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European Cities Clamour to Take London’s Post-Brexit Banking Crown

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London’s primacy as a global banking hub is under threat as Frankfurt, Paris and even Amsterdam and Dublin jostle to take finance jobs from the UK capital after Brexit. 

A huge chunk of the City’s trading and backroom business could be lost across the English Channel if talks on a divorce settlement for the financial services industry leaves the UK cut off from Europe.

Banks prepare to ship out

Overseas banks including JPMorgan and Citigroup of the US, Deutsche Bank, Switzerland’s UBS, and Japanese lender Nomura have indicated they will shift thousands of jobs to Frankfurt. Data compiled by Bloomberg also indicate French bank Societe Generale will join the US’ Morgan Stanley and Bank of America in relocating staff to Paris. Estimates put likely City job losses at around 10,000 and the relocation of €1.8 trillion of assets from the UK.

Just over a year from the March 2019 separation, City job vacancies have dropped, with recruiter Morgan McKinley putting the decline at 37% last year. At the same time, banks including Goldman Sachs and Morgan Stanley have already begun advertising for staff overseas to replace their London employees. Other City institutions, like Lloyds of London, have also begun shifting some operations to Europe.

“There will be a cascade effect on the banking sector in the UK – once you move something to Frankfurt, then why not move something else?” said Dr Enrico Onali, lecturer in finance at Aston Business School in Birmingham. Whatever part of a bank’s business is moved, “associated activities and administrative activities would probably have to move too.”

Passporting rights at stake

At the heart of the City’s concern is uncertainty over the future of passporting rights for financial services companies. Such provisions in European Union laws enable companies to operate throughout the bloc’s single market from a base in any of the member states.

Some non-EU members, such as Norway, have been granted similar privileges as part of the wider European Economic Area (EEA) as long as they operate under EU trade and finance rules. So far, the UK has made little headway in securing a trade deal that includes financial services. If UK and overseas banks based in the UK aren’t entitled to EU passporting rights, then many would have to set up shop within the EU.

“Brexit won’t be a problem if the UK stays in the EEA and retains passporting rights,” said Dr Enrico Onali, lecturer in finance at Aston Business School in Birmingham. “If passporting rights go, then a big chunk of the City’s banking business will have to move. London will lose a huge part of its business.”

Roles significantly diminished

Despite Brexit fears, London remains top of the Z/Yen Global Financial Centres Index of the most important financial cities, above New York. While Brexit concerns lowered the UK capital’s score from previous years, it had a much smaller impact than concerns about Donald Trump have had on New York’s overall score.

Its historic role is reflected in some mammoth figures: It accounts for a fifth of world wholesale banking activity and assets held by City institutions amount to almost five times the UK’s total economic output, according to a paper issued by the German Institute for Economic Research (DIW).

“The UK plays 
two key roles in the European financial system: as amajor hub for wholesale banking activities conducted by large European banks, and the second as a major entry point for non-European capital entering the single market. If the UK were
to lose passporting rights, both of these roles would
 be significantly diminished,” wrote DIW economists Jakob Miethe and David Pothier.

Clearing, settlement to be hardest hit

Experts forecast a bad Brexit deal will hurt post-trade processing departments hardest. Clearing and settlement, in which security trading transactions are essentially paid and recorded, may be largely backroom operations but they are lucrative and vital to the smooth functioning of the financial sector and its compliance with regulations. Historically, the lion share of euro-denominated transactions are cleared and settled in London.

If the UK loses its passporting rights through non-membership of the EEA, those activities and much of the trading of securities they service, will almost certainly be pulled back to an EU member state.

“It’s unlikely that the EU member state politicians will be able to justify having a large part of financial services outside its borders,“ said Onali.

Frankfurt, Germany aerial view
Frankfurt used the Brexit vote as an incentive to lure banks and it’s working.

Rival European cities have been vying to capture that business. Paris already has a growing financial sector and former President Francoise Hollande declared the city “the financial capital of the future” soon after the Brexit vote in June 2016. Frankfurt is selling itself on its own large financial sector and the fact that the European Central Bank is located there. Amsterdam and Dublin benefit from their conversant use of English and the Irish capital, in particular, has deep economic ties with the UK as a result of the two nations’ shared history.

If Brexit is pitting European partners against each other, the prize at the end makes it worthwhile: About half of London’s banking sector is tied to euro-denominated business, for which about €1 trillion is cleared each day.

Looking to the rest of the world

Experts are split on whether the loss of that trade could be made up from business with other financial partners.

“The rest of the world is growing and developing enough and the UK does have some important links with these economies that it could make up for lost ground,” said Helen Thomas, managing director if BlondeMoney, a macro economics and politics consultancy. “The developing world is becoming more developed and opening yourself up to those markets has got to be a good thing.”

There would be a lot of catching up to do, according to Cambridge Econometrics. The knock on effects of lost earnings from financial trades, lower tax revenues and a slump in investments is likely to cost the broader UK economy almost half a million jobs, it said in a report commissioned by London Mayor Sadiq Kahn.

Few expect the US to plug the gap any time soon. In fact, Onali predicts President Donald Trump’s nationalistic economic policy will close US borders to wider overseas activity by American banks.

“If in 10 years the world becomes more globalized, fine, but if we have another five years of Trump and the US becomes more isolated the UK won’t be able to replace lost EU business with US business,” he said.

Note: The opinions expressed in this article are the author's own and do not necessarily reflect the view of Alvexo on the matter.