Trouble just beginning for banks
The same forces that helped build London into a global financial superpower now appear to be lining up against it as the dust settles from last week’s Brexit vote.
Long viewed as a top destination for bankers and businesses seeking a gateway to Europe, British banks now face the prospect that talent and capital may start to flow elsewhere.
Those fears have made the banking sector one of Brexit’s biggest losers since the vote: While share prices rallied somewhat on Tuesday, the country’s biggest banks have been hammered in the past few days, with Royal Bank of Scotland down 30 per cent, Barclays PLC down 29 per cent and Lloyds Banking Group PLC down 24 per cent.
“Don’t expect a mass exodus from London, but do expect a decline in new inward investment as companies realize they will no longer be able to access the EU from the U. K. and need to have a location inside the now- 27 member union,” said William Reinsch of the Stimson Center, a Washington-based think-tank.
Even Britain’s own banks are expected to begin to shift operations, as they attempt to re- establish their connections with the European Union.
“British companies will be reviewing their options and adopting hedging strategies that allow them to remain in the U.K. while at the same time moving resources to the EU to preserve their position there,” said Reinsch.
Both HSBC and Morgan Stanley have warned they could move thousands of positions as a result of the Brexit vote. And J.P. Morgan Chase & Co. chief executive James Dimon said in a memo over the weekend that his company may have to make changes to the “location of some roles” following the vote.
Even without a mass exodus, what may be more damaging is a dearth of new talent heading for the U. K. While it remains to be seen how Britain will negotiate its exit from the EU, the potential for EU nationals to lose their ability to work visa-free in London may prompt them to migrate to Europe’s other financial capitals.
Analysts at American investment bank Jefferies said the potential shift of financial operations out of London was causing “tectonic plate shifts” in European bank investing.
The analysts slashed their earnings forecasts for Barclays, Lloyds and RBS for the next two years, warning that the “information vacuum” created by Brexit would hurt British banks for the foreseeable future.
Capital also appears reluctant to come to the city. The Bank of England has been busy pumping liquidity into the system in a bid to quell any panic in Britain’s financial system, with a special auction on Tuesday that injected 3.1-billion pounds into banks. Central bank Governor Mark Carney has said he’s willing to pump 250- billion pounds into the banking system if necessary.
Flight of talent and capital would have been unthinkable just a year ago. In October, think-tank Z/Yen named London the world’s top financial centre, surpassing New York City. The Boston Consulting Group a year earlier found that in a poll of more than 200,000 people in 189 countries, London was the seen as most appealing city to move to for work.
Much of that appeal was due to the many multinational companies, particularly from the United States, that set up substantial operations in London. The city was seen as an excellent launching point for European markets, because it had a large talent pool, spoke English and was in proximity to the European mainland. Basing operations in London also allowed for “passporting” — or access to the European single market for international companies.
Now, many expect those operations will shift to other cities, such as Frankfurt and Paris.
While it may be possible for Britain to negotiate exit terms that could keep banks from shifting their operations, it appears that those negotiations will be long and drawn out — and top talent may not wait around to find out the results.
In t he meantime, t he rough ride for the banks is expected to continue.
While Standard & Poor’s cut its rating on the sovereign debt of the United Kingdom Monday, Jimmy Jean, senior economist at Desjardins, says it’s a matter of time before they single out bank debt.
“The question is now how long it takes for the banks to be downgraded,” he said.
Don’t expect London to top any financial lists this year.