London is likely to lose its financial services passport, and investment banks that shift operations abroad quickly will benefit from a “first-mover advantage,” according to a confidential Deutsche Bank briefing seen by Business Insider.
The internal note, titled “Brexit Briefing” and prepared for a July 5 board meeting, said the banks’ competitors would likely ramp up non-London operations in Ireland, France, Germany and Luxembourg, where they have existing subsidiaries. A spokesman for Deutsche Bank declined to comment.
Barclays and Bank of America Merrill Lynch could shift their markets business to Dublin, while Goldman Sachs has subsidiaries in Paris and Frankfurt it could use to keep its access to the 27-member single market once the UK officially leaves the European Union, according to the note. JP Morgan could shift resources to Luxembourg, where it has a subsidiary.
Here’s the breakdown, according to Deutsche Bank:
Under EU law at the moment, European banks can operate branches in the UK that do not need to be separately capitalised from the parent company abroad. Similarly, non-EU banks can use their London subsidiary to sell services to clients across the EU.
The use of this bank “passport,” which allows banks in London to access to the EU single market of 28 nations, could come to an end after the Brexit vote.
With client access at stake, banks could rush for the exits, placing a strain on the European Central Bank, which regulates Eurozone banks through its Single Supervisory Mechanism, for approvals, according to the note.
There will be staff shortages as firms look for local talent. Meanwhile, the UK could loosen rules and lower taxes to make London a more attractive financial centre.
Here’s the document:
Last week, JPMorgan CEO Jamie Dimon warned the bank could be forced to move thousands of staff out of Britain. Richard Gnodde, co-head of the Goldman Sachs International, wouldn’t rule out moving some or all of the bank’s 6,500 UK staff members to Europe when asked about Goldman’s post-Brexit plans.
The note warned that Deutsche Bank, which operates a branch in London, could lose access to EU clients in the longer term:
The note shows that Deutsche Bank thinks the most likely outcome of trade negotiations between the UK and EU would be for the UK to lose this access, because Theresa May’s government won’t accept the EU condition of free movement of people across borders.
Here’s how Deutsche Bank sees the main scenarios panning out, assuming the negotiations start at the end of the year:
With the UK out of the EU, European banks will have to set up subsidiaries, forcing them to pump extra capital into the UK. Much of European banks’ derivatives and wholesale markets operations are based in London. Earlier this week, Boston Consulting Group warned European banks will need to inject as much as €40 billion (£29 billion) of capital into their UK operations in order to keep doing business in the country after Brexit.
The Deutsche paper is speculative and written shortly after the Brexit vote. No one knows for sure what the UK’s Brexit agreement is going to look like.
But the mere fact that a major investment bank is even discussing a post-London future suggests banks are prepared for London’s near-1,000 year history as a centre for international trade and finance to come to an end, if needs be.