Blog Post

With Brexit London would lose business as a global financial centre

London could lose its status of a global financial hub if there is a Brexit. Who would win the business that London would lose?

By: Date: June 6, 2016 Topic: European Macroeconomics & Governance

This text was published in the Spring 2016 issue of The International Economy.

There are multiple sub-scenarios in the aftermath of a No vote on June 23. In almost all of them, however, London would lose business as a global financial center. Part of its unmatched position as a hub for international financial services is linked to its membership of the European Union and corresponding access to the EU internal market. Non-European banks, especially US ones, use London as a beachhead into the single market, and many euro-area banks centralize their EU wholesale markets activities there. The EU “passport” concept of mutual recognition among supervisory authorities works smoothly for investment banking activities. The EU framework provides strong legal protection against regulatory fiat, as was illustrated when the European Court of Justice in March 2015 rejected the European Central Bank’s “location policy,” intended to force clearing houses to move their euro-denominated operations from London to the euro area. The access and protections would disappear if the UK was to withdraw from the internal market.

Most non-UK-headquartered large financial institutions take the possibility of a No vote seriously.

Most non-UK-headquartered large financial institutions are actively working on post-referendum plans, and take the possibility of a No vote seriously. For understandable reasons they do not communicate about this planning work and its conclusions. But early indications suggest that their moves following a No vote could be quick and significant, given the likelihood that the United Kingdom would enter a prolonged period of high uncertainty. An order of magnitude of one-third of activity potentially relocated outside of the United Kingdom does not appear far-fetched.

Who would win the business that London would lose?

The next obvious question is about who would win the business that London would lose. Inside the European Union, some have expectations that, since Germany and France would be the largest remaining countries, Frankfurt and Paris would be best placed to gain. But this ignores the incentives for financial firms to go to the most finance-friendly places, and there are a number of them in Europe. A rule of thumb of finance-friendliness is provided by the European Commission’s ill-starred proposal of a Financial Transaction Tax, whose adoption only a minority of EU member states are considering. FTT doubters such as Denmark, Ireland, Luxembourg, the Netherlands, and Sweden are more likely to attract business from London than FTT supporters including France, Germany, or, for that matter, Belgium.

But even bigger transfers could happen outside the European Union, and specifically to the United States. On almost any measure, London and New York are by far the world’s two largest financial centers. U.S. authorities have acknowledged London as a preferred entry point into the European Union for American financial firms, and have built strong working relationships with UK financial regulators over the years. But once the bilateral link with London is no longer part of the larger relationship between the United States and the European Union, one can expect a more competitive stance to favor New York as the best place to do international financial business.

London would have a lot to gain from the continuation of EU financial integration.

Even more difficult to assess, but arguably also even more substantial, is the opportunity cost of a Brexit. London would have a lot to gain from the continuation of EU financial integration. Banking Union, even in its current halfway form, will lead to the opening of more financial business to cross-border competition across the European Union, and so will any concrete moves in the direction of the European Commission’s vision of a Capital Markets Union. But if the United Kingdom is no longer in the European Union, it will not be able to reap as much advantage from these future developments as it has in the past steps of EU integration.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read about event More on this topic

Upcoming Event

Dec
12
12:30

The impact of Brexit for Research & Innovation in Europe

This event will feature a new and interactive format, with a restricted and high-level on-site audience and in parallel, it will be livestreamed on our website to remain public and attract the widest participation

Speakers: Alastair Buchan, Matt Dann, David Earnshaw, Kurt Deketelaere, Maryline Fiaschi, Martin Muller, Christian Naczinsky and Reinhilde Veugelers Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Opinion

Brexit: When the banks leave

More than a tenth of the City’s business is now bound to go, but how much worse could things get?

By: Nicolas Véron Topic: Finance & Financial Regulation Date: December 1, 2017
Read article More by this author

Blog Post

The impact of Brexit on the Irish energy system – pragmatism vs. principles

Brexit promises pain for Ireland that could be cut off from the EU internal market and be left exposed to market instability in the UK. Georg Zachmann assesses the scale of the possible damage for Ireland, and how the UK and EU might use the special energy relations on the Irish island to commit to a pragmatic solution.

