Financial Services may be unaffected by Brexit

Many financial chiefs had made the worst predictions about Brexit. If one believes what they say, the United Kingdom trade would soon descend into a kind of nuclear winter. Companies would ship out of the continent. Massive job losses in their thousands would be the order of the day. The EU would impose punitive rules which will govern access to their customers. Euro clearing activities will move out of London and go to a more sociable European capital.

Even leading financial companies like EY and Oliver Wyman were taken by this gloomy outlook. A study commissioned by London Stock Exchange estimated that a mind-boggling 232,000 posts in euro-denominated securities clearing could move to the Eurozone.

Better reality

The reality is that outcomes can rarely happen. The EU, although it is trying its hardest to snatch away financial jobs from the UK, cannot do anything. This is because a harsh financial statement by the EU against the UK will hurt the financial status of Europe much more than it would hurt Britain itself.

To understand why it is so, it is important to know and comprehend comparative outcomes of EU banks and British banks as parts of a particular deal involving both the sides to be placed into full subsidiaries and a few of the systematically important operations present in each other's territories. Right now they enjoy an automatic right to function through branches. This makes them extremely efficient in capital consumption. However, the creation of subsidiary companies could be a possible consequence if the present rights are revoked.

Moving to continent means loss of money

Yet another conundrum is the quantum of capital needed to support the “ringfenced” activities. This capital will no longer be subjected to the diversification and netting benefits which leak out the precious capital of a bank. According to BCG, a consulting company, European banks will have to scrape together an extra 40 billion euros in aggregate if they go for subsidiary companies and all that goes with it. A British company could do the same with a few billion.

Many would argue that nothing stops the companies from moving back to the Eurozone. If they do so, it is pointed out, not much capital is needed. Nothing actually stops them from doing so. However, these could bring a lot of business and regulatory problems. Such activities will damage the access to the vital dollar London markets. The latter are settled via the US Federal Reserve administered London-headquartered CLS International Bank.

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