Morgan Stanley, Citigroup and Bank of America are among the banks planning to use London branches of their EU subsidiaries to smooth the process of building new headquarters on the continent, according to five people briefed on the plans.
One banker involved said the option — dubbed “branch-back” by lawyers — was “the simplest arrangement” available that offered “less costs, less disruption and movement”. Branch-back is essentially a reversal of the current set-up, where US banks tend to use their London operations to “passport” their services across the rest of the EU.
A second banker said using London branches of EU divisions was “a reflection of the fact that hiring [back office] staff is tight in the EU in the investment banking market; it’s easier in retail, sales and trading”.
However, the plans risk antagonising European regulators, who may resist moves by banks to keep staff who are handling transactions with EU clients in the UK along with much of the capital associated with the activities.
For the plans to work, UK authorities would also need to allow investment banks based in the rest of the EU to continue operating in Britain through more lightly regulated branch structures.
“All of us aren’t quite sure yet where the UK regulators will come out in terms of how they treat branches of EU entities,” said the first banker. Banks would argue for newly created branches to receive the same treatment as existing ones, like the big London branch that Deutsche Bank uses for its European investment bank, the banker added.
BofA is in the process of merging its UK bank into its Irish operation to make it a branch of its Dublin-based subsidiary and establishing a similar structure for its European broker-dealer. One banker involved in the move said the merger was part of worst-case scenario planning. It is set to be completed by July next year.
Citi already has a UK branch of its Dublin-based bank Citibank Europe, and a UK branch of the German entity that it is repurposing as its EU broker-dealer. Both branches will be more extensively used after Brexit, subject to regulatory permissions, a person familiar with Citi’s plans said.
If successful, the plans could provide a boost to the City of London, following warnings that, as Europe’s current financial heartland, it faces an exodus of talent. A report by Oliver Wyman consultancy estimated that Brexit could cost up to 75,000 jobs in the UK’s financial services sector while the Bank of England expects 10,000 immediate job losses in the event of a hard Brexit. Representatives from Frankfurt, Paris and other continental cities have been eagerly courting banks in an attempt to snag some of those jobs.
The strategies by the US banks have emerged after they confided in Wilbur Ross, their US commerce secretary, while he was in London over their dismay at the state of Brexit talks. They warned that the “point of no return” — where they will have to deploy their worst-case contingency plans in order to be ready for the March 2019 Brexit deadline — was fast approaching unless there was clarity over what a transitional deal might look like.
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