Blog Post

Losing “EU passport” would damage City of London

If the UK cannot secure a “Norway” deal and stay within the internal market, the UK will lose the passporting rights which make London attractive as a financial centre. The macroeconomic fall-out from Brexit has also damaged the performance of banks and insurers.

By: Date: June 28, 2016 Finance & Financial Regulation Tags & Topics

1. Passporting

Part of London’s attractiveness as international financial centre is the access to the internal market of the wider European Economic Area (EEA). By using a UK licence as European passport, foreign financial firms can offer their financial services throughout the EEA. If the UK cannot secure a “Norway” deal and stay within the internal market, the UK will lose these passporting rights.

The internal market is underpinned by a network of Directives and Regulations, which permit access to other EEA member states if a firm has a licence in one member state (the ‘home’ member state). The most important directives for financial services are:

  • the Capital Requirements Directive (CRD IV, 2013/36/EU) for banking
  • the Markets in Financial Instruments Directive (MiFID, 2004/39/EC) for investment services
  • the Alternative Investment Fund Managers Directive (AIFMD, 2011/61/EU) for hedge funds and private equity
  • the Insurance and Reinsurance Directive (Solvency II, 2009/138/EC) for insurance

We illustrate the how the passport works legally with the Capital Requirements Directive (CRD IV), the legal framework for credit institutions (banks). The passport consist of several elements of the CRD IV:

  • Licence: Title III of CRD IV (Articles 8 to 21) specifies the requirements for access to activity of credit institutions. The main element is authorisation by the home supervisor, which provides the single licence.
  • Freedom of establishment: Title V (Articles 33-39) contains the provisions concerning the freedom of establishment and the freedom to provide services. It means that if a credit institution is authorised in one member state, it has the freedom to establish a branch in (or to provide services to) any other EEA member state without prior approval. The credit institution only needs to notify the host country supervisor.
  • Home supervision: Title VII sets out the principles of prudential supervision, which predominantly gives powers to the home supervisor with some very limited powers for the host supervisor in the area of liquidity supervision. As these powers of liquidity supervision are related to the operations in different currencies, the new European Banking Supervision framework has decided to give up these host country powers within the euro area, which uses the single currency (Schoenmaker and Veron, 2016).

This system of full access based on a single passport (provided by the home country supervisor) is constrained to the EEA. So, if the UK were to leave the EEA, UK licensed banks (either UK head-quartered or foreign-headquartered) would need to obtain an extra licence from the host supervisor in an EEA member state in order to offer financial services in that member state.

An extra licence would be necessary for all forms of cross-border services, ie through the establishment of a branch or subsidiary or through the direct offering of cross-border services. The UK would then become a third country, which needs to find a point of access for business in the EEA. Similarly, EEA financial institutions would need to apply for a licence to enter the UK. The other Directives apply a similar passporting system to the CRD IV.

2. Banking vs insurance

An interesting question is whether different financial sectors are equally affected by possible changes in passporting arrangements for the financial sector. We examine the two largest financial sectors, banking and insurance. It appears that banking relies far more on the passport than insurance. We measure this by differentiating cross-border business through branches (based on the passport) and subsidiaries (new licence).

Table 1 reports the relative share of branches and subsidiaries in cross-border business. The passport (branch) is not important for insurance. The aggregate number for all EU member states is 13 percent, and even less for the UK at 9 percent. These are minor amounts. The main vehicle is through subsidiaries, because insurers want to contain ‘insurance’ risk in separate legal entities. At the aggregate EU level, the relative share of branches is 36% for banking.

Finally, European banks typically use their passport to enter the London wholesale market; that is for 69 percent of the cases. Many international banks, including the major European ones, have branches operating in London, which is an international financial centre, but actually do little business with UK clients (Burrows and Low, 2015).

Summing up, insurance will be far less affected than banking if and when the UK leaves the EU. Next, the major European banks would need to apply for a UK licence, if they want to keep on doing business in London. Examples are Deutsche, BNP Paribas, Societe Generale, ING and UniCredit. The largest European bank in London is Deutsche Bank, which gets 19 percent of its total net revenues from its UK branch (Deutsche Bank, Annual Report 2015). In turn, the UK banks would need to apply for a licence in the EEA. Some major banks have already a subsidiary on the continent: HSBC in France and RBS in the Netherlands. Barclays is operating through branches, for example, in Italy and France (Schoenmaker and Véron, 2016). Lloyds Bank has almost no foreign business.

3. What do the stock markets tell us?

Next to changes in passporting arrangements, the macroeconomic fallout from Brexit also damages the performance of banks and insurers. Reduced economic growth will directly affect banks in the UK as well as the rest of Europe. Lower interest rates would affect the business model of banks. Insurance companies would also suffer from lower interest rates, as the discounted value of their liabilities increases. On the asset side, insurers have made losses due to the financial market turmoil.

Figures 1 to 5 illustrate stock market performance in the UK as well as 4 other major EU countries from 22 June (the day before the referendum) till 28 June (3 working days after the referendum). Banks and insurers have experienced a far larger price decline than non-financial companies. While UK insurers are more affected that UK banks, it is the opposite for their European counterparts. In line with the larger changes in passporting arrangements, the banks are more affected than insurers in the 4 EU countries.

The authors would like to thank Bennet Berger and Alvaro Leandro for excellent research assistance.


