UK’s banking loss may be New York’s gain in Brexit

Bloomberg

New York rather than the European Union may be the winner from any exodus of financial services from London unless Brexit negotiators on both sides are pragmatic, UK lawmakers warned.
Without early clarity on the future relationship between Britain and the EU, banks and other financial firms may set up subsidiaries and transfer workers abroad, the House of Lords EU Committee said in a report. The expertise lost may be hard to replicate in cities such as Paris and Frankfurt, which are “far behind” London and New York as financial-services centers.
“EU firms rely on the services provided in the U.K., and pain caused to the U.K.’s financial sector will not be the EU’s gain, but New York’s,” Kishwer Falkner, who heads inquiries into EU financial affairs for the panel, said in a statement. “We are in danger of a lose-lose scenario if pragmatism does not prevail.”
The UK financial-services industry, which employs 1.1 million people and accounts for 7 percent of economic output, is set to be one of the fiercest battlegrounds in Brexit negotiations. France, Germany and Poland are among countries trying to lure banks and insurers away from London. Chancellor of the Exchequer Philip Hammond and Brexit Secretary David Davis have vowed to maintain London as global finance hub.

Passporting
Prime Minister Theresa May wants to trigger the Brexit process by the end of March and the Lords panel said an early goal in the talks should be to “agree a transitional period so as to prevent UK-based financial-services firms from restructuring or relocating on the basis of a worst-case’ scenario.”
Executives including Alex Wilmot-Sitwell, president for Europe at Bank of America Corp., warned the committee of the complexities involved in moving employees and derivatives trading activities from London after Brexit, comparing it to moving nuclear waste. Banks have pressed the government to strike an interim deal with the EU to keep passporting — the ability of banks to sell their services freely across the bloc.
Current passporting rights bring in as much as 50 billion pounds ($64 billion) in annual revenue to UK firms, according to the report. Arrangements for non-EU countries that provide “equivalence” in financial regulations are “patchy” and “vulnerable to political influence,” it said.

Rolet’s Warning
The government “needs to determine as precisely as possible which firms currently rely on passporting and the degree to which equivalence provisions might provide a substitute,” Falkner said. The committee also took evidence from London Stock Exchange Group Plc Chief Executive Officer Xavier Rolet, who said stripping London of its euro-clearing operations could cost banks $77 billion in additional collateral, almost doubling what they post.
Clearing houses stand between traders to prevent a default from spiraling out of control. Rolet estimated about 100,000 clearing-related jobs in the U.K. could be lost post-Brexit.