Alternative Centers

A Dirty Post-Brexit Battle for Banks

  • Why it matters

    Why it matters

    Tax and regulatory incentives could help attract banks and insurance companies to a country’s shores, but the effort is not only causing anger among neighbors but fears of a destabilized financial system if it means weaker regulation.

  • Facts

    Facts

    • HSBC is saying that 1,000 jobs could move from London to Paris.
    • The insurance giant AIG has already decided to move to Luxembourg.
    • Citigroup and Morgan Stanley are looking closely at Frankfurt, but have not yet made a decision.
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    Audio

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Canary Wharf Bank Skyline
Leaving London, but where will financial services go? Source: DPA

Banks, asset management firms and insurance companies are planning to move offices out of London and amid fears that the financial sector will lose its passporting rights once Britain leaves the European Union but it is not yet clear which city will benefit from this move.

HSBC is saying that 1,000 jobs could move from London to Paris. Goldman Sachs will conduct its E.U. business, according to financial sources, from Frankfurt in the future, but they also plan to send investment bankers to Paris as well. Their competitors like Citigroup and Morgan Stanley are looking closely at Frankfurt, but have not yet made a decision.

Banks like Barclays and Credit Suisse are leaning towards Dublin, according to financial sources. The insurance giant AIG has already decided to move to Luxembourg. The special insurers Hiscox and Lloyd’s also have Luxembourg at the top of their lists.

Final decisions will only be made after British Prime Minister Theresa May submits Britain’s official application to withdraw from the European Union.

Bernd Geier from the international law firm Dentons said their final decision will depend on the incentives offered by various banking regulators, and this is where the problems begin: Many are concerned that some of these incentives go against the spirit of a level playing field.

UBS banker Stefan Winter, President of the German Association of Foreign Banks, warned recently, that “we are hearing promises that push the limits of regulatory arbitrage and now and then appear to raise legal concerns.”

Mr. Winter does not want to go into details, but Frankfurt sources said he was referring to France, which has offered the trading arms of major investment banks – those doing broker-dealer business – the possibility of having their activities fall under the authority of French national authorities, so they won’t have to fear regulation by the European Central Bank in Frankfurt.

And while Frankfurt and Paris are shadow-boxing, Luxembourg and Dublin have already come to blows.

It could be that every weakening of London as a financial center could mean a further strengthening of New York as the largest financial center on the planet.

In an interview in Reuters, Eoghan Murphy, Irish minister of state at the departments of finance and public expenditure & reform, accused rivals of foul play in its attempt to lure Brexit refugees with promises of an illicit loosening of capital requirements.

“We are hearing from various sources that companies are being offered certain incentives,” Mr. Murphy said. “That they are offering a back door to the single market, without the requirement to have capital to back up their entities in the European Union.”

While he didn’t mention them by name, observers say he was pointing in particular to Luxembourg: The catalyst for Mr. Murphy’s accusation was likely the decision of the U.S. insurance company AIG to locate its E.U. business to the Grand Duchy.

It didn’t take long for Luxembourg to respond to Mr. Murphy. “I would never have thought that the Irish could be such sore losers,” said Nicolas Mackel, from the financial agency Luxembourg for Finance. “The same rules apply to banks and insurance companies in Luxembourg, as they do everywhere else in the European Union.”

Many national supervisory authorities are willing to make compromises during the transition period after the Brexit. But national regulators will not be allowed to go too far in what they offer. A watering down of bank controls will not be accepted by overseers at the ECB.

And what do the Americans think about all this? It could be that every weakening of London as a financial center could mean a further strengthening of New York as the largest financial center on the planet.

James Gorman, head of Morgan Stanley, did not mince words months ago when he said, “The big winner of Brexit will be New York.”

The problems in London will, in his opinion, cause a discussion at many U.S. banks about whether they need as many locations for global trading on capital markets as they have now. Where this business is conducted has lost some of its importance, he said, partially because it has become automated. However, Mr. Gorman said, if it does come to a centralization of this area of business, then it will probably be in New York.

Goldman Sachs chief Lloyd Blankfein said there was once the good possibility of moving more business from New York to London, which is closer to Europe and has good links to Asia. “But after the Brexit,” he said when the vote in Great Britain was in, “we put these plans on ice for the time being.”

Some experts in London see New York as benefiting as well. John Nelson, President of Lloyd’s of London, said: “no city in the E.U. has the infrastructure to assume the role of London. Only New York can do this.” Most of the industry agrees that both cities are equal as financial centers go, whereby London is somewhat more internationally focused, while New York handles the huge U.S. capital market.

New York, however, has transformed during the last few years from a city of finance to a widely diversified center with many industries. In New York, for instance, entertainment, tourism, new technologies and many universities play a major role. A good 460,000 people work in the financial industry in the city. This is far fewer than work in government jobs or in the “distribution, transport and utilities” industries.

Seen long-term, the drop in financial jobs is even more dramatic. At the start of the 1990s, over 500,000 people worked in the financial sector in New York. This drop in jobs can be attributed mostly to automation. More tourists walk down Wall Street these days than traders, and buying and selling of stocks is being conducted less on the trading floor, and more in huge data centers outside the city gates.

 

Michael Brächer is a financial editor in the investment team in Frankfurt. Katharina Slodczyk is Handelsblatt’s London correspondent. To contact the author: braecher@handelsblatt.com and slodczyk@handelsblatt.com

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