68 Finance & economics The EconomistJune 29th 2019
21the City of London’s trajectory was better
than that of New York as gravity shifted
eastward to Asia, says William Wright of
New Financial. “London is London as we
know it, the world’s number-one or num-
ber-two financial centre, because the eu al-
lowed it to become the financial centre of
the euro zone,” says an eu27 official.
Now that status is at risk. “Before the
[Brexit] debate began in 2015 it never
crossed anyone’s mind that we would have
to move financial services for Europe out of
London,” says Bernard Mensah, president
of Europe and the Middle East at Bank of
America Merrill Lynch. “It was as if the Brit-
ish court system suddenly stopped work-
ing.” For the hundreds of small companies
doing business with the eu27, the removal
of passporting and uncertainty over what
will replace it is an existential threat, says
John Liver, global head of regulation at ey.
Financial services account for 6.5% of
Britain’s economic output and 11% of its tax
revenue. The sector and its ecosystem of
lawyers, consultants, lobbyists and the like
employ 2.2m people, not only in the
wealthy centres of the Square Mile, Canary
Wharf and Edinburgh but also in places
like Cardiff and Bournemouth.
Yet Britain’s negotiators have treated
the industry as a sideshow. The govern-
ment took the view that the City is strong
enough to cope, and made little effort to
keep passporting, which would have
meant blurring Mrs May’s red lines. Nor
did it press hard for “mutual recognition”,
in which the eu would accept Britain’s
rules as a basis for future trading as long as
they did not diverge too much. The City is
likely instead to be left with “equivalence”,
a piecemeal status that the eu sometimes
grants to third countries.
About half of the City’s business is do-
mestic, a quarter from the eu27 and a quar-
ter with the rest of the world. At worst the
City could lose a quarter of its business and
some of its non-eu international activity.
Few City veterans expect things to get that
bad. If regulators work together, equiva-
lence could be made to function well.
Yet the obstacles are not merely techno-
cratic. The eu would like to use Brexit to
force much City activity to relocate to the
European mainland. A row has broken out
over plans from the European Securities
and Markets Authority (esma) to stop eu
investors trading stocks in London—a bla-
tant land grab, say City folk. In May the
Bank of England fulminated against “eu
colleagues” who, it said, were scaremon-
gering about Brexit in meetings with a for-
eign bank to lure it to the continent.
But eu regulators had become con-
cerned that London’s clout impinged on
the bloc’s financial and economic sover-
eignty well before the Brexit referendum.
In 2011 the European Central Bank (ecb)
tried to force British clearing houses hand-ling huge volumes of euro-denominated fi-
nancial products to move into the euro
zone, only to be defeated four years later
when the eu General Court said it lacked
powers to make them do so. In the middle
of the ecb’s gambit, the decision by
lch.Clearnet, Europe’s dominant, London-
based clearing house, to raise margin re-
quirements on some Italian and Spanish
government bonds was seen by some in the
eu27as a hostile act. Monetary sovereignty
A paper by economists at the Bank for In-
ternational Settlements underlines the
City’s centrality to eu financial operations.
About half of all the €2.6trn ($3trn) of euro-
area bonds bought by the ecb’s asset-pur-
chase programme came from institutions
outside the euro zone. Banks in Britain
were the main facilitators of bond sales.
That eu regulators have spotty control over
activities core to the bloc’s banking stabil-
ity becomes troubling post-Brexit, they say.
“If I have one heart I rely on and it’s inside
me, that’s fine,” explains Olivier Guersent,
director-general of the European Commis-
sion’s unit for financial stability, financial
services and capital markets union. “But if I
am reliant on a mechanical heart outside
me, I become shaky.”
“How do you manage a financial crisis if
the bulk of your financial services are pro-
vided by a third country?” adds RobertOphèle, chairman of the Autorité des mar-
chés financiers, France’s stockmarket reg-
ulator. Suppose the eu wanted to impose a
blanket ban on shorting the shares of
banks, he says (some countries restricted
shorts during the crisis in 2008-09). In the
eu, Britain could not easily refuse.
For its part, once it has left the euBrit-
ain will no longer be able to block the
forced relocation of financial activities to
the euro zone. City folk fret about four ar-
eas in particular: clearing; share trading;
risk management; and “delegation”, in
which firms set up office in one eu country
while their funds are managed in another.
Few rule out a fresh attempt to force
euro-denominated clearing to relocate. In
the meantime Eurex Clearing, lch’s main
eu27 rival, is trying the carrot rather than
the stick. A new revenue-sharing model
has helped increase its market share in
euro-denominated interest-rate swap
clearing (measured in notional amount
outstanding) to 15%, from under 1% at the
start of 2018. “Banks have flicked a switch
in our favour where they easily can,” says
Erik Müller, the firm’s boss.
As for share trading, in late May esma
partially backed down and said that eu
fund managers could continue to trade 14
stocks in London that trade overwhelm-
ingly there now. But that leaves 6,186 more
that, in the event of a no-deal Brexit, eu-
registered investors will be able to tradeCityona hillSources:OliverWyman; Z/Yen;
NewFinancial;TheCityUK; PwC*Credit-ratingagencies,payment and data services †Composite of 133 indicators
‡Includescompanies destined for London pre-Brexit referendumShareofserviceswithinthesevenleadingfinancialcentres
2016 orlatest,%Britain,financial-services
revenues,2015,£bn0 30 60 90 120
Banking
Insuranceand
reinsurance
Market
infrastructure*
Asset
managementDomestic EU-related
Non EU-relatedGlobal Financial Centres Index† (March 2019, rank out of 102)2007 09 11 13 15 17 19500600700800New York (1)London (2)Hong Kong (3)
Singapore (4)Shanghai (5)Frankfurt(10)
Paris (27)Financial-company headquarters
relocating from London for
EU business post-Brexit‡
Bydestination0 10203040
Dublin
Luxembourg
Frankfurt
Paris
Amsterdam
OthersAsset managers Banks 0 20406080100International listingsForeign-exchangetradingIPO issuanceCommercial insurance
and reinsuranceLife and non-life insurance
excl. commercial
Equity trading
Sovereign-bond tradingBritain UnitedStates Japan China
Hong Kong Germany Singapore