Financial Uncertainty

How to Kill a Financial Hub

London banks-Bloomberg
Troubled skies in a troubled financial hub.
  • Why it matters

    Why it matters

    The significance of London as one of the most important financial centers in the world is certain to decline in post-Brexit Britain.

  • Facts

    Facts

    • Britain’s financial sector employs 2.2 million people and accounts for a 12 percent share of the country’s economic output.
    • One study estimates that Britain’s departure from the European Union could cost up to 100,000 jobs.
    • Banks will be severely affected by the loss of their so-called passport rights, which enable banks headquartered in London to do business in other E.U. countries with little red tape.
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    Audio

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A banker who works for a foreign lender in the City of London and who asked to remain anonymous, told Handelsblatt he still hopes not much will change. But he admits it’s wishful thinking.

“Today is day four after the Brexit vote. It should slowly be seeping into my brain that the majority of the British have decided to leave the E.U., and have therefore opted for a somewhat gloomy future,” he said. “But somehow I still hope that it won’t get that far and I won’t have to put together a plan B for my professional future. But that’s probably an erroneous assumption.”

Hoping that some of the consequences can be averted is one reaction in the British financial sector to the Britons’ decision to turn their backs on the European Union. But there is also another reaction: A number of bankers have already contacted headhunters.

“As of the end of last week, we have received more CVs from bankers indicating that they want to change jobs,” said one recruitment consultant. “The prospects of being placed are now declining from one day to the next, because it’s already clear the supply of jobs will decrease while demand will rise.”

The financial sector is one of the most important industries in Great Britain. Some 2.2 million people work at banks, investment companies and their service providers. They account for a 12 percent share of the country’s economic output.

Investment banking and the trading business could be especially hard hit, and relatively soon. Some 77 percent of bankers expect that the affected jobs will disappear from the British capital within two years.

But the situation is likely to change after the Brexit referendum, and experts believe that financial companies will be among the biggest losers. According to a study by PwC, Britain’s departure from the European Union could cost up to 100,000 jobs and reduce the gross value added of the financial sector by up to 9.5 percent between now and 2020.

American banks with their European headquarters in London will likely be the first to react to the Brexit decision. Some of them have contingency plans in place and have already announced relevant figures. For instance, JP Morgan Chief Executive Officer Jamie Dimon said that up to 4,000 jobs could be shifted away from the island. Between 1,000 and 6,000 jobs could be affected at Morgan Stanley, according to news agency Reuters.

Even some employees of British banks could be packing their bags soon. HSBC head Stuart Gulliver announced at the beginning of the year that if there were a Brexit, 1,000 jobs would be moved to Paris.

British banks already completed large layoffs after the financial crisis, although they managed to find jobs for a number of employees in their asset management divisions. That will likely be more difficult now, with a few investment companies considering shifting jobs to Dublin or Luxembourg.

But what is most likely to harm London banks is the loss of their “passporting” rights to operate Britain. At present, if an institution holds a banking license in Britain, it can manage initial public offerings in other E.U. member states without further scrutiny, provide advice on bond issues and sell certificates. This is what makes London so attractive to U.S. banks, and has helped make the British capital one of the world’s top financial centers. But now banks, in particular, must look for alternatives and, in some cases, obtain a banking license in another E.U. country.

 

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According to legal experts, it generally takes two to three months to assemble the necessary application, and another six to nine months until the bank license is issued. For this reason, observers do not expect a major wave of bank relocations to occur until next year.

“It is difficult at this point to specify a precise time-frame,” said an official at a major U.S. bank, who asked to remain anonymous. “We won’t begin with the outplacement of jobs until there is more clarity over what future relations between London and Brussels will look like, and what can still be easily done in London.”

Boston Consulting Group, or BCG,  interviewed top bankers in Britain, France, Germany and the United States and many of them expressed similar views. Many of them have no specific plans yet on how they will react to the Brexit vote. The majority of the bankers said the consequences are difficult to assess but believe that up to 20 percent of the 400,000 jobs in the financial sector in London alone could be moved elsewhere as a result of the referendum vote to leave the European Union.

Investment banking and the trading business could be especially hard hit, and relatively soon. Some 77 percent of bankers polled by BCG expect that the affected jobs will disappear from the British capital within two years.

When asked where the jobs will go, the respondents’ answers varied, depending on whether they were given specific criteria or asked an open-ended question. In a comparison of 14 criteria, Frankfurt came in first as the most popular alternative to London, ahead of eight other cities. Frankfurt benefits primarily from the fact that the respondents value Germany’s economic and political stability.

But when the respondents were given no criteria, New York and Dublin were more popular than Frankfurt. “Frankfurt needs to improve its image,” said Wolfgang Dörner, a partner and the head of the Frankfurt BCG office. “When it comes to the question of how attractive a city is for employees, Frankfurt still gets relatively poor marks.”

Mr. Dörner warned against Frankfurt getting its hopes up, saying that it is an exaggeration to predict “there will be more than a few thousand new jobs here,” adding that “Frankfurt will not be the only winner.”

 

Elisabeth Atzler is the banking correspondent of Handelsblatt since 2012. Katharina Slodczyk is Handelsblatt’s London correspondent.  To contact the authors: atzler@handelsblatt.com and slodczyk@handelsblatt.com

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