How will the banks cope and adjust to possible restrictions on London-based operations post-Brexit? First we must consider that the UK’s negotiations with the European Union have only just begun. Whatever the City might want in terms of a softer Brexit, the truth is that it is too soon to tell. While the banks may indeed be pushing for “mutual recognition” of regulation and “mutual access” to markets as conditions for Brexit, they also must be realistic about what negotiators on the EU side will accept. And so the preparations and manoeuvres on the part of the banks begin – writes Dmitry Leus
There is an EU rule that allows a bank to locate a fully regulated entity on one EU member state and operate across other states without the need for additional local regulation in the other countries. This is commonly called “passporting”. This practice allowed London to be very much the financial hub for the rest of Europe. Indeed, a large proportion of Europe’s hedging, foreign exchange, lending and securities transaction have taken place in London. The big challenge facing banks is how to manage the future of their European business once London is no longer a part of the EU.
It is my view that London will always be London and a major international financial centre. Even after Brexit, London will remain a crossroads between Europe, Asia and the Americas. Business likes the UK’s legal system and regulatory system and that will remain unchanged. But it cannot be denied that certain services for European clients cannot be operated out of London in the future. The big questions looms: where will the banks take these services that have relied on “passporting”? Natural candidates include Frankfurt, Paris, Dublin, Amsterdam and Luxembourg.
There has of course been some fierce competition from the serious contenders among the cities hoping to host these operations. Paris offered tax breaks of up to 50 percent designed to woo the banking world’s top dogs. Paris even had an advertising campaign: “Tired of the fog? Try the frogs”, said posters promoting the La Défense business district of Paris. Frankfurt was perhaps a little more earnest and precise in its campaign, detailing the ‘Eight reasons to invest in Frankfurt’.
Frankfurt seems to be a frontrunner for the Japanese banks. Mizuho, Daiwa and Nomura have all named Frankfurt as their new home specifically for pan-European business. It is very important to note that London will still be a European hub for them; it is simply that certain operations that require “passporting” will run from Frankfurt. HSBC has opted for Paris and Deutsche Bank has chosen Frankfurt. This is definitely not an exodus, just a strategic movement of very specific operations.
Of the US banks, we already know that Morgan Stanley and Citibank have also chosen Frankfurt and at the time of writing it seemed likely that Goldman Sachs might follow suite. Bank of America has taken a different path, announcing they will mover certain operations to Dublin, an understandable decision since they already have a significant foothold in Ireland.
It also seems that no single European city has emerged as a replacement for London, even for these very specific services. The banks are varying in where they choose to move these operations. Yes Frankfurt has been successful in luring quite a few banks, but not without a healthy showing from other cities. The presence of the European Central Bank in Frankfurt may have been a draw.
We should not overplay these announcements by the banks. It is hardly as though these institutions are abandoning London. They are just planning for the possibility that certain, specific operations could have to be conducted elsewhere. The fact that Citigroup’s “move” actually only entails a mere 150 of its 6000 strong UK workforce shows that this is hardly an exodus. It also shows that the banks live in hope of a softer Brexit than we might have feared.
Dmitry Leus is a London-based entrepreneur and banking and financial services professional. His previous positions include Chairman of the Russian Depository Bank. In 2006 he founded Zapadny Bank, where he worked as Chairman until late 2013.