Is the Financial Heartbeat of Europe at Risk of Being Displaced?
When Britons voted for a Brexit on June 23, 2016, nobody quite understood the gravity of the vote. The yes vote was based on emotional reasons, with immigration and the rule of law at the heart of the movement. Nobody quite anticipated what would happen to the UK economy post-Brexit. The British Bankers Association (BBA) has been lobbying Prime Minister May to try and hammer out a blueprint before a Brexit is initiated. This strategic roadmap would pave the way for passporting rights to the European Union as part of Britain’s exit from the EU. London is home to a smorgasbord of the world’s biggest banks, some of them UK-owned and operated, most with foreign headquarters. These include JPMorgan Chase, Morgan Stanley, Goldman Sachs, HSBC, Citigroup, and a treasure trove of others. The City of London also hosts the world’s premier credit rating agencies. All of these financial institutions are going to come in for some tap after Prime Minister May initiates a Brexit. There is particular emphasis on credit rating agencies, and how they will fare once Britain is clearly on the path to a Brexit. All the big 3 credit rating agencies including Standard & Poor’s, Fitch and Moody’s are based in the UK. Combined, they employ a total of 1,400 people and generate £600 million for the UK economy.
Credit Rating Agencies Wrongfooted by Brexit Decision
Most of this revenue is centered in the City of London. The problem with the credit rating agencies is that they are reliant on their European regulation to function. If Britain is no longer part of the EU, the ratings agencies become toothless tigers. These credit rating agencies have suggested that one of the workarounds is if the Financial Conduct Authority (FCA) assumes full supervision of all 3 credit agencies. Another problem for Moody’s, Fitch and S&P is that neither the Bank of England nor the Financial Conduct Authority can guarantee that the European Union will recognize their authority.
Combined, these 3 credit rating agencies control the operations of 93% of European banks, but according to ESMA rules, credit ratings agencies have to be registered. This is a dilemma for the UK, and it is creating growing uncertainty in the financial markets. From the FCA’s perspective, it is leaving everything up to the government of the United Kingdom. From a contrarian perspective however, many analysts believe that ratings agencies are largely to blame for talking up the banks that actually precipitated the global financial crisis in 2008.
The City of Paris Steps in to Subvert the City of London
Meanwhile, the City of Paris is going full steam ahead building 7 skyscrapers with 375,000 m² of office space. These will be used to house the influx of banks and financial institutions post-Brexit. Paris hopes to have these skyscrapers built and ready for tenants by 2021. This is all being done in an effort to reassure banks and financial institutions in and around London that even if a Brexit takes place they will have a safe-haven in Paris. Major banking corporations are none too impressed with the Paris idea, owing to the extremely high taxation in France, the language barrier, and complex regulations. To assuage these concerns, the French have made it easier for foreign banks to complete their filing forms in English.
Already, leading UK bank HSBC has signaled that it will be moving its investment bank from London to Paris. That will result in the relocation of 1,000 jobs from the UK abroad. Much the same is happening with JPMorgan Chase which will be moving 25% of its 16,000-strong workforce from the UK abroad. UBS has been somewhat vague about how many jobs would be affected, but change is coming. The business district of Paris began a bold advertising campaign titled: Tired of the Fog? Try the Frogs! This is aimed at banks and financial institutions in London. As yet, there is little clarity about the nature of a Brexit and how the UK government plans to structure its exit strategy. Clearly it behooves Britain to negotiate the best possible deal so that passporting rights remain in place, with reciprocal trade agreements.
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