Leaving London

Brexit move challenges banks

Moving London operations to Frankfurt and other EU financial centers is a tall order for banks. Source: Reuters

While there is still a lot of uncertainty about what banks in London must do to relocate operations in the wake of Britain’s exit from the European Union, there is one certainty emerging very clearly – it will be a lot more than they thought.

“Brexit has taken on an ever greater magnitude the deeper we’ve probed our businesses and delved into the ramifications,” said Heinz Hilger, who heads the Frankfurt operation of Britain’s Standard Chartered Bank. “Every day more aspects come to the fore regarding the EU and what we have to handle differently than today.”

Some London banks are holding back on their transition plans. They want to give up as little control and as few jobs as possible, so they don’t want to talk prematurely about big moves, in the belief they will be able to get away with few changes. That hope is illusory, however, say the experts.

Everything from office space to personnel to IT to the regulatory framework and customer contracts are subject to change. The data challenge alone, which entails migrating billions of bits of information to a different IT infrastructure without making a single mistake and while business is being conducted, is overwhelming. There are countless small discrepancies that further complicate the task. For instance, Deutsche Bank found the addresses of German customers stored in London don’t always say which German state the customer is in – a detail required in the German IT system.

“What exactly needs to be transferred is a moving target, because things become more complicated with battles on many fronts.”

European banker

Germany’s largest bank has it relatively easy because it is mostly repatriating personnel and has considerable resources at its corporate headquarters. But many non-German banks are also choosing Frankfurt as the location for their new EU headquarters, not least because the European Central Bank is there, making it easier to coordinate the regulatory transition. The size of the German economy and the number of direct flights from Frankfurt also tip the scale in its favor. As many as 40 different institutions may come to Frankfurt or expand their existing operations there, says Volker Bouffier, prime minister for the state of Hessen.

“What exactly needs to be transferred is a moving target,” said a top banker from a European institution, “because things become more complicated with battles on many fronts: the battle with regulators over the exact design of the new entities, with the politicians over the shape of Brexit, and internal debates over the shift in power.”

As London and Brussels fight over the details of Brexit, the banks have to plan for the worst-case scenario – that there will be a hard Brexit in March 2019 and that is their deadline for being ready to do business in their new EU headquarters. British Prime Minister Theresa May is seeking a two-year transition period keeping the status quo beyond 2019, but even if Brussels agrees to that extended deadline, it will be tight for many of the banks.

Then there is the cost. HSBC wants to transfer 1,000 employees to Paris and estimates the cost at $300 million (€260 million). Other banks reckon the transition will be closer to $500 million. On top of that comes some $30 billion to $50 billion in additional capital the banks will have to put up for their EU headquarters, which must be fully independent from London.

There is still little clarity about exactly what business must be transferred. Investment banks handling mergers and acquisitions for EU corporate clients must conduct the business in the EU. Trading in securities and currencies, on the other hand, will depend on contact the traders have with customers and to what extent they closed the contracts and generated the trades. Just getting customers to sign new contracts for doing business in a different location will be a mammoth chore. “Here is where English and German corporate law comes into play – that is an adventure with uncertain outcome,” said Stephan Lutz at consulting firm PwC. “It can go well, but it can also be an immense jolt.”

The jockeying for top personnel is still in the early stages, but some banks are already making hires just to fulfill regulatory requirements for the new operations. “The competition for good people is staying within limits,” said one top banker in charge of his institution’s transition to Frankfurt. “Poaching from others is not so expensive the earlier you start.”

Deutsche Bank sees a chance to expand its business and win market share. “We want to shine and are taking a lot of trouble right now to make it as easy as possible for our customers,” said Stefan Hoops, director of Deutsche Bank’s capital markets business, “so we can gain new customers and expand our market share.”

By the same token, however, the bigger presence of foreign institutions will mean more competition for domestic banks in Germany. “Foreign banks will grow here and seize the opportunity to increase their market share with more capital here,” said Tim Jennison at banking consultant BCG. Domestic banks should be giving more thought to their EU strategy and how they will react to sharper competition, he added.

More thought, more effort, more time, more money – much more, in short, than they thought they would need.

Katharina Slodczyk covers banks for Handelsblatt. Darrell Delamaide adapted this story into English for Handelsblatt Global. To contact the author: slodczyk@handelsblatt.com.

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