banking sector

Brexit and a Costly Continental Drift

FILE PHOTO:  Workers walk in the rain at the Canary Wharf business district in London
If Britain wants to leave, it might need a rainy day fund first. Source: Reuters

True blue Brit businessman Christopher Nieper knows no fear. He owns a dressmaking firm and he doesn’t think Brexit will hurt. His customers are mainly older women who will pay an extra pound or two for their summer frocks, he’s sure. “I’m not afraid of the future,” he told Handelsblatt.

Mr. Nieper is not alone; many other business leaders are unworried about the impact of Britain’s departure from the European Union. But a new report suggests their confidence may be misplaced. A hard Brexit will come at a high cost for banks and businesses, says a survey of more than 60 managers across several industries, carried out by the Boston Consulting Group and the Association for Financial Markets in Europe (AFME). A hard Brexit would be bad news not just for banks but would also have a major impact on the real economy said Simon Lewis, the chairman of AFME.

After Britain leaves, if they are to provide services in the EU, London-based banks will need a legally independent subsidiary registered in an EU member state, and not just a banking license. Experts say this could cost €15 billion ($17.19 billion), a sum likely to put a major dent in those banks’ return on investment, possibly an impairment of 0.5 to 0.8 percentage points in the next couple of years.

That’s a fraction of the €1.3 trillion in assets – loans, securities and derivatives – that experts say may need to be rebooked from the UK to new EU locations in the case of a hard Brexit. These assets will be supported by €70 billion, or approximately nine percent, of the affected banks’ equity capital. In the worst case scenario, banks may have to hold an additional €20 billion in equity capital due to long-term Brexit-related inefficiencies.

Banks shouldn’t underestimate these challenges, says Peter Beardshaw, an expert in banking at Accenture who is based in London. He warns that people tend to focus on Brexit’s immediate consequences for banks but what about banking customers? These questions hinge on the guidelines to be issued by supervisors and the form that Brexit takes. But Bafin, the German financial watchdog, and the European System of Financial Supervision recently stated that superficial measures won’t go far enough. The Bank of England, meanwhile, set a deadline of last Friday for the banks it supervises to submit detailed Brexit plans.

For banks, the trouble is that it’s not yet clear what they are preparing for, as negotiations between Brussels and London have only just begun. On the other hand, banks also want to move forward. “Since we lack clarity about the timing and form of an agreement, we want to take the necessary steps to ensure access to the market for our customers,” said Barclays CEO Jes Staley on Friday. The British banking giant plans to beef up its Dublin office. Others, too, are taking steps. Deutsche Bank, previously with a strong London focus, is expected to make Frankfurt the center for securities trading, its most important business sector. Japanese Daiwa Securities, Nomura, and Sumitomo Mitsui all plan to head to Frankfurt. And US giant JP Morgan is also expected to set up its registered office for European business in Frankfurt as it already has a subsidiary there along with the licenses it needs.

It’s a shift in the banking landscape on an unprecedented scale and beside the impact on the balance sheet, it could cost London up to 70,000 jobs in the financial sector, according to projections by the Centre for London. The think tank polled companies for its recent report, Bridging to Brexit: Insights from European SMEs, Corporates and Investors, and found many hope banks will come good for the costs. But banks are grappling with ever tougher regulations, digital investments and low interest rates.

It will likely vary from one bank to the next how far institutions or their customers come good for the costs of Brexit. But companies are unlikely to escape scot-free and that could also include feisty SMEs like Christopher Nieper’s dress shop.

Want to keep reading?

Subscribe now or log in to read our coverage of Europe’s leading economy.