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18 March 2016

LSE: The City and the EU - There are clear divisions in the UK’s financial services sector over a Brexit


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While some of the main trade associations have adopted softly pro-European rhetoric in relation to the referendum, there is no unified view, with clear divisions existing over which course of action would be the most beneficial for businesses.


[...]Finance, above all else, is deeply uncomfortable about making public interventions into politics and would prefer to be on the winning side. Broadly speaking the City has been supportive of the Prime Minister’s renegotiation of the terms of British membership. It is strongly supportive of the EU single market, access to which is an important source of the City’s success as a global financial hub, but it is deeply concerned about the regulatory implications of banking union and Eurozone caucusing. This is reflected in the softly pro-European rhetoric of the main trade associations, such as TheCityUK and the British Bankers’ Association. [...]

The banking industry, which is dominated by a few large players and has been regulated by Europe for decades, is deeply concerned about the impact of Brexit and the implications of this for their continued access to lucrative European financial markets. Moreover, their bruising experience of post-crisis regulation has been shaped primarily by the UK government’s determination to pursue banking reform.

This is intended to resolve the so-called ‘British dilemma’: how to maintain the competitiveness of the financial industry while containing the risk to UK taxpayers of future bank failures. The reforms have taken two forms. First, banks have been forced to deleverage and recapitalise significantly faster than those in the rest of Europe, and to go beyond international and EU-level commitments (as enshrined in Basel 3 Accord and the Capital Requirements Directive IV).

For this reason, the UK government, egged on by the Bank of England, opposed EU attempts at the ‘maximum harmonisation’ of bank capital, wishing to reserve the right to impose requirements above and beyond those sanctioned by the Commission. Second, the Coalition government established an Independent Commission on Banking (ICB) which recommended that UK banks’ retail activities be ‘ringfenced’.

This was followed by a series of scandals, including Libor, which exposed the industry to intense scrutiny and the establishment of the Parliamentary Commission on Banking Standards (PCBS). For the banks the post-crisis experience has left a bitter taste in the mouth, leaving many convinced that they would prefer to take their chances in the quiet politics of Brussels to the Wild West of Westminster.

By contrast, the highly fragmented non-banking sector – including private equity, hedge funds and venture capital firms – had little or no involvement with Brussels prior to the financial crisis. Unsurprisingly their view of Europe has been tainted by the baptism of fire they have undergone in recent years, most notably with respect to the Alternative Investment Fund Managers’ Directive (2011). This was a Franco-German regulatory initiative, rooted in perceptions that the crisis was caused by ‘Anglo Saxon’ capitalism, embodied in the high risk and predatory activities of the non-banking sector. [...]

In short, there is no unified City view on Europe. Principal-agent analysis tells us that trade associations (as agents) simply tend to vocalise the preferences of their largest members (principals), hence their soft pro-Europeanism. However, this shouldn’t disguise the fact that the City’s carefully crafted collective voice masks real divisions over Brexit.

Full article on LSE



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