(5 July 2017 – United Kingdom) Banks in the UK could hit with €15 billion (A$22 billion) in costs to relocate certain activities to Europe after Brexit, according to a study by a finance trade group.
The Association for Financial Markets in Europe warned that the cost of creating a subsidiary in the EU would have a “material impact” on banks’ bottom lines. These additional costs could be passed on to European customers, the industry group added.
British banks will likely have to shift large chunks of their operations into the EU after the UK leaves the trade bloc in order to continue servicing customers there. The UK is currently locked in negotiations with the EU to try to guarantee as much access to the EU as possible, while remaining outside the single market.
Should a deal not be reached, and London is frozen out of Europe, more than €1 trillion of bank assets, including loans, securities and derivatives, may need to be rebooked into European subsidiaries, AFME said.
That could prove expensive on several counts. Not only do banks have to shuffle staff, expand offices and get regulatory approval, but they would also have to capitalize their new European entities.
Investment banks used London as a springboard to sell to clients not only across Europe but also Africa and Asia. Having capital pooled in one place made it more efficient to do business. However, if the rights to sell to EU clients from London are lost, Boston Consulting Group estimates that €70 billion of equity capital would have to be pumped into these new European units. These costs amortised over three to five years could reduce the banks’ return on equity, a key measure of profitability, by 0.5 percent to 0.8 percent, the report says.
The European Union’s executive arm proposed plans that could force clearing houses that do a large of chunk of business in euros to move into the EU. BCG estimates that moving the approximately €83 trillion of euro-denominated interest-rate contracts out of the UK would force European banks to hold an extra €30 billion to €40 billion of collateral.
Clearing is a business that depends on scale, where a mass of contracts with opposite bets can cancel each other out, reducing the amount of capital banks have to hold against the risk.
A survey showed that European businesses were largely unconcerned with the banks’ plight. “Most businesses we interviewed told us that they expect their banks to address all the challenges and absorb all the costs that Brexit could create,” the AFME report said.