Britain to EU: You Need Our Banks as Much as They Need You

Updated on
  • May and Carney fire back at Barnier over trade deal warning
  • Carney warns deal needed simply to protect existing contracts
EU's Barnier Sees Brexit Transition Ending Dec. 31, 2020

The day after the European Union’s chief negotiator warned that there could be no special deal for Britain’s finance sector, the U.K. sent a message back: You need our banks as much as they need you.

“The City of London is actually the banker for Europe,” Prime Minister Theresa May told a parliamentary committee on Wednesday. “It’s a significant provider of capital finance for Europe. There will be greater recognition of the role that the City plays.”

Bank of England Governor Mark Carney used almost exactly the same words during his own questions session in Parliament a couple of hours earlier. He said London handled “the most complicated bits of finance, the wholesale markets, the equity underwriting, the derivatives, FX trading.” The British regulatory system meant it was well equipped to do that business, he said.

The future of banking after Britain leaves the EU is one of the biggest questions in the Brexit talks. Finance is a significant U.K. industry, and a deal that prevented British banks from continuing to operate in the EU could see jobs move overseas. EU negotiator Michel Barnier told journalists this week that financial services couldn’t be included in a trade agreement. Such a deal, he said, would be unprecedented.

Carney argued that was too negative a position. “I don’t accept the argument that just because it has not been done in the past, it can’t be done in the future,” he said. “We’d just walk away from progress if that were the approach we took to issues.”

Green Shock

The back and forth on the role of banking in the capital is a key development in the Brexit saga, yet it will be temporarily overshadowed by May’s firing Wednesday evening of one of her closest allies: Damian Green. An old friend and her deputy, he was found to be in breach of the ministerial code over an investigation into pornography found on his computer in Parliament almost a decade ago. It’s the third high-profile resignation in under two months.

Domestic political upheaval notwithstanding, May’s government makes the case that Barnier doesn’t get to set his own negotiating terms. The 27 EU capitals have to approve the deal and they may decide that it’s worth giving Britain a good arrangement if it’s the price they have to pay to keep trading freely.

The U.K.’s comments weren’t simply saber-rattling ahead of negotiations. The Treasury said Wednesday that legislation may be needed to protect the validity of existing financial contracts such as derivatives and insurance policies after Brexit.

About 20 trillion pounds ($27 trillion) of existing derivative contracts are at risk, while on the insurance side, a total of 60 billion pounds of liabilities could potentially be affected in a hard Brexit with no trade agreement, according to the Bank of England. To solve the problem, the U.K. and European Union both need to adopt legislation to protect the “long-term validity” of existing contracts, the BOE has said.

Chancellor of the Exchequer Philip Hammond said on Wednesday that, if necessary, the Treasury would propose legislation that would enable firms in the European Economic Area -- the EU plus Iceland, Liechtenstein and Norway -- to obtain a “temporary permission” to continue operations in Britain for a “limited period after withdrawal.” 

But Carney said the derivative issue can’t be solved by the U.K. alone, because “we also need something in parallel” from the EU. “The derivative contract is a two-way contract; it requires permissions on both sides.”

“The incentives for the EU27 are aligned; it’s their citizens who would bear the brunt if the legislation doesn’t pass,” Carney said. “We have had conversations with our counterparts over recent months on this issue, and they’re well aware of it.”

— With assistance by Svenja O'Donnell, Lucy Meakin, David Goodman, and Ian Wishart

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