Some of the biggest US financial groups, including Morgan Stanley, Bank of America and Citigroup, are examining whether to move transactions totalling hundreds of billions of dollars out of London to rival hubs because of Brexit, calling into question the City's role as one of the world's leading centres for investment banking.
The largest investment banks book much of the business they do around the world in London, not only from European clients, but also from those in Asia, Africa, the Americas and the Middle East.
Twice as many US dollars are traded in London as in New York, and the UK accounts for almost 40 per cent of the world’s $3 trillion-a-day interest rate derivatives market, although it was recently overtaken by the US.
While bank bosses have made many headline-grabbing statements about moving thousands of jobs out of the UK because of Brexit, the possibility that they will drain some of their big pools of money out of London has drawn less attention. But reducing the funds they hold in the UK could have consequences for almost every aspect of their presence in the country – including staffing.
“From a supervisory perspective, what matters is aligning the risk-taking, the management and the money [both in the form of capital and revenues],” says Stephen Adams, senior director at the consultancy Global Counsel.
Senior executives at some banks say they are considering how to handle their “rest of world” business if they had to shift capital and liquidity from the UK to the EU.
They fear that if a “hard Brexit” severs financial services access between the two markets, London would become less effective as a global booking centre. As a result they are in early-stage discussions on whether to shift some of the business to New York, Hong Kong, Singapore or Frankfurt.
Split capital
Michael Cole-Fontayn, head of Europe at Bank of New York Mellon and chairman of the Association for Financial Markets in Europe, warns of the “pretty enormous” costs if Brexit forced banks to split the capital currently concentrated in London.
“That’s absolutely a potential outcome and what we’ve said all along is that it is important that this capital and liquidity currently based here to fund jobs and activity is not moved to New York,” Cole-Fontayn says.
He adds that UK-based banks had €57 billion of capital supporting more than €1 trillion of securities and derivatives trades with EU clients and another €13 billion of capital to support €180 billion of loans to EU clients.
Most banks have only recently started to think about how they may change their global booking structures after Brexit. Any big moves are unlikely to be decided until the UK’s new trading agreement with the EU is finalised, according to senior bankers.
The risks to London’s position were underlined for some bankers by the European Commission’s recent proposal to give EU regulators powers to vet overseas clearing houses, including those in the UK, and if necessary force them to relocate in Europe.
Fragment
“If location requirements are introduced in several areas you start to fragment quite an efficient ecosystem that has built up in London,” says a senior financier who has been lobbying the government over Brexit. “It is a slow, 10-year drip-drip bleeding, rather than an immediate cut to the artery.”
Out of the £190 billion to £205 billion total financial services revenues in the UK in 2015, just under half was for UK clients, about a fifth was for EU-related business and almost a third was for business from the “rest of world”, according to an OliverWyman report for TheCityUK lobby group.
Non-EU countries accounted for about two-thirds of UK financial services exports, such as trading bonds and equities for asset managers and pension funds or selling derivatives to protect companies against moves in currencies and interest rates.
Richard Gnodde, head of Europe at Goldman Sachs, warned in a recent podcast: “If we get to a place where we have to fragment and we have to have one pool of capital sitting in the UK and another pool of capital sitting in the EU27, and all the consequences of that, that’s obviously less attractive and more expensive.”
Bankers say London had several natural advantages, including language, timezone, a deep pool of talent, legal system, transport links and professional services. Some call for a “grandfathering” arrangement to shelter earlier transactions from any Brexit changes.
Many investment banks struggle to generate attractive returns in Europe, and the disruption of Brexit could persuade them to shut some UK-based activities. Plans drawn up in Brussels to make banks establish holding companies for their EU operations with separate pools of capital could be another blow to the City.
Pressure
“It could very well be that people consider the ‘rest of world’ component very seriously [if there’s a hard Brexit],” says one senior markets executive at a large US bank that books many of its global trades through London.
“I don’t think it’s top of mind right now, there is so much to do to get yourself ready for Brexit,” says the executive, who judged there was a “not insignificant” 20 to 30 per cent chance of the UK losing both “rest of world” and European markets business.
Sylvie Matherat, head of regulation at Deutsche Bank, recently warned that nearly half the German lender's 9,000 staff in the UK could be forced to leave the country under pressure from regulators because of Brexit. A person briefed on Deutsche's strategy says: "It is too early to draw any conclusions at this stage. We are analysing various scenarios."
Morgan Stanley, Bank of America, Citi, JPMorgan, Goldman, Deutsche, BNP Paribas, Société Générale, HSBC and UBS declined to comment. – Copyright The Financial Times Limited 2017
