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09 Feb 2017

Could Brexit Cost the UK £1.5 trillion?

Brussels think tank Bruegel released a report that sent an icy chill through the City. It warned that Britain’s financial sector was at risk of losing 30,000 jobs and £1.5 trillion in assets. They calculated a loss of £6.8 billion (€8 billion) in revenue, at minimum. The assets, representing 17% of the UK’s banking system, would move to Europe if the UK loses its passporting rights. These rights permit the City’s banks and financial firms to sell products and services to European states from their London offices. It appears highly likely that the UK can’t keep these passporting rights, making a “hard Brexit” especially hard for the City.
Bruegel’s painting a picture, it says “for the purposes of illustration and debate, and not intended as forecasts”. Last year Consultancy EY foresaw a darker future, estimating that up to 83,000 jobs could leave the City. The precise figures of volumes of trade are only alarming estimates, although financial regulation specialist Simon Gleeson described the morning after Brexit as a nightmare scenario: the UK losing “20% of its volumes overnight.”
How to hold the “strong position”?
The report includes insight that can fortify the UK’s position in the negotiations. Europe’s economy is linked with London’s financial centre. If Brexit blocks EU states having access to London’s efficient, centralized market, EU borrowing with fragmented services is estimated to rise at an “extra annual cost of €6 billion to €12 billion for households and corporates”. This increase demonstrates the enormous value of London’s one-stop efficiency. It’s clearly advantageous to have a single place for both settlement and clearing operations to occur. This point encourages optimism on the part of City Minister Simon Kirby who sees the UK negotiating from “a strong position”.
That bargaining chip isn’t a sure bet, since the report suggested ways that EU could crush London’s advantage. In preparation for Brexit, Bruegel recommended Europe see the changes as “an opportunity for the remaining EU27 to accelerate the development of its financial markets”. If they dug in and accomplished a more streamlined and efficient, possibly centralized market, it could diminish any leverage the UK hopes to have when the negotiations begin.
Banks hedging their bets
Goldman Sachs is considering slashing half of its London staff, which is a loss of 3,000 jobs. The bank also plans to transfer 1,000 staff members to their new Frankfurt offices. The exodus of international banks includes JPMorgan Chase and UBS. HSBC has said they’ll move 1,000 bankers to France, most likely. Other services that are associated with the financial sector are also planning to relocate to some staff to Europe including, ironically, London’s iconic 328-year old insurance market Lloyd’s of London.
High-level Paris representatives met with leaders of UK-based international firms at The Shard on Monday, February 6th. Presenting their case for Paris as an alternative global city, the sales pitch for relocating included the statement that, for a business that wants to be in the EU, Paris offers “stability”. That’s not a certainty, given the upcoming elections. In fact, if JP Morgan executives attended the meeting, they might have discussed their strategists forecasting the likely impact on the single market currency should Marine Le Pen win the presidency.
They said there’s only a 3% chance of her National Front party’s victory, but after the surprise results of Brexit and Trump, many are taking all political polls with more than a grain of salt. In the unlikely event that she does win, her promise of Frexit would likely devalue the euro by 10%, immediately, JP Morgan says. In the longer run, however, it would likely set off a domino effect that could shatter the European Union, putting an end to the euro, too.
Would the banks then troop back to the City? Is the safest way forward to consult with the venerable Lloyd’s (formerly) of London, wherever they may have decamped to, and see if they can insure against yet another risk?