloc.

But banks still lack clar­ity on ex­actly what func­tions can re­main in Lon­don as op­posed to the EU — and the num­ber of peo­ple that this will af­fect. “We are all driv­ing in the dark,” said an­other banker.

Some banks are study­ing “back-to-back trades”, in which prod­ucts are sold in the EU be­fore the risk is trans­ferred to the UK via an in­ter­nal trade, as a tech­nique to keep more cap­i­tal and staff in Lon­don.

The EBA said that back-to-backs would be tol­er­ated, but with the caveat that enough cap­i­tal and se­nior staff would have to be lo­cated in the EU to mit­i­gate against risks. The UK and reg­u­la­tors have said back-to-backs are likely only to be a tem­po­rary so­lu­tion.

Bob Penn, a lawyer at Cleary Got­tlieb Steen & Hamil­ton, said: “Per­haps the most sig­nif­i­cant on­go­ing cost of Brexit for UK and in­ter­na­tional banks arises from the frag­men­ta­tion of their bal­ance sheets across the UK and Europe.

“For those that can man­age it, re-domi­cil­ing, or a cross-bor­der merger [re­sult­ing in a sin­gle Euro­pean bank with a UK branch] rep­re­sents the least-cost so­lu­tion.”

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