Brexit threat to European banking system
Impact on London’s financial hub will be felt years down the line, says head of new UK lobby
A CLIFF-EDGE Brexit in early 2019 would pose serious dangers to the whole European financial system and will be avoided at all costs by both the British Government and EU authorities, the City of London’s top financial consortium has concluded.
The much greater threat to London’s banking, insurance and fund industry lies further ahead, several years after the UK has left the single market and has lost its full “passporting” rights for financial services. This may be hard to head off even if there is a transition phase.
“A hard rupture from day one would be very disruptive on a Continental scale. The European banking system does not have the infrastructure capable of absorbing these activities,” said Stephen Jones, head of the newly formed mega lobby UK Finance.
“Everybody realises this and I cannot believe that either the UK or the EU would let it happen. Wolfgang Schauble’s cabinet totally understands it,” he said, referring to Germany’s all-powerful finance minister.
London handles the lion’s share of debt and equity securities issued in Europe, as well as much of its syndicated lending and risk management. Roughly 40pc of the $5 trillion of global currency trades every day are booked in London, as are two thirds of all interest rate derivatives in euros – chiefly for European firms.
“Our working assumption is that EU regulators will be flexible from day one, but over time they will require more infrastructure to move,” he told The Daily Telegraph.
Banks and finance houses are already drawing up contingency plans and acquiring permits for EU branch offices. “They are establishing a presence that could be dialled up significantly if required to by regulators,” he said. Just how much they will have to “dial up” is the elemental question for the City.
Mr Jones, former finance director at Santander and Barclays, was born in Brussels and grew up in Germany. He has a “Fingerspitzengefuhl” (fingertip feeling) for the EU scene that is vitally needed. UK Finance was launched last month after a merger by the British Bankers’ Association, the Asset Based Finance Association, the Council of Mortgage Lenders, and three other entities.
He said it is not yet clear whether the EU will insist that all syndicated loans, capital markets, and interest rate derivatives based in euros, will have to move to Europe, or how much “local content” the EU will demand.
“We just don’t know. We would like mutual recognition where we accept each other’s supervisory regime. If there is the political will, this might be possible. We hear different things,” he said.
While the process of setting up footholds inside the eurozone usually begins as a paper exercise – more of an option if need be, rather than an actual switch – it risks turning into a relentless drain from Britain as the EU builds up its own hubs and gradually imposes stiffer demands.
RBS revealed last week that it was eyeing Amsterdam as a new home for its European banking arm if there is a hard Brexit, a move that could lead to 150 Natwest Markets staff migrating. “It’s in case we need it. We’ll be operationally ready if required,” said the chief executive Ross Mcewan.
The charms of the EU single market can be exaggerated. The latest version of the Market in Financial Instruments Directive (Mifid II) is something of a horror story in itself. Critics say it is so
restrictive that it will ultimately render Europe a global backwater in finance. “I am far more worried about the damage from Mifid than I am about Brexit,” said one London banker from a eurozone state.
The drip-drip of Brexit-linked announcements is unsettling – and easily manipulated by Brexit foes – but it has not reached the point of mass exodus. A recent report by consultants Oliver Wyman said that loss of privileged access to the EU market would drive 35,000 to 40,000 financial jobs out of the UK, half in wholesale banking.
“So long as the outcome of the Brexit negotiations remains unpredictable, banks must act as if a hard Brexit is coming. Some of the fragmentation and inefficiency that would result from a hard Brexit will likely occur even if a closer relationship between the UK and the EU is ultimately negotiated,” it said.
The report said the process has reached a “critical stage” for banks. They are trying to devise ways to keep some Eu-linked trading and risk man- agement in the UK. While regulators in EU states are signalling leniency for the first “interim” phase of Brexit, they will tighten the rules over time.
The concern is that commercial logic will compound this effect as chunks of the financial market “ecosystem” migrate to the EU, pushing total jobs losses in banking alone to 40,000 in the long run.
Yet one major danger has for now been averted. “At present, none of the other European banking centres seem set to replace London as a pre-eminent global financial services hub. Should a new EU hub emerge, banks would be quick to re-orient their operations towards that location,” it said.
The picture is messy. Some are going to Frankfurt or Dublin, others to Amsterdam, Luxembourg, Paris, or Brussels. This is a risk for the EU itself – and why it may force a policy – since a fragmented system is likely to force banks to
‘None of the other European centres seem set to replace London as a pre-eminent global financial services hub’
raise the $30bn to $50bn in extra capital, shaving two percentage points off their return on equity.
“These new challenges from Brexit will raise difficult questions about the viability of some activities over the medium term. Some banks may even choose to withdraw capacity from the European market as a whole and redeploy to other regions, such as Asia or the US,” it said.
The City has few friends after banking debacle in 2008, but the Square Mile quietly butters a lot of turnips. Financial services generate £71bn in taxes – roughly 10pc of government revenue, or two-thirds of the NHS budget – and help to plug a big hole in the UK’S trade deficit.
Philip Hammond, the Chancellor, has told business leaders that he wants an “off-the-shelf” transition deal. It is far from clear what this actually means and whether the European Commission will agree at this late stage.
The EU has developed its strategy based on the core assumption that the UK will leave both the single market and the customs union as stated in Theresa May’s Article 50 letter to Brussels. This will remain the case until the EU is informed otherwise in categorical terms with the full force of the British Government and Parliament behind it.