European Banks Threaten Exodus From London

European banks have indicated in private discussions that they would shift hundreds of jobs out of the UK if Brexit results in the Bank of England demanding that they pour in fresh capital into their British operations.

The new capital requirements could exceed 40 billion euros ($43.73 billion) and has the potential to trigger an exodus of banks from London according to industry observers. Three of the largest European banks – Deustche Bank, BNP Paribas and Societe Generale are currently functioning as branches in London but handle a substantial amount of operations. Operating as branches requires lesser capital requirements as compared to a subsidiary structure.

While Britain was part of the EU, UK regulators allowed banks to operate via branches, but with Brexit being triggered they could demand additional capital to be sunk in so as to ensure that the banks have sufficient support. Without a deal in place, regulators may also ask the banks to convert their London branches to subsidiaries and submit to regulatory supervision of the Bank of England.

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Deutsche Bank alone has around 9,000 staff based in UK while BNP Paribas has around 6,500 employees. Societe Generale has nearly 4,000 people working out of Britain. Boston Consulting has estimated in a recent report that it might cost the banks up to 40 billion euros in extra capital if the switch is required.

In a statement, a senior executive with an EU lobbying firm said

We hope it's a warning and that it will not translate into anything. The transformation to a subsidiary has a lot of consequences, on the liquidity side, capital. It will create more costs for banks. We are sure that London will remain an important financial market and it (requirements to set up subsidiary) will not probably lead banks to leave London. But it's not an incentive to expand business there.

A majority of the European banks handle their investment banking activities out of London, so much so that Bank of England Governor Mark Carney has previously called the city as the investment banker of Europe. Currently Britain's Prudential Regulatory Authority (PRA) has little say in the operations of these banking units since they come under the regulator of their parent company’s country of origin. Without an appropriate Brexit deal, this would necessarily change.

Carney has called on Britain and the EU to reach a deal that recognizes each others' regulatory frameworks to avoid lasting damage to financial services across Europe.

Chad Simmons

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