LONDON (Reuters Breakingviews) - On his landmark album Exodus, Bob Marley crooned about the importance of keeping the faith. British Chancellor Philip Hammond’s plea for mutual recognition with the European Union is similarly designed to forestall a crisis of confidence among London-based investment banks. Large-scale job flight can be avoided – provided UK regulators stick to EU rules.
With just over a year to go until the UK formally leaves the EU, big banks are voting with their feet. UBS, Goldman Sachs and Standard Chartered are all preparing to send more bankers to Frankfurt – ranging from around 200 to a couple of dozen employees each.
Such manoeuvres hardly constitute an emergency: only 725 jobs have left the City due to Brexit since the 2016 referendum, according to the City of London Corporation. However, the lobby group forecasts between 4,600 and 13,000 roles shifting to the EU, depending on the outcome of negotiations.
Leaving the single market requires Britain to surrender the “passport” that permits bankers to sell equities, bonds and derivatives across the EU single market. These jobs must be done elsewhere – and related salespeople, risk managers and other staff will follow. A Brexit transition period that Britain hopes to agree later this month will not change the outcome.
The number of jobs that depart will depend in part on the degree to which banks’ EU-based subsidiaries can continue using London-based infrastructure. One option is to turn their London operation into branches of EU-based subsidiaries. For example, UBS plans to merge its British entity into its Germany-headquartered unit, according to an internal memo cited by Reuters on March 9.
That system can function after Brexit as long as EU regulators continue to trust the oversight of their UK counterparts. Hammond’s proposal for mutual recognition is an attempt to turn an understanding into a more formal agreement – with governance structures and mechanisms for resolving disputes. So far the EU has shown little enthusiasm: this goes far beyond conventional trade deals, which tend to focus on goods rather than services.
For now, Hammond’s hopes of protecting the industry that contributes about 11 percent of Britain’s tax depend on the EU recognising the downsides of disrupting what remains the region’s largest financial centre. Maintaining the status quo may be impossible – but that doesn’t make a City exodus inevitable.
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