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 article More on this topic More by this author

Blog Post

Silvia Merler

Should we worry about Greek banks?

Earlier this month, the IMF and the European institutions clashed over conditions for sustainability of the Greek debt. One of the main disagreements seems to be the evaluation of the Greek banks’ health. Whose assessment should be trusted and are there reasons to worry?

By: Silvia Merler Topic: European Macroeconomics & Governance Date: February 23, 2017
Read article More on this topic

Blog Post

Simone Tagliapietra

Brexit goes nuclear: The consequences of leaving Euratom

The UK Government has confirmed that it will withdraw from Euratom. But what does Euratom actually do? And what will happen when the UK leaves? The authors find major risks, potential costs and open questions.

By: Enrico Nano and Simone Tagliapietra Topic: Energy & Climate Date: February 21, 2017
Read article More on this topic

Blog Post

Zsolt Darvas

The Brexit bill: uncertainties in the estimate of EU pension and sickness insurance liabilities

Pension and sickness insurance liabilities for EU staff could be an especially contentious part of negotiations on an EU-UK financial settlement: the “Brexit bill”. This post looks behind the calculation of the alleged cost of pension benefits and concludes that it may be less than half of what it seems.

By: Zsolt Darvas, Konstantinos Efstathiou and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: February 17, 2017
Read article More on this topic

Blog Post

Zsolt Darvas

The UK’s Brexit bill: could EU assets partially offset liabilities?

The ‘Brexit bill’ is likely to be one of the most contentious aspects of the upcoming negotiations. But estimates so far focus largely on the EU costs and liabilities that the UK will have to buy its way out of. What about the EU’s assets? The UK will surely get a share of those, and they could total €153.7bn.

By: Zsolt Darvas, Konstantinos Efstathiou and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: February 14, 2017
Read article More on this topic

Blog Post

MariaDemertzis1 bw

The impact of Brexit on UK tertiary education and R&D

In this blog post, we look at the impact of Brexit on UK’s education and research and development sectors in terms of students and staff, as well as funding.

By: Maria Demertzis and Enrico Nano Topic: European Macroeconomics & Governance Date: February 14, 2017
Read article Download PDF More on this topic

Policy Contribution

PC 17 04

Brexit and the European financial system

Brexit will lead to a partial migration of financial firms from London to the EU27. This Policy Contribution provides a comparison between London and four major cities that will host most of the new EU27 wholesale market: Frankfurt, Paris, Dublin and Amsterdam. It gives a detailed picture of the wholesale markets, the largest players in these markets and the underlying clearing infrastructure. It also provides data on professional services and innovation.

By: Uuriintuya Batsaikhan, Robert Kalcik and Dirk Schoenmaker Topic: Finance & Financial Regulation Date: February 9, 2017
Read article More on this topic More by this author

Blog Post

Zsolt Darvas

Questionable immigration claims in the Brexit white paper

The UK government's white paper on Brexit suggested that the EU's "free movement of people" has made it impossible to control immigration. This seems to rest on an assumption that EU citizens can "move and reside freely" in any member state. Zsolt Darvas finds these arguments problematic, and points out that it is difficult to infer public opinion about immigration from the referendum result.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: February 8, 2017
Read article Download PDF More on this topic

Policy Brief

PB 17 01

Making the best of Brexit for the EU27 financial system

The EU27 needs to upgrade its financial surveillance architecture to minimise the financial market fragmentation resulting from Brexit and the corresponding increase in borrowing costs for firms.

By: André Sapir, Dirk Schoenmaker and Nicolas Véron Topic: Finance & Financial Regulation Date: February 8, 2017
Read article More on this topic

Blog Post

MariaDemertzis1 bw

Bruegel conference discusses strategies to tackle Europe’s NPL crisis

Bad loans and private sector debt distress are widely acknowledged to hold back investment and growth in Europe. It was good, then, to hear ECB Vice-President Vítor Constâncio call for a comprehensive strategy to address the non-performing loans problem at an event hosted by Bruegel last week.

By: Maria Demertzis and Alexander Lehmann Topic: Finance & Financial Regulation Date: February 7, 2017
Read about event

Past Event

Past Event

Brexit and trade: what EU and WTO rules imply

Bruegel in collaboration with Leuven Centre For Global Governance Studies organizes an event at which we will discuss the options for redesigning trade relations in the post-Brexit era.

Speakers: Viktoria Dendrinou, Hosuk Lee-Makiyama, Petros C. Mavroidis, André Sapir and Prof. Jan Wouters Topic: European Macroeconomics & Governance, Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 6, 2017
Read article More on this topic More by this author


Alicia García-Herrero

China banks in 2017: No rebound in sight, rising risks for smaller banks

Alicia García-Herrero finds it unlikely that risk in the Chinese banking sector will abate any time soon. And the worries are strongest for smaller institutions. However, the chances of a total crisis are low, and proactive decisions now could pay dividends in the medium term.

By: Alicia García-Herrero Topic: Finance & Financial Regulation Date: February 6, 2017
Read article More by this author

Parliamentary Testimony

House of Lords

Brexit: UK-EU movement of people

On 18 January 2017 Zsolt Darvas appeared as a witness at the House of Lords Select Committee on the European Union, Home Affairs Sub-Committee.

By: Zsolt Darvas Topic: House of Lords, Parliamentary Testimonies Date: February 3, 2017
Load more posts