The UK’s Bank of England ended 2017 by appearing to offer an olive branch to Europe by saying that EU investment banks operating in London will be able to do so post-Brexit under almost unaltered conditions. This overture from Mark Carney at the Bank of England came just after Michel Barnier, the EU’s chief negotiator in Brexit talks, had taken a hard line, warning of the danger that UK banks will lose their ‘passporting’ rights to operate in the single market after Brexit.
The Bank of England appears to be offering a fairly straightforward process to enable EU wholesale banks to continue to operate in the UK. EU banks would fill out a form that would change their UK branches status from “passported” to “authorised”.
With this seemingly generous move, the Bank of England has been signalling that it does not want to be too heavy-handed – which would have been the case if they had insisted that the EU banks’ currently lightly regulated branches in the UK be turned into subsidiaries. Subsidiaries would be more expensive to operate since capital has to be ring-fenced.
The Bank of England’s condition for this generosity is that it gets to assume “an appropriate degree of supervisory co-operation” from EU countries and regulators. If the Brexit negotiations go badly, we can assume the Bank of England’s offer will be withdrawn and that expensive subsidiaries will be the order of the day.
This move is certainly a significant concession from the UK, especially given the very negative tone from EU negotiators. Why has the Bank of England made this offer? Are they taking the moral high ground, deliberately in contrast to Michel Barnier’s rather less generous comments just weeks before? Or is the Bank of England just acting in the UK’s own self-interest. The truth is probably a combination of both.
The self-interest for the UK is fairly clear. One of the many great attractions of London is the City’s openness to global capital. At this point in the Brexit negotiations, it would be self-sabotaging to tell EU wholesale banks that they will be treated more harshly than those from the USA, Switzerland and Japan, countries which all operate branches in the UK. Also, on a pragmatic level, it would be silly to tell EU banks to set up subsidiaries only to tell them they can dismantle them should Brexit negotiations become more positive. It would waste time on both sides. The move would also give a certain advantage to the Bank of England in terms of leverage over EU-based banks, letting them reach back into the headquarters of banks who operate in London only as branches. If those banks created subsidiaries, the Bank of England would only have oversight of their UK entities. So this move is not without benefits for the Bank of England.
But I think we can credit the UK with some moral high ground as well. The Bank of England says it wants to cooperate with EU regulators on data-sharing and supervision. This invites a return in kind. When talking to the Treasury Select Committee, Mark Carney has repeated his aim for the UK to remain the “Bank of Europe”, meaning there are advantages for EU companies and governments in having certain services concentrated in London.
The UK has also run the risk of being perceived as weak, rather than cooperative. There is a suspicion that EU negotiators would really like to punish London and grab the opportunity to create rival hubs in Frankfurt, Paris, Berlin, Dublin, Luxembourg… anywhere but London.
But it does appear from a negotiating perspective that the Bank of England made a smart move. They are starting by assuming that there will be cooperation and an open spirit and they are emphasising the advantage of keeping this openness and structure.
Does this olive branch from the Bank of England allow us to hold out hope that there could, after all, be a free trade deal that includes the financial services sector? Well, I think we must remain realistic and pay attention to Michel Barnier’s tough talk towards the end of 2017. But graciousness and generosity from the Bank of England at this stage cannot hurt and certainly increases the chances of a better deal for London.