London banks set to decide within weeks on Brexit moves

As Britain prepares to negotiate its EU departure a number of banks are likely to decide within two months where to set up new continental bases to make sure they can keep serving clients in the bloc after Brexit.

The European Central Bank said it would host a meeting of banks on May 4th at its offices in Frankfurt. It will spell out in detail what those moving some of their operations out of London must do to apply successfully for a licence.

Talks with financial authorities have been under way for several months but the banks are expected to make up their minds imminently on where to move staff and operations.

“We are in the hot phase. In the next six to eight weeks there will be a series of decisions,” Felix Hufeld, head of Germany’s Bafin financial regulator, told Reuters.

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Ireland’s Central bank will hold a similar gathering next month to advise groups considering a move to Dublin, which along with Frankfurt, Paris and other centres is competing to offer the banks a second base that remains in the European Union. A spokeswoman for the Irish Central Bank added that it had regular contact with the industry concerning “the potential consequences of Brexit”.

Authorities expect potentially dozens of international banking groups, currently operating their euro zone business out of London, to move some operations and staff to the 19-member euro zone. They are likely to shift several thousand staff out of London as banks based in Europe’s biggest financial centre will lose automatic “passporting” rights to sell services across the EU when Britain is no longer a member state.

Hufeld predicted Frankfurt would play an “important role” in this process, although he said other cities would also gain.

Bankers also say Frankfurt is set to win the most business following a discreet but concerted German campaign to promote the financial centre of Europe’s biggest economy.

Suspicious

German politicians have been reluctant to lobby publicly for big global banks to move to the country. Federal elections will be held in September, and some voters remain suspicious of the financial industry after several German banks were forced to seek taxpayer-funded bailouts during the global crisis. However, they have held a series of meetings with bank executives.

Finance minister Wolfgang Schäuble and politicians from the state of Hesse, home to Frankfurt, have met Wall Street powerbrokers in the US and Germany in recent months, according to several sources familiar with the matter.

As far back as October, Schäuble met Goldman Sachs CEO Lloyd Blankfein in Berlin and discussed its post-Brexit plans, according to two sources familiar with the matter. Goldman Sachs is considering moving some operations to Frankfurt.

James Gorman, the chief executive of one of the world’s biggest banks Morgan Stanley, recently visited Frankfurt ,where he met local regulators, one person familiar with the matter said. Morgan Stanley intends to move jobs from London to cities such as Frankfurt, people involved in the process have said.

A spokesman for Schäuble declined to comment, as did both banks.

France is still pushing for banks to move to Paris, and HSBC has a big presence in the city. However, many of its peers are reluctant to move to the city, where rents are high and they would face a special tax on wages in the financial sector.

Hufeld’s comments and the regulators’ meetings show how banks are rapidly advancing towards a move. Last month UK prime minister Theresa May formally declared Britain’s intention to leave the EU, opening a two-year period for both side to negotiate the divorce.

Brexit timetable

Talks are expected to begin in June, although May’s surprise calling of an election for June 8th has added to the uncertainty. Given the tight Brexit timetable, bankers are keen to get cracking.

“March 2019 is not far away, and we are running out of time,” said Lutz Raettig, president of Frankfurt Main Finance, a group that promotes the city. “The time for making decisions is soon. People want to know for sure what direction they are taking by the summer,” said Raettig, who is also chairman of Morgan Stanley’s supervisory board in Germany. “They can wait a little longer but not much more.”

The ECB, which takes the final decision on granting a bank licence, has said the banks should allow at least six months to get one. However, Barclays chief executive Jes Staley said on Wednesday that obtaining a licence to trade on the continent and changing financial contracts to another jurisdiction takes a year to 18 months.

Initially, banks had hoped that the immediate impact of Brexit would be softened by a so-called transition arrangement to delay the full effect. However Hufeld, who also sits on the ECB’s supervisory board, said this offered little consolation.

“Even if there were to be transition arrangements, they would come at such short notice,” he said. “If they come four weeks ahead of time, then that does nothing for you.”

High risks

Despite the high prize in terms of jobs and tax revenue, many country regulators are treading carefully for fear of getting lumbered with high risks. This is particularly the case in Ireland, which had to seek an international bailout in 2010 due to the huge cost of bailing out its banks. The ECB is likely to caution banks against relying on “shell companies”, with operations effectively run by people still in London but the responsibility for handling any mishaps lying with continental authorities. “If it’s high-risk and low value-added then you don’t want it,” said one person familiar with the thinking among the Irish authorities. “Let Frankfurt have it.” – Reuters