Banks are anticipating the decline of the City and the rise of other financial centers.
Without really believing it, the primary European banks had been preparing for more than a year for the exit from the European Union voted by the British. But the Brexit victory took the City and the major international financial centers by surprise. The financial sector is one of the industries that will be most affected. Overview of the major upheavals to be expected in European finance.
What will happen to La City?
London is widely expected to remain an important financial center, but its star is likely to fade. The United Kingdom is now the largest financial center in the European Union, accounting for almost 25% of its financial services and employing 2.2 million people in the financial industry. However, London’s disaffection will depend on the United Kingdom’s exit negotiations with the European Union.
The main risks for La City is to lose its European “passport” and its euro “clearing” activity – and therefore investors. London is indeed an important clearing center in euros, a system that provides financial security for transaction processing. The European Central Bank does not like this situation since it cannot exercise control over these activities, which potentially pose a systemic risk to monetary union. In 2011, the Frankfurt institution had tried to repatriate these clearing houses. But the City had won its case before the European courts. By leaving the European Union, London will no longer be able to invoke the benefit of belonging to the common market to counter a future takeover of the ECB. For the boss of a French CIB “, repatriation of the euro clearing could greatly weaken the City.”
Which financial centers to take over?
For financial analysts, “no financial center is likely to replace London.” For Société Générale boss Frédéric Oudéa, European finance will become more “multipolar.” Who, from Paris, Frankfurt, Luxembourg or Dublin will benefit most from the expected downgrading of London? Everything will depend on the decisions of investors and financial groups to relocate certain activities to the EU. Dublin and Luxembourg are more attractive from a tax point of view than Paris, which can, however, count on several assets: the presence of large groups active on the markets or a leading asset management center, and real estate or transport capacities. While taking note, with regret, of the decision of the British, the Place de Paris is swamping its weapons.
Are French banks ready?
“We are ready to manage the emergence of the coming days and also to adapt to this new institutional framework,” assured Frédéric Oudéa on Friday morning. After having suffered a violent stock market shock, French banks still have to build their post-Brexit future. Across the Channel, they have just under 3% of their total workforce, concentrated in corporate and investment banking (CIB) activities. Will they be partly transferred to the mainland? For the moment, no French bank has revealed its game.” This will depend on the negotiation of Brexit and the behavior of our customers,” explains one banker.
In the shorter term, the consequences of Brexit on the markets could also plummet the results of the French groups’ financing and investment banks in the second quarter. Volatility on the markets could continue, says Romain Burnand, manager at Moneta, everything will depend on political responses, the impact of Brexit on the economy…”.
What are the consequences for banks operating from London?
It is quite possible that, following its negotiations with Brussels, the United Kingdom will lose its European passport, which allows a credit or payment institution authorized in an EU country to operate in the various single market countries. From then on, the major American or Swiss banks, or even fintech, which used London as a bridgehead to radiate in Europe, will have to obtain approval in an EU country.