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Post-Brexit City: multipolarisation of the European financial system

The Brexit took effect in the first days of 2021 and its effects on the financial markets were soon felt. Amsterdam very quickly overtook London in the market for European company shares. However, the Dutch capital has not taken the central position in the European financial system that the City used to occupy. In 2018 we anticipated a multipolarisation of this system and a clear political will on the part of the ECB to mark the break with London. Six months after the divorce, we believe that we were right, except for the date (we thought that this change would be spread over a longer period of time) and the identification of Amsterdam as the first beneficiary of this new distribution. Although the pandemic makes it all the more difficult to assess what is attributable to the Brexit or the confinements, we thought it useful to update this trend.

Here is what the GEAB wrote in January 2018:

“To establish the independence of the eurozone, Europeans seem ready to emancipate themselves from London, even if it means losing some feathers. […] We now anticipate a gradual disconnection between the City and the single market during and after the post-Brexit transition period, as well as a multipolarisation of financial services within the eurozone by 2022. “

The move away from the City and from a centralised to a multipolar system:

The break between the City and the continent has been marked very quickly, as the figures show. 440 financial companies have left the City since the Brexit. UK-based banks have transferred around 10% of the entire UK banking system, or £900 billion of assets. Insurance companies, together with asset managers, have transferred over £100 billion of assets and funds. As a result of these monetary and capital flows, “some” 7,400 jobs were transferred[1]. This “gradual disconnection”, to use our own words, is marked primarily by tariff and non-tariff barriers, as City firms have lost their “financial passport”[2]. London-based bankers are therefore obliged to use an EU-based ‘chaperone’ every time they deal with EU clients.

By 4 January 2021, the first day of trading on the London Stock Exchange under an effective Brexit, more than €6 billion – about half the market – of European corporate stock trades had left the UK[3]. These “billions” went to be traded in several European capitals, so it was not a single financial centre that won the entire stake. Therefore, there will not be a single financial centre in the future with the aura that the City had before the divorce. “Many companies have deliberately split their operations and chosen different cities as hubs depending on the divisions they have made”[4]. An example of this is Bank of America’s decision to choose Dublin for its EU banking hub and set up a new one in Paris as a hub for its capital markets business. While Amsterdam was the first, Dublin, Paris and Frankfurt have also benefited from the transfer of assets and staff as a result of the Brexit.

The ECB, authoritarian and ready to ensure the distance from the City:

The other aspect of our anticipation pointed to the ECB’s determination to distance itself from the City even if it means “losing feathers”, and the result is obvious here as well. The Frankfurt institution wants to avoid banks relying on London subsidiaries after Brexit[5]. It seeks to curb “back-to-back booking”, the practice of banks serving clients in Europe while maintaining capital and management in the UK. The ECB denounces this practice on the grounds that it makes risks more difficult to assess and contain, but there is a clear desire to undermine the financial strength of the City.

The view we took in 2018 and confirm in this update is a European view. It should not suggest that the City, partially cut off from the single market, will be fatally undermined. In our June bulletin, we analyse the UK’s post-Brexit strategy, Global Britain, and of course the City is an integral part of that strategy and its pivot to the east which has financial centres of global proportions. No doubt UK financial players have this in mind and are looking to make up for or even outweigh their losses in European markets by directing their energies to other parts of the globe. Moving away from the continent may also mean breaking free from its shackles[6], and the UK could establish a new tax competition strategy as it has already done with Jersey for example.

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[1] Source : Euractiv, 19/04/2021

[2] Expression designating the set of equivalences allowing financial market players to trade smoothly within the EU’s single market. London and Brussels have negotiated a Memorandum of Understanding, but it remains far below what existed before the Brexit Source : L’Opinion, 07/04/2021

[3] Source: Alternatives Economiques, 17/02/2021

[4] Source : Euractiv, 19/04/2021

[5] Source : Bloomberg, 26/05/2021

[6] Source : Bloomberg, 01/07/2021

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