20 June 2017

Financial Times: Brexit forces some US banks to consider shifting funds out of UK

[...]The largest investment banks book much of the business they do around the world in London, not only from European clients, but also from those in Asia, Africa, the Americas and the Middle East.

Twice as many US dollars are traded in London as in New York and the UK accounts for almost 40 per cent of the world’s $3tn-a-day interest rate derivatives market, although it was recently overtaken by the US.

While bank bosses have made many headline-grabbing statements about moving thousands of jobs out of the UK because of Brexit, the possibility that they will drain some of their big pools of money out of London has drawn less attention.

But reducing the funds they hold in the UK could have consequences for almost every aspect of their presence in the country — including staffing.

“From a supervisory perspective what matters is aligning the risk taking, the management and the money (both in the form of capital and revenues),” says Stephen Adams, senior director at the consultancy Global Counsel.

Senior executives at some banks said they were considering how to handle their “rest of world” business if they had to shift capital and liquidity from the UK to the EU.

They fear that if a “hard Brexit” severs financial services access between the two markets, London would become less effective as a global booking centre. As a result they are in early-stage discussions on whether to shift some of the business to New York, Hong Kong, Singapore or Frankfurt.

Michael Cole-Fontayn, head of Europe at Bank of New York Mellon and chairman of the Association for Financial Markets in Europe, warns of the “pretty enormous” costs if Brexit forced banks to split the capital currently concentrated in London.

“That’s absolutely a potential outcome and what we’ve said all along is that it is important that this capital and liquidity currently based here to fund jobs and activity is not moved to New York,” Mr Cole-Fontayn says. He adds that UK-based banks had €57bn of capital supporting more than €1tn of securities and derivatives trades with EU clients and another €13bn of capital to support €180bn of loans to EU clients.

Most banks have only recently started to think about how they may change their global booking structures after Brexit. Any big moves are unlikely to be decided until the UK’s new trading agreement with the EU is finalised, according to senior bankers.

The risks to London’s position were underlined for some bankers by the European Commission’s recent proposal to give EU regulators powers to vet overseas clearing houses, including those in the UK, and if necessary force them to relocate in Europe.

“If location requirements are introduced in several areas, you start to fragment quite an efficient ecosystem that has built up in London,” says a senior financier who has been lobbying the government over Brexit. “It is a slow, 10-year drip-drip bleeding, rather than an immediate cut to the artery.” [...]

Full article on Financial Times (subscription required)

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