Clock ticking

Banks warned over Brexit move

  • Why it matters

    Why it matters

    Britain’s decision to leave the EU by March 2019 could spell chaos for Europe’s banking sector, if financial institutions fail to reorganize their businesses in time.

  • Facts

    Facts

    • Brexit could bring as many as 10,000 new jobs to Frankfurt over the next four years, according to some estimates. Other cities in the 27 countries that remain in the EU also stand to benefit.
    • US investment banks Morgan Stanley and Goldman Sachs, whose European operations are centered in London, have reportedly rented new office space in Frankfurt.
    • Some members of the European Parliament support rules that would require banks to relocate their derivatives businesses, the majority of which go through London clearinghouses, to the EU.
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    Audio

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General Views Of The European Medicines Agency And European Banking Authority  Offices Ahead Of Brexit Relocation Announcement
Don't let the door hit you on the way out. Source: Bloomberg

You may delay, but time will not. Although more than a year has passed since Britain voted to depart the European Union, banks that are tempted to leave London for the Continent have been curiously reluctant to make concrete plans. And their hesitation, critics say, isn’t good for business.

“The banks have to finally get their act together, otherwise they won’t make it before Brexit happens at the end of March 2019,” a high-ranking regulator, who wished to remain anonymous, told Handelsblatt. “The decisions must be made now.” Financial institutions need to allow enough time to hire employees and get their IT systems running smoothly, the source said.

A member of the European Central Bank’s executive board, Sabine Lautenschläger, made similar comments last week. “I have a very clear message for banks both small and large: The clock is ticking,” she said. These institutions “still haven’t made as much progress as we’d like,” Ms. Lautenschläger added.

With the outcome of the UK’s negotiations with the EU still unclear, Ms. Lautenschläger advised banks to prepare for a hard Brexit – meaning no trade agreement, no special exceptions and no transitional rules for British firms and organizations. To continue to do business in the European Union, from 2019 the UK’s financial institutions will need to hold a banking license in at least one of the trading bloc’s other 27 countries.

While some banks have inched their plans forward, it’s time for the big bosses to shed their reluctance and take decisive action, the ECB board member added. “We haven’t seen a lot of final decisions there on how these and other banks are looking to organize their businesses,” Ms. Lautenschläger said.

“I have a very clear message for banks both small and large: The clock is ticking.”

Sabine Lautenschläger, member of the ECB's executive board

Many managers are dallying, another regulator told Handelsblatt, because they fear spending money in the wrong places. Banks may be bracing themselves for many millions in restructuring, funding and legal costs to deal with the Brexit fallout, but they still appear reluctant to act before negotiations are concluded. A lawyer who advises financial firms said some banks remain optimistic about Brexit “ultimately not being so bad.”

Meanwhile, real-estate agents in Germany’s financial hub are licking their lips over the prospects, even if only a handful of banks (including US investment banks Goldman Sachs and Morgan Stanley) have secured new office space. Morgan Stanley has reportedly rented space in the Omniturm, a skyscraper still under development. Goldman Sachs, which already has offices in Germany’s financial hub, has taken an option on additional space. More US investment banks are starting to look at relocating operations from London to Frankfurt, according to insiders.

As the headquarters of the European Central Bank, Frankfurt is among the most attractive destinations for banks looking to migrate their operations into an EU country. But as José Martinez, managing director of BNP Paribas Real Estate in Frankfurt observed, there has been lots of talk but very few contracts signed so far. The city’s property managers, it seems, were betting on London’s financial firms showing up sooner.

“So far there’s not too much disappointment, because the real estate market in Frankfurt is so good,” said Simon van Zoggel, a senior consultant with Savills, a large property broker. “But the Brexit refugees would be the cherry on the cake.”

“It’s not enough to keep a post office box and set up a sales department.”

Peter Lutz, banks supervisor at German financial regulator BaFin

Another reason banks with UK-based European operations are hesitating: They’re not sure which staff to relocate. Some banks want to concentrate business in Frankfurt, while others are seeking to spread personnel across Europe. Hubertus Väth, head of marketing outfit Frankfurt Main Finance, estimates the city will gain about 10,000 jobs by 2021 thanks to Brexit.

For now, it seems banks are keen to keep their options open, but it could cost them precious time. German authorities say that to get a banking license, financial institutions will need to relocate board members and key parts of their risk management team to Germany. “It’s not enough to keep a post office box and set up a sales department,” said Peter Lutz, a banking supervisor at German financial regulator BaFin.

Another concern for European regulators? The internal models that banks use to determine capital requirements. Ms. Lautenschläger said the ECB would allow UK financial institutions to use their current models (approved by their home supervisory authority) during a transitional period. Eventually, however, the ECB would have to conduct its own review.

Derivatives transactions are another sticking point, and the European Commission hasn’t yet indicated how it will handle the issue. At the moment, London clearing houses carry out the bulk of that business, but members of the European Parliament are pushing for relocations away from London, and more oversight. Deutsche Bank boss John Cryan already has a blueprint to form a derivatives team in Frankfurt – a “parallel infrastructure” to its London operation, as the CEO doesn’t want to “wait until the last minute” with its Brexit preparations.

 

Yasmin Osman and Andreas Kröner reported this story for Handelsblatt. Amanda Price and Jeremy Gray adapted this story into English for Handelsblatt Global. To contact the authors: a.kroener@vhb.de, osman@handelsblatt.com

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