By: Georg Zachmann Topic: Energy & Climate, European Macroeconomics & Governance Date: November 21, 2017
Read article Download PDF

Policy Contribution

A ‘twin peaks’ vision for Europe

The organisation of the European Supervisory Authorities (ESAs) is based on a sectoral approach with one ESA for each sector, with separate authorities for banking, insurance and securities and markets. But is this sectoral approach still valid? This Policy Contribution outlines a long-term vision for the supervisory architecture in the European Union.

By: Dirk Schoenmaker and Nicolas Véron Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: November 13, 2017
Read article More on this topic More by this author

Blog Post

The Bank of England’s dovish hike

For the first time since 2007, the Bank of England raised interest rates, with a hike of 25 basis points. At the same time, it provided forward guidance that outlines a very gradual path for future increases. We review the economic blogosphere’s reaction to this decision.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: November 6, 2017
Read article More on this topic More by this author

Blog Post

Falling Pound might not bring UK trade balance boost

The Pound Sterling depreciated by 14% against a basket of world currencies in the four months after the referendum vote to leave the EU. A number of pundits claimed that this would improve the UK trade balance and boost the economy. But the data do not show any visible improvement in the trade balance to date. Could it be that currency depreciations have less impact on trade balances than before?

By: Nicholas Branigan Topic: European Macroeconomics & Governance Date: October 31, 2017
Read article More on this topic More by this author

Blog Post

EU borders: walking backwards from Northern Ireland to Cyprus

The Good Friday agreement put to rest age-old conflicts on Ireland. It also offered hope that the reunification of Cyprus might be possible within the European Union. Lately, however, the “Green Line” that divides the easternmost island of the EU, is viewed as a template for a soft border at the westernmost island of the Union after Brexit.

By: Stavros Zenios Topic: European Macroeconomics & Governance Date: October 25, 2017
Read article

Blog Post

India’s trade ties with the UK and EU

As EU and Indian leaders meet in Delhi, we look at the figures on trade. The UK’s place in the relationship warrants special attention. EU-India trade has more than tripled since 2000, but UK-India trade is largely static. The shift is especially noticeable for EU exports to India, where the UK share has dropped from 29% to 10%.

By: Maria Demertzis and Alexander Roth Topic: European Macroeconomics & Governance, Global Economics & Governance Date: October 6, 2017
Read article More on this topic

Blog Post

Can roaming be saved after Brexit?

The referendum where UK voters chose to exit the European Union has many unanticipated consequences. One that is gaining visibility in the UK just now is the impact of Brexit on mobile roaming arrangements. How might the UK maintain roaming arrangements with the EU in the event of a hard Brexit?

By: J. Scott Marcus and Robert G. Clarke Topic: Innovation & Competition Policy Date: September 21, 2017
Read article Download PDF More by this author

Policy Contribution

Dutch Senate

Europe’s fourfold union: Updating the 2012 vision

The depiction of the euro area/European Union (EU) as a ‘fourfold union’ emerged in the first half of 2012 at the height of the euro-area crisis. In the past half-decade, Europe’s financial union has been significantly strengthened but remains incomplete and is challenged by Brexit. No consensus has been found on fiscal union and economic union has not made material progress, but political union might have advanced further than many observers realize.

By: Nicolas Véron Topic: Dutch Senate, European Macroeconomics & Governance, Finance & Financial Regulation, Testimonies Date: September 21, 2017
Read article Download PDF More on this topic

External Publication

Review of EU-third country cooperation on policies falling within the ITRE domain in relation to Brexit

What is the possible future relationship between the EU and the UK in light of Brexit? The report provides a critical assessment of the implications of existing models of cooperation between third countries and the European Union on energy, electronic communications, research policy and small business policy.

By: J. Scott Marcus, Georgios Petropoulos, André Sapir, Simone Tagliapietra, Alessio Terzi, Reinhilde Veugelers and Georg Zachmann Topic: European Macroeconomics & Governance Date: July 5, 2017
Read article More on this topic

Blog Post

Can EU actors keep using common law after Brexit?

English common law is the choice of law for financial contracts, even for parties in EU members with civil law systems. This creates a lucrative legal sector in the UK, but Brexit could make UK court decisions difficult to enforce in the EU. Parties will be able to continue using English common law after Brexit, but how will these contracts be enforced? Some continental courts are preparing to make judicial decisions on common law cases in the English language.

By: Uuriintuya Batsaikhan and Dirk Schoenmaker Topic: European Macroeconomics & Governance Date: June 22, 2017
Load more posts