Reshaping the post-Brexit financial centre landscape – a nebulous constellation or new rising star?

Brexit, uncertainty, EU passporting, euro clearing, relocation – all terms that have unfortunately seeped into the common vernacular and littered the columns of newspapers over the past year. Since the United Kingdom’s 2016 referendum on European Union membership, the realisation has slowly set in that the UK and EU are on an express train towards an uncomfortably hard Brexit. The exact outcome of a hard Brexit is still murky, but this uncertainty is exactly what is driving a shift in Europe’s financial centre landscape.

The UK’s withdrawal from the EU will certainly result in a transfer of operations and liquidity onto the continent, but this transfer will not dramatically diminish London’s significance as a leading global financial centre. Rather, the continental drift will either bolster several financial centres or solidify one as Europe’s leading financial centre. While the outcome has yet to be determined, early indications point towards the latter scenario, with Frankfurt taking the lead.

Immediately following the referendum, representatives of the Financial Centre Frankfurt were contacted by financial services firms concerning relocation to Frankfurt. As UK prime minister Theresa May’s speeches pointed increasingly towards a hard Brexit and after the triggering of Article 50, these first theoretical discussions became increasingly concrete. The first announcements in favour of the Financial Centre Frankfurt were made by Standard Chartered, VTB Bank, UBS, Woori bank and Silicon Valley Bank.

The Japanese government notably signalled its discomfort in September 2016 in a rather stern letter, Japan’s Message to the United Kingdom and the European Union. It was not surprising that in June this year three Japanese banks, Daiwa, Nomura and SMFG, were among the first to publicly announce concrete plans for establishing a European hub in Frankfurt. They were joined last month by Mizuho Securities.

Frankfurt’s strengths

As the Bank of England’s July 14 deadline for banks to submit their Brexit plans loomed nearer, Goldman Sachs’s European head, Richard Gnodde, reported that the group would most likely more than double its staff in Frankfurt. Joining Goldman Sachs, will be fellow “Big Five” American investment banks, JP Morgan, Citigroup, and Morgan Stanley. At least 12 banks are expected to announce their decision for Frankfurt before the end of 2017, with some estimates pointing to as many as 20.

Other financial hubs, however, do have advantages for specific business units. Luxembourg, for example, has been a magnate for asset managers and Amsterdam will welcome insurers. Frankfurt, on the other hand, leads in attracting lucrative trading and front office functions. Like most business units, trading requires a unique habitat. Since Frankfurt is already a trading hub that structurally mirrors London, albeit much smaller, the preconditions for expanded operations are set in place. With one of the world’s largest and technologically advanced securities and derivatives exchanges, Deutsche Börse, and the world’s busiest data exchange hub, DE-CIX, Frankfurt comfortably meets these infrastructure preconditions.

In addition, the German banking industry is built on a tradition spanning centuries and is an economic and societal pillar, rather than enemy or scourge. As financial firms thrive on stability and certainty, seesawing attitudes from politicians and governments cannot provide the safe harbour they require. Years of political and economic stability result in a business-friendly environment with competitive tax rates, notably without caps on bonuses. Unsurprisingly, the Frankfurt Rhein-Main region, with a gross domestic product (GDP) of €215bn, is a stable, thriving and diverse powerhouse in Europe’s largest economy, fuelled by the Financial Centre Frankfurt.

A regulatory hub

As Frankfurt is already a hub for trading, the German supervisor, the Federal Financial Supervisory Authority aka BaFin, is capable of and experienced in handling the complex derivatives business that banks will need to move from London. Since the June 2016 referendum, BaFin has been increasingly proactive in assisting banks interested in applying for licences in Germany. Large portions of applications may be submitted in English, information websites in English were launched, and at informational events held in English, BaFin representatives explained that they would do whatever they could to make the process as painless as possible. These proactive efforts are those, characteristic of services in a global financial centre.

Besides the proximity to BaFin and the Deutsche Bundesbank, Frankfurt has established itself as regulatory hub, home to the European Central Bank (ECB), the European Insurance and Occupational Pensions Authority (EIOPA), the European Systemic Risk Board (ESRB) and soon – as many prognosticate – the European Banking Authority (EBA). While applications for the EBA relocation beauty contest are still open, Frankfurt Main Finance is quite confident that the Financial Centre Frankfurt and its many merits will prevail. That said, the EU is a complex bureaucracy and decision makers will take many political considerations into account as well. While we would find this unfortunate, EBA could very well go to a country that does not yet host an EU agency.

Some observers, particularly those in the City of London hoping to mitigate European revanche, suggest that the results of a hard Brexit will only serve to strengthen financial centres in North America and Asia, rather than weakening London and strengthening European centres like Frankfurt, Paris, or Dublin. Despite the far-reaching consequences of Brexit, the centre of gravity is unlikely to shift from London. Any changes to the UK’s current access to the Common Market could not enable New York or others to poach business from the City, for they are subject to the same restrictions. In addition, London’s significance will be protected by its time zone location, situated comfortably between Asia and the US. Furthermore, while 23% of the UK’s financial services revenues are EU-related, the remaining 77% of the UK’s annual £200bn finance industry stands to command a great deal of global influence.

Conclusion

The final picture of the redrawn financial centre landscape remains nebulous, but it is clear that Brexit is bad for the UK, Europe, and Germany. However, it presents European financial centres with a unique opportunity to gain influence, jobs and business. Will the financial services be diluted across European centres, or will one European centre emerge as the continent’s leading financial centre? Current developments adumbrate the latter scenario, with the Financial Centre Frankfurt taking the lead.

Despite some appetites for punishing the UK and financial centres’ thirst for influence and jobs, Frankfurt Main Finance maintains that Europe does indeed need the City of London. We hope that Brexit negotiations will provide for a bridge to link London’s financial centre to the eurozone, ideally with one end anchored firmly in the Financial Centre Frankfurt.

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