Will Brexit Trigger an Exodus of Banks From London?

Deutsche Bank Said to Prepare Retreat From London

London has flourished as a financial center for decades in part because global banks, from offices around the bustling City of London district, could sell their services freely around the European Union. Now that British voters have decided to leave the 28-nation trading bloc — the complicated international divorce known as Brexit — the city’s status as a banking hub is under threat. If U.K. firms lose easy access to Europe’s $19 trillion economy, which seems likely under the terms laid out by Prime Minister Theresa May, Britain becomes a far less attractive place to do business.

1. How big a loss is this for London?

London could lose 10,000 jobs in banking and 20,000 roles in the larger field of financial services, according to Bruegel, a Brussels-based think tank. Other estimates range wildly from as many as 232,000 jobs to as few as 4,000, so view them with some skepticism. Executives at banks including Morgan Stanley, Citigroup Inc., Deutsche Bank AG and JPMorgan Chase & Co. have said they are considering moving staff and operations out of Britain to service their EU clients. The top five U.S. investment banks keep about 90 percent of their EU-based employees in London.

2. Which businesses might be on the move?

No one really knows, but potentially any front-office or back-office operation with customers in the EU could have to pack up. One likely target is euro clearing, a service to help traders complete transactions safely and at the executed price. The EU is seeking to retake control of a function traditionally handled by London-based clearinghouses: settling derivatives trades denominated in Europe’s common currency, the euro.

3. So when might this start?

To some degree it already has. Global banks have begun the process of moving some U.K.-based operations to new or expanded trading hubs inside the EU, and at least a few non-British traders are returning home. Others, tired of wondering whether their jobs will be moved or cut, are volunteering to move to their native EU countries should their employers need to relocate staff. European and U.K. regulators are pushing financial firms to waste no time in making contingency plans for leaving London before Brexit actually happens. Consultancy firm EY said 59 of the 222 financial services firms it monitors have said they have started moving people out of the U.K., or are reviewing their domicile. The U.K. is on course to leave the EU by March 2019.

4. Is there another way?

Not really. Though May has said she wants a “bold and ambitious free-trade agreement” with the EU — one that would safeguard the rights of banks to provide services across the continent — EU regulators have indicated that they won’t tolerate fly-in, fly-out arrangements with bankers commuting from London.

5. Has the recent U.K. election changed anything?

Yes, although how much remains to be seen. May had hoped more Conservatives would win seats in the House of Commons, giving her an increased majority, so she could avoid having to placate either euroskeptics or pro-Europeans. Instead, she ended up with a minority government, a result that drained her of personal authority and threatened to reignite the civil war in her party over the EU. The betting now is that she will have to soften her plan, perhaps by keeping the U.K. in the customs union, allowing a continued role for the European Court of Justice or weakening immigration controls to keep ties to the single market. There is a view that the U.K. will end up in the European Economic Area, like Norway, at least for a short period. But if Brexit hardliners turn against her, she could have problems. So the election has increased the likelihood of both a softer Brexit and the hardest Brexit of all -- Britain crashing out without a deal.

6. What are the banks hoping for?

For one thing, they want a managed transition to a new trading relationship, not a sudden change that May has compared to falling off a “cliff edge.” There are different ideas on how to achieve that. The financial industry has pushed for a “standstill” arrangement that would preserve existing rules for four or five years until new regulations take effect. May talks about a gradual phase-in.

7. What sort of new system do they want?

Bank executives long ago gave up hope of preserving so-called passporting rights, which allow global banks with bases in London to provide services to the rest of the EU. Instead, they have focused on securing a version of regulatory “equivalence,” or a formal recognition by the EU that the U.K.’s rules and oversight of specific businesses are as tough as its own. That would pave the way for a continuation or resumption of cross-border business, on a case-by-case basis.

8. Where will London’s bankers go?

Frankfurt is emerging as the leading alternative. Standard Chartered Plc, Nomura Holdings Inc., Sumitomo Mitsui Financial Group Inc. and Daiwa Securities Group Inc. have picked the city. Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley are weighing a similar move. Barclays Plc is considering Dublin, Ireland’s capital. JPMorgan plans to build up in Frankfurt, Dublin and Luxembourg. But no other European location quite matches London’s depth of markets, breadth of expertise or regulatory appeal. While banks will move some operations to the continent to ensure access to market activity in European time zones, they could ultimately move even more across the Atlantic to New York, which could be the only genuine one-stop shop for finance after Brexit.

9. So how many people are we talking about?

If the high estimates are correct, the number of bankers on the move would account for about 10 percent of the 2.2 million people that lobby group TheCityUK says work in finance and related professions in the U.K.

The Reference Shelf

  • A QuickTake Q&A on London’s dominance of the clearing business.
  • Another Q&A explaining the possible "cliff edge" in bank regulation.
  • The Boston Consulting Group’s white paper on the impact of Brexit.
  • Oliver Wyman’s report on the impact of Brexit on U.K. financial services.
  • The big winner from Brexit could be New York.
  • Bloomberg View’s Mark Gilbert says London bankers might like Paris.
  • Sign up for Bloomberg’s Brexit Bulletin newsletter.
  • Follow @Brexit on Twitter for full coverage of Britain’s exit from the EU.
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