Finance

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

Hope for the best and prepare for the worst -- that's how financial markets took U.K. Prime Minister Theresa May's promise on Sunday to trigger formal talks to leave the European Union by the end of March. Just look at the pound, which on Monday slid at least 0.8 percent against the dollar. What once was an amorphous threat is starting to take shape.

But you don't have to be a full-throated Brexiteer to see that there is a silver lining to this storm-cloud for jittery bankers.

A Taste of Brexit
Theresa May's pledge to trigger EU exit talks by end-March hit the pound
source: Bloomberg
Intraday times are displayed in ET.

Firstly, the City of London now has some clarity on the timetable of Brexit. Talk of a "starting gun" may be going a bit far, given a lot could happen in six months -- and even more in the two years that the eventual negotiations would likely cover. But at least banks now know how long they have to prepare and get their contingency plans in order, regardless of whether they manage to extract any transitional measures from government.

Secondly, May's speech also offers a form of legal stability. She promised that the U.K. exit would abide by existing law and treaty obligations, and pledged to convert existing EU law into British law in order to give maximum certainty to businesses and workers. That indicates the U.K. wants to stay on an equivalent legal footing right up to the day of Brexit, which is crucial for investment firms who still hope that the U.K. regulatory regime will be deemed equivalent to EU rules under forthcoming MIFID II rule -- offering a workaround to the potential loss of passporting into the EU.

Slow Recovery
European bank stocks have yet to recover to pre-Brexit referendum levels
Source: Bloomberg

Business groups were quick to press for more details on the actual shape of Brexit, complaining about having to "operate in the dark." That's absolutely fair. Nobody can really say what the negotiations will yield, but May's language also showed little desire to sacrifice control over immigration in favor of other ends.

That suggests it's time for banks to prepare for the worst-case scenario -- the loss of passporting that would guarantee their access to the single market. That is not in itself a cause for celebration, since passporting is far preferable to an equivalence regime that's more vulnerable to changing political winds. But at least it still means more clarity for the contingency-planners. 

So if the outlook is still muddy, what can banks actually do with the timetable they now have? The question is whether banks have a separate non-U.K. EU subsidiary that can provide a channel to the single market. Big global banks like JPMorgan, Goldman Sachs, HSBC and Credit Suisse already have subsidiaries in countries like France, Ireland and Germany. Smaller banks theoretically now have the time, between today and 2019, to set one up -- launching a new bank in Luxembourg takes about 16 months from start to finish, according to PwC.

Passport to Luxembourg
Illustrative timeline of how long it takes to set up a credit institution in Luxembourg
Source: PwC

The rest is clearly in the lap of the gods. How much staff or capital would a bank really want to allocate to a place like Luxembourg or Dublin before Brexit is done and dusted? Probably as little as possible. We still don't know who will occupy the White House, the Elysee Palace or the German Chancellery in 2017; we don't know whether the London Stock Exchange and Deutsche Boerse will succeed in their merger; we don't know how MIFID II equivalence will be implemented. Bank staff morale is low enough without being sent on one-year secondments to Luxembourg.

May has done banks a small favor with her speech, and they should now focus on building the minimum protection against the worst kind of exit, while planning creatively in case things turn out better. That's still the best hedge for the next two years.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net