Global banks in search of a “New London” after Brexit.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
As global banks begin scouting for a new European base in the wake of last month’s Brexit vote, it appears that the City of London’s glory days as the world’s most important financial center may be numbered. City-based banks and hedge funds are worried about losing their passporting rights, which grant them full access to the EU’s financial markets. They’re also concerned that the UK might lose its special authorization to clear transactions in euros.
“In theory, extending third-country AIFMD passporting to the U.K. after Brexit should be straight-forward,” Matt Huggett, a partner at law firm Allen & Overy in London, told Bloomberg. “In practice, it will be a political decision with an uncertain outcome. Many managers would like to safeguard themselves beforehand and set up offices in places like Luxembourg and Dublin.”
In true beggar-thy-neighbor fashion, many of Europe’s most prominent capitals are bending over backwards to provide global banks with the perfect enticements to lure them away from The City. As the New York Times puts it, “The race is on to be the new London.”
Spain’s capital, Madrid, has spent the last couple of weeks frantically ruffling its feathers in an attempt to attract the attention of not only banks but also the European Banking Authority, one of the EU’s most important (but currently London-based) financial regulatory bodies.
It’s not as absurd as it may sound. Madrid already boasts the cheapest corporate tax regime in Spain and will no doubt be prepared to drop rates even further to accommodate some of the world’s biggest banks. As JP Morgan banking analyst Kian Abouhossein notes, office space in Madrid is also more readily available and cheaper (€27/sqm/month) than in the other prime locations competing to displace London as Europe’s financial capital: Paris (€67/sqm/month), Dublin (€52), Frankfurt (€40) and Amsterdam (€29).
But the price of commercial real estate is just one of many factors global banks are likely to take into consideration. The others, as New York Times points out, include:
English-language facility, (essential for attracting a global work force); a favorable regulatory environment, especially regarding employment; excellent transportation and communications infrastructure; availability of prime office space and luxury housing; good schools; good restaurants and cultural offerings; and finally, an intangible quality that includes a certain energy level and openness to an influx of highly paid, competitive City of London-Wall Street types.
There’s one other factor that The Times didn’t mention: proximity to the major seats of political, judiciary and regulatory power. It’s one of the main reasons why London, once the center of the world’ biggest empire, has served as one of the world’s top-three financial capitals for the last 200 years. It is also the main reason why, if the City of London does fall from grace, the biggest beneficiary is likely to be Frankfurt, which is already home to Europe’s most powerful financial institution, the ECB.
The fact that Germany also enjoys more influence over European economic policy-making than any other EU Member State would certainly be an added enticement for the world’s biggest financial institutions. Over 70% of respondents to a recent Ernst & Young survey said they expect Frankfurt to come out on top in the race to displace London.
But such a move is unlikely to be welcomed by many other European countries, especially those in the South where resentment over Germany’s influence over their economies is already running high. Nor is it likely to be welcomed by many in Germany who, as Bloomberg points out, are likely to witness a surge in property investment volumes, prices and rents, with Frankfurt emerging as the biggest “beneficiary”.
One city that is determined to steal Frankfurt’s thunder is Paris, whose government has promised to unfurl the red carpet for the City of London’s highest paid bankers while seeking to grow as a clearing center. Prime Minister Manuel Valls recently announced he would do his best to make the domestic business conditions the most attractive in Europe: The measures, he said, will include income and corporate tax cuts.
“It is a gesture of trust from France towards those that want to come to work here, to innovate, to create jobs in France and to participate in our country’s outreach,” he said.
Valls’ words could not clash more starkly with the combative stance France’s President Francois Hollande took against global finance before winning national elections in 2012. “I’ll tell you who my opponent is, my true opponent,” he said at the time. “He has no name, no face, no party. He will never run for office. He will not be elected. And yet he governs. My opponent is the world of finance.”
Now, Hollande and his government are doing everything within their powers to lure that same faceless, nameless enemy across the English Channel to Paris. But it’s unlikely to work: the banks know that if they were to move their European base to Paris or even Frankfurt, they could probably expect a lot more government interference in their operations.
Indeed, no city — not even semi-official tax havens like Dublin, Amsterdam, or Luxembourg — can offer financial institutions what the City of London currently offers them: an autonomous city within a city where banks and hedge funds can engage in activities that would be unimaginable in most other jurisdictions, including New York and Chicago. Oh, and it also serves as the beating heart of the world’s most extensive network of tax havens, where financial secrecy is (almost always) guaranteed.
In the absence of regulatory oversight, London has been home to just about every major global financial scam and scandal of the last decade, including Libor, Forex, MF Global, the London Whale and rampant gold and oil-price rigging. It’s the sort of gig that the world’s biggest banks and hedge funds do not want to give up without a fight, as JP Morgan Chase CEO Jamie Dimon amply demonstrated last week when he suggested that, to avoid banks like his having to up sticks, the votes of over 17 million British citizens may need to be overruled:
“Maybe you can even reverse Brexit. There are always solutions to the problems, as long as you have the right people in the room.”
Whether that is what ultimately happens, time will tell. Certainly the UK’s newly formed government appears to be in no rush to begin the official process of decoupling from Brussels. In the meantime, one thing we can be sure of: the likes of Dimon are working tirelessly behind the scenes to get all “the right people” in the room. By Don Quijones, Raging Bull-Shit.
This is happening, even as all heck is breaking loose in Italy’s banking crisis. Read… Who’s Most Afraid of Contagion from Italy’s Bank Meltdown?