Relocation or consolidation? Banks in Europe after Brexit

Algirdas Brochard // 2 August 2017

The fear that the UK-based financial industry will not be able to fully conduct all its current post-Brexit pan-European operations has prompted several London-based institutions to make plans to move some jobs to the continent or to Ireland. This move will however not be a full-scale relocation but instead a reinforcement of banks’ existing EU subsidiaries.

 

As the chairman and chief executive of Morgan Stanley, James Gorman, recently stated, the financial industry likes the UK. In particular, it likes the country’s liberal mindset, which is reflected in the tax and court system; it likes Britain’s geographical location between Asia and America and, perhaps most important of all, it likes the fact that English is the UK official language. Jamie Dimon, the chief executive and chairman of JP Morgan, explained that “The clustering of financial services in London is hugely efficient for all of Europe”. As replicating this unique framework poses great difficulties, London will continue to be one of the world’s leading financial centres for at least the coming ten to twenty years, according to John Cryan, CEO of Deutsche Bank.

 

Whilst the role of London as one of the world’s largest and most important financial centres is not directly under threat, financial institutions will have to relocate some of their operations in the EU. For operations that need to be conducted in the European single market, banks will most likely reinforce their operations across their EU subsidiaries. JP Morgan, for example, has stated that as many as 4,000 of its 16,000 UK employees could be relocated to their expanded offices in Frankfurt, Dublin and Luxembourg. At the same time, Morgan Stanley’ chief financial officer, Jonathan Pruzan, said that the firm’s EU offices will be expanded after Brexit. The same goes with Citigroup which specified that, even though it would base its EU broker dealer in Frankfurt, it would scatter other businesses across Paris, Dublin, Luxembourg, Amsterdam and Madrid.

 

Shortly after last year’s Brexit referendum, Paris began an aggressive campaign to lure the City’s jobs. The president of the Paris region declared that France would roll the “red-white-and-blue carpet” for UK bankers. France new Prime Minister, Édouard Philippe, said that he wants to make Paris “the number one financial centre in Europe after Brexit”. However, even after several contacts between French officials and heads of major financial institutions, the only banks which announced that they would move jobs to Paris already have a strong foothold there. HSBC, for instance, announced it would move to the capital up to 1,000 jobs. Interestingly, HSBC has already a strong presence in the country through the acquisition of Credit Commercial de France in 2000. French banks BNP and Société Générale also confirmed they would move between 300 and 400 jobs to their home market.

 

So far, the reputation of France for hostility towards finance (high taxes, inflexible labour code, bureaucracy, regular strikes as well as the language barrier) has not offset the efforts made by the new administration. Indeed, after campaigning to lower corporate tax rates and to reform the country’s wealth tax system, the former Rothschild Banker and now French president Emmanuel Macron recently proclaimed that he would scrap the highest bracket of payroll tax on employees in the financial sector, that he would cancel a 2018 planned extension of the financial transaction tax and that he would make sure that bonuses are no longer taken into account when labour courts decide on unfair dismissals.

 

The biggest winner of Brexit thus far appears to be Frankfurt. Despite being the home of the European Central Bank and of the Deutsche Börse Group, one of the world’s leading stock exchanges and derivatives markets operators, Germany’s financial capital lacks many of the cultural attractions of Paris and London and labour laws are quite rigid. To give an example, one Frankfurt based employment lawyer stated that a senior banker earning $1.5m in total remuneration could typically be made redundant with a payout of $150,000 in London, but the cost could be 10 or 15 times that in Frankfurt.

 

Hitherto, in addition to Deutsche Bank, which will replicate its London booking system in Frankfurt, Mizuho, Nomura, Daiwa, Sumitomo Mitsui Financial, UK Chartered, Morgan Stanley and Citigroup have chosen the city as their new EU base – with further announcements expected from JP Morgan and Goldman Sachs. This said, banks will endeavour to move in priority only operations that must take place in the EU. As such, Citigroup has announced that just 150 of its 6,000 UK staff would move to Frankfurt and other offices in the EU.

 

Another city which also seems to benefit from Brexit is Dublin. Ireland’s capital was already a target for companies looking to relocate their staff to less expensive destinations. Thanks to the fact that the Irish legal system is similar to that of the UK, that Dublin is in the same time zone as London and that English is Ireland’s natural first language, JP Morgan announced in May that it had bought a new office building that can accommodate up to 1,000 staff. According to a recent EY study, of London’s 222 biggest financial services companies, 19 have so far have spoken about moving to Dublin, compared to 18 to Frankfurt and 11 to Luxembourg City. In fact, Luxembourg is also set to benefit from Brexit, but conscious of its several drawbacks, such as its tiny size, it is looking to position itself as a complementary financial centre to London and not as a competitor.

 

Lastly, one important thing to bear in mind is that the competition for relocation is not only between London and other European cities. Richie Boucher, chief executive of Bank of Ireland recognizes that “as far as investment banking is concerned, the presumption that it is a competition between London and another European centre has a degree of naivety. It’ll be between London and New York”. As the costs of doing business in Europe are set to increase, the financial industry may look at shifting its capacity to America or Asia.

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