LONDON — Restructuring operations around a hard Brexit could cost UK banks €15 billion (£13.1 billion) and add €40 billion (£35 billion) to tier one capital requirements, according to a new report.
A report for the Association of Financial Markets in Europe (AFME), compiled by the Boston Consulting Group and Clifford Chance, suggests that Britain’s exit from the EU could be hugely costly and disruptive to wholesale finance markets across Europe.
Philippe Morel, a senior partner at BCG, says: “We found that in aggregate the cost, in the event passporting is lost, would be significant, both in terms of transferring bank operations and capital to new entities, as well as restructuring costs, and ongoing higher capital needs.”
UK Prime Minister Theresa May has made it clear that she plans to pursue a hard Brexit, trading off access to the EU Single Market for sovereignty over borders and immigration. This would force UK-based banks that conduct cross-border business to establish or staff up EU subsidiaries to handle any business in the EU Single Market.
“Approximately €1,280 billion of bank assets (loans, securities and derivatives) may need to be re-booked from UK to EU27 following a hard Brexit, unless alternative arrangements can be agreed,” AFME’s report says. “These assets are supported by €70 billion or approximately 9% of the (Tier 1) equity capital of the banks affected.”
The report, published on Monday, says that the securities and derivatives trading operations of banks are most at risk of disruption from a hard Brexit.
But the impact will not just be felt by banks, AFME warns. Businesses of all sizes also face upheaval as restructuring and regulatory uncertainty disrupts bank funding and lending to companies. The report’s authors interviewed 62 CEOs and treasurers of SMEs, large corporates, and investors, and spoke to 10 industry associations representing a wide range of companies and sectors in multiple geographies.
Simon Lewis, CEO of AFME, says in the report: “Both SMEs and large corporates also face potential disruption in the provision of wholesale financial services which in turn will lead to a higher cost of capital for businesses. That is why above all else business would like the status quo preserved.”
AFME’s report comes as senior finance figures travel to Brussels to lobby EU leaders for market access. The Financial Times reports that former City Minister Mark Hoban is leading a delegation calling for a free trade deal with the EU for financial services post-Brexit.
The plan is said to have “unofficial support of senior figures in Whitehall,” according to the FT. It comes amid a wider push for a soft Brexit from a faction within the Tory party, in the wake of Theresa May’s poor snap election performance.
Chancellor Philip Hammond has publically made the case for a softer Brexit in the weeks since the election and the Guardian reported on Sunday that a “mood of realism” is setting in for the government, with increasing acceptance of “the inevitability of a painful trade-off between market access and political control when the UK leaves the EU.”