How is Brexit Going to Affect European Financial Markets? Milan Simacek Czech National Bank 27- th Economic Forum Krynica Zdrój, Poland, September 5 7, 2017 1
United Kingdom versus European Union What will be missing in Europe after Brexit? What banks are dominating the European wholesale financial sector? It s easy to say that the new financial center will be elsewhere in Europe. Will it be in Frankfurt, Paris, Dublin or Warsaw? Is it possible to designate a financial center from the table? And can the financial center in London even be replaced at all? 2
Source: Forbes European Investment Banking, TOP 20 banks Rank Bank Country of origin Fees (USD mil.) Market share (%) 1. JP Morgan US 549 6,1 % 2. Goldman Sachs and Co. US 483 5,4 % 3. Morgan Stanley US 462 5,1 % 4. Barclays UK 432 4,8 % 5. BNP Paribas SA Euro area 400 4,4 % 6. Deutsche Bank Euro area 373 4,1 % 7. Citi US 358 4,1 % 8. Bank of America Merrill Lynch US 338 3,7 % 9. HSBC Holdings PLC UK 329 3,7 % 10. Rothchild UK 246 2,7 % 11. Société Generale Euro area 212 2,4 % 12. Crédit Agricole CIB Euro area 209 2,3 % 13. UBS Switzerland 194 2,2 % 14. Lazard US 192 2,1 % 15. UniCredit Euro area 184 2,0 % 16. Credit Suisse Switzerland 151 1,7 % 17. ING Euro area 137 1,5 % 18. Evercore Partners US 129 1,4 % 19. Santander Euro area 116 1,3 % 20. Natixis Euro area 112 1,2 % 3
United Kingdom versus European Union The European wholesale financial sector dominated by US and Swiss banks located in the UK The UK leads Europe in Euro denominated wholesale banking, FX and derivatives trading: 43% of daily FX spot transactions, 37% of total forex derivatives trading, 75% of interest rate derivatives 48 % of direct foreign investments in the UK come from the EU The UK has stronger capital markets than the EU; British markets are twice as developed as the EU markets, when relating to GDP 4
The UK vs the EU or Who needs whom more? UK is the third largest economy in EU 4 000 3 500 3 000 2 500 2 000 1 500 1 000 500 0 GDP (bln. USD) UK export to the EU27 400 Export (bln. USD) Import (bln. USD) 350 300 250 200 150 100 050 000 Source: Thomson Reuters 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 5
Brexit negotiations results still uncertain Article 50 was triggered in March 2017, officially beginning the process of the UK leaving the European Union Two year timeframe for negotiations The UK is trying to negotiate a tailor made deal, which would be a combination of three alternatives: The 3 existing alternatives being considered are: 1. Membership in the European Economic Area (EEA), like Norway 2. Negotiated bilateral agreements, such as those between the EU and Switzerland,Turkey or Canada 3. The third country status in case of no deal, World Trade Organization (WTO) laws will apply without any form of specific agreement with the EU, like Russia or Brazil 6
Potential regulatory outcomes of Brexit 1. Passporting and full equivalence will be retained for the UK: Passporting allows financial services firms to provide services to EU clients (either on a cross-border basis or by establishing branches) based on their authorisation and licensing in one EU member state Maintaining the Status quo, only if accessable to EEA 2. Partial equivalence for a third country: Concept of equivalence of regulatory and supervisory framework for a third country in the EU as assessed by the European Commission Partial equivalence passporting rights may not fully cover the entire spectrum of a firm s activities 3. In case of no equivalence for third countries: Case by case basis by each member state based on licencing and other permissions The UK need to establish subsidiaries or branches that are authorized to provide services in the EU 7
Possible Impacts on Financial Markets In case no passporting rights are granted to UK financial service firms, they might relocate to where their clients are There will not be a mass exodus of companies or of individuals from the UK It is important for the EU to complete the Banking Union, including the Deposit Insurance Scheme (expansion of the Banking Union) Completion of the Capital Markets Union (CMU) project, which would mean deeper integration of trading, stock exchanges and settlement of trades. ECB may seek to move the Clearnet clearing center to the EU (clearing for 90 % of euro derivatives) Some European institutions (e.g. European Banking Authority, EBA) will be moved to other EU countries 8
Importance of financial sector for UK Employment, GVA and tax contributions as a proportion of the UK total UK financial services export by region 14 12 10 8 6 4 2 0 Employment GVA Tax contribution Source: BruegelCNS Book, TheCityUK Over 2,2 million people are employed in financial and related professional services 46 % of financial industry s GVA is generated in London The UK the financial sector tax revenues are 100 times greater than in Germany The UK financial sector trade balance is greater than Germany s and France s by a factor of 10 EU Asia Rest of the World North America Rest of Europe 9
(% of market) Potential migration of financial services POTENTIAL MIGRATION OF WHOLESALE MARKETS FROM LONDON TO EU27 100 90 80 70 60 50 40 30 20 10 0 90 2 1 2 1 1 3 60 14 8 7 5 2 4 United Kingdom Germany France Ireland Netherlands Luxembourg Current situation (% of market) Integration Scenario (% of market) Source: Bruegel Bruegel estimates that around EUR 1.8 bln. (34 %) of wholesale banking assets and around 10, 000 banking positions might move out of the UK The main prospective destinations for relocation are Frankfurt, Paris, Dublin and Amsterdam 10
Issues to be solved UK financial firms wishing to operate in the EU will be required to comply with EU regulations The uncertain future for euro denominated clearing and settlement infrastucture, where European institutions may require the systematicly important firms to relocate to the EU The EU should move to a fully integrated single market for financial services in order to avoid regulatory arbitrage Banking union and Capital market union would need to be finalized A greater role for ESMA; to enhance ESMA s responsibilities? 11
Thank you for listening Milan Simacek, Ph.D. Czech National Bank milan.simacek@cnb.cz www.cnb.cz 12