The EconomistJune 29th 2019 Finance & economics 692
1only on exchanges in the eu27.
Regarding delegation, in 2017 esma
published guidelines aimed at stopping
European financial centres making “sweet-
heart” deals to lure financial firms from the
City. It warned national regulators to watch
out for firms that follow eu rules and locate
there but keep managing their portfolios
from Britain. Stopping eu funds from be-
ing run by City-based stockpickers would
strike at the heart of the active asset-man-
agement model. Though esma appears to
have backed off for now, risk management
is still in regulators’ sights. The ecb sees
“back-to-back” operations—doing busi-
ness in the eu27 but shifting the risk to
London using internal trades—as a ruse to
minimise relocations.
After the referendum global banks
made grids to help them decide where in
the eu27 they might open new offices or ex-
pand their business, says a lawyer in Lon-
don. Criteria such as size, tax and regula-
tion were colour-coded red, green and
amber. Then they examined the red and
orange squares—and ruled everywhere
out. “Frankfurt was seen as boring; Amster-
dam, Luxembourg and Dublin were too
small; Madrid and Milan had tax and regu-
lation problems; and Paris was a nightmare
for employment law,” says the lawyer.
Nevertheless, London’s rivals are doing
their utmost. Paris is touting its size, cul-
tural richness, financial-markets tradition,
derivatives talent and proximity to Lon-
don. François Hollande, France’s president
until 2017, had declared in campaigning
that his “true enemy” was finance. But Em-
manuel Macron is more welcoming. La-
bour-market reforms and the abolition of
the wealth tax have helped. And dinner
with him is a big lure, bankers say.
Frankfurt, for its part, emphasises its
banking clout—it is home to the ecb and
has long been Germany’s banking capital—
plus regulatory and political predictability.
It lies tenth in the Global Financial Centres
Index (gfci), a ranking of competitiveness.
That is well above Paris, at 23rd. Germany’s
government has chipped in by allowing
banks to hire and fire far more readily.
To some banks Frankfurt’s refusal to
make “crazy” deals is preferable to Paris’s
newfound flexibility. As the head of Brexit
preparations for an American investment
bank tells it, French officials asked “what
would you like?” and offered to change na-
tional law. The bank thought they might re-
verse things for someone else and went
elsewhere. Though it has made strides,
France has still to establish a long record as
a reliable home for international finance,
acknowledges a government adviser.
Staff have been mutinous about leaving
London. For its way of life, Paris is the clear
winner. In some of Frankfurt’s elegant sub-
urbs the population is so elderly that
“you’re the youth policy”, quips the Euro-pean head of an American investment
bank. All the same the German city has won
the most banking business, attracting 44%
of bank moves, according to New Finan-
cial. Paris has attracted a wide range of fi-
nancial firms; Dublin and Luxembourg are
popular with asset managers; Amsterdam
is favoured by trading firms and market-
infrastructure providers. Sell signals
The shifts that have happened so far are
just the start, however. According to the
French government adviser, banks are
placing smallish bets across Europe, and
are likely to reconcentrate their eu27 activ-
ities once the dust settles. For London, the
harm could be substantial.
Warning signs are already in evidence.
The number of initial public offerings in
London has fallen of late, with the total val-
ue in 2018 down 23% compared with 2017.
Frankfurt, by contrast, had one of its best
years in terms of issue volume since the
turn of the century. London kept its top
spot in the gfci in March 2018 but was beat-
en by New York this year.
Catherine McGuinness of the City of
London Corporation, the municipal body
that governs the Square Mile, says that
more business is moving away than is vis-
ible in banks’ announcements. She fears
more will leave than are legally required to.
Asian institutions in particular are flum-
moxed by the Brexit chaos. Nomura, a Japa-
nese investment bank, no longer counts
London as its global wholesale hub and will
soon slash staff there. American invest-
ment banks, which particularly value pass-
porting, are among the most critical of
Brexit’s harm to financial services. In a de-
cade, under even a soft Brexit, London will
no longer be the financial centre it oncewas, Jamie Dimon, the boss of JPMorgan
Chase, recently said.
“How much of the City’s international
position relies on single-market access to
the euhas not yet been tested,” says Mr
Wright. Capital flows can quickly shift
course if market infrastructure or regula-
tion change. A case in point are so-called
venues, where fixed income, currencies
and commodities (ficc) trade. mifid2, a
huge piece of new European regulation,
regulates venues for the first time, creating
greater scope for European regulators to try
to bring ficc liquidity onshore.
Over the next decade London could see
business trickle away to eu27 capitals, New
York and, increasingly, Asian financial
centres. The situation is highly unpredict-
able, says Mr Mensah of Bank of America
Merrill Lynch. “The City grew organically
over a long period of time, so there is no
blueprint to dismantle bits of it while
avoiding unintended consequences.”
Yet the City is not a passive observer of
its fate. Britain’s time zone, between New
York and Asia, and common-law system
are powerful advantages—as are a willing-
ness to experiment, global approach, cul-
tural allure and deep hiring pool. And even
if it loses some of its eu-related business,
optimists think that revenues from the rest
of the world will grow faster.
One way to safeguard the City would be
for Britain to become a rule-taker, hewing
to European financial regulation. But Brit-
ish regulators (and especially the large in-
surance industry, which has less eu27 busi-
ness) reckon it is too big and important to
be lashed to the eu. Following the eu’s
more dirigiste and inflexible rule book
after Brexit could hobble it relative to New
York and Asian financial centres, they say.
What is more, in future eu regulators could
set out to harm London deliberately. Euro-
pean officials know where the compro-
mises are between British priorities and,
say, French ones, says Jonathan Hill, Brit-
ain’s former eu commissioner in charge of
financial services. “They know precisely
how to send Exocets into London.”
Hence another possibility: to embrace a
buccaneering future. Brexiteer politicians’
conception of “Singapore-on-Thames”—
slashing regulation, lowering capital stan-
dards and corporate taxes, and prioritising
competitiveness—is often compared to the
1980s Big Bang. Though it is unclear how
Britain could emulate a city state, eu nego-
tiators take the risk seriously.
The Bank of England and the fca are
pressing for a compromise. Under “stylish
regulation” Britain would return to a more
outcomes-based system, guided by six
principles, including openness to the rest
of the world, sensitivity to business mod-
els and promoting competition.
As for equivalence, Andrew Bailey, the
fca’s chief executive, says Britain will need