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: and 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.

Read article More on this topic More by this author
 

Blog Post

Banks post-Brexit: regulatory divergence or parallel tracks?

Post-Brexit UK bank regulation is not likely to compromise on international standards, but will place greater emphasis on competition, making close UK-EU dialogue essential.

By: Alexander Lehmann Topic: Finance & Financial Regulation Date: July 6, 2021
Read article Download PDF More by this author
 

External Publication

European Parliament

UK banks in international markets

Implications of UK-euro area divergence in regulation and supervisory practice

By: Alexander Lehmann Topic: European Parliament, Finance & Financial Regulation, Testimonies Date: June 25, 2021
Read article More by this author
 

Parliamentary Testimony

House of Lords

The UK’s security and trade relationship with China

Testimony before the International Relations and Defence Committee at the House of Lords, British Parliament on the UK’s security and trade relationship with China.

By: Alicia García-Herrero Topic: Global Economics & Governance, House of Lords, Testimonies Date: May 27, 2021
Read article More on this topic More by this author
 

Blog Post

New EU insolvency rules could underpin business rescue in the COVID-19 aftermath

Corporate bankruptcies are set to rise in the context of COVID-19. EU countries should speed up adoption of recent insolvency reforms and, in addition, offer consistent treatment to restructuring finance.

By: Alexander Lehmann Topic: Finance & Financial Regulation Date: March 24, 2021
Read article More on this topic More by this author
 

Blog Post

Financial services: The Brexit dust begins to settle

The phase of greatest Brexit-related uncertainty for the European financial sector ended on 1 January. Although too early to discern more than the broadest contours of the future landscape, it is increasingly apparent that London will be less dominant than before.

By: Nicolas Véron Topic: Finance & Financial Regulation Date: March 11, 2021
Read article More on this topic More by this author
 

Blog Post

The double irony of the new UK-EU trade relationship

The Trade and Cooperation Agreement signed between the European Union and the United Kingdom goes against six decades of UK efforts to avoid being economically disadvantaged in Europe. Tracking the evolution of the EU-UK relationship over the last 60 years can help in understanding this.

By: André Sapir Topic: European Macroeconomics & Governance Date: January 12, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

The future of EU-UK relations (again!)

At the eleventh hour of negotiations, what will the future of the EU-UK relationship look like?

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: October 13, 2020
Read about event More on this topic
 

Past Event

Past Event

The Sound of Economics Live: The future of EU-UK relations (again!)


At the eleventh hour of negotiations, what will the future of the EU-UK relationship look like?

Speakers: Maria Demertzis, Giuseppe Porcaro, André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: October 13, 2020
Read article More by this author
 

Opinion

The EU’s Opportunity to Turn Its Markets Toward the Future

Meeting the fiscal demands of COVID-19 will require the European Union to borrow on capital markets more than ever, and for European pension funds and households to look more widely for ways to build their nest eggs safely. The EU should take the challenges of the pandemic and Brexit as a chance to get its financial infrastructure house in order.

By: Rebecca Christie Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: July 16, 2020
Read article More by this author
 

Podcast

Podcast

One rule to ring them all? Europe's financial markets after Brexit

What effect will brexit have on Europe's financial markets?

By: The Sound of Economics Topic: European Macroeconomics & Governance, Global Economics & Governance Date: June 26, 2020
Read article More on this topic More by this author
 

Opinion

How will COVID-19 impact Brexit? The collision of two giant policy imperatives

The United Kingdom left the European Union on Jan. 31, 2020. Now, the U.K. must decide whether and how to extend the transition period, currently set to expire at the end of 2020.

By: Rebecca Christie Topic: European Macroeconomics & Governance Date: May 19, 2020
Read article Download PDF More on this topic
 

Policy Contribution

The European Union’s post-Brexit reckoning with financial markets

In the negotiations between the European Union and the United Kingdom over their future relationship, we see a high probability of a weak contractual outcome, given the dominance of politics over considerations of market efficiency.

By: Rebecca Christie and Thomas Wieser Topic: European Macroeconomics & Governance Date: May 13, 2020
Load more posts