How Brexit is set to hurt Europe’s financial systems

LONDON/BERGAMO - 13 July 2017: Like many multinational companies, Italian engineering business Brembo relies on London to run its finances. The company, based close to the Alps, makes brakes for Formula One cars and motorbikes and sells them in 70 countries. Hundreds of millions of euros pass through its bank accounts each year – and London is the hub for those flows.

As Britain prepares to leave the European Union, the company says it may now have to shift the centre of its banking operations to Frankfurt. If Brexit happens with little provision for London’s financial services, banks, funds and insurers in London will lose their ability to sell many of their services to European companies.

Such upheavals will hurt not just London, say bankers and businessmen, but Europe as well. Financial firms say such shifts will mean the cost of banking for European companies will have to rise, though it is not clear yet who will pick up the bill – the banks or their clients.

“At the end of the day it will not be a problem for Brembo, but for our bank,” said Matteo Tiraboschi, executive vice president of Brembo, in an interview at the company’s headquarters in Bergamo. “We expect to have the same service for the same price.”

Brembo’s main bank, Citigroup, declined to comment.

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The EU needs London’s money, says Mark Carney, governor of the Bank of England. He calls Britain “Europe’s investment banker” and says half of all the debt and equity issued by the EU involves financial institutions in Britain.

Rewiring businesses will be expensive, though estimates vary widely. Investment banks that set up new European outposts to retain access to the EU’s single market may see their EU costs rise by between 8 and 22 percent, according to one study by Boston Consulting Group. A separate study by JP Morgan estimates that eight big U.S. and European banks face a combined bill of $7.5 billion over the next five years if they have to move capital markets operations out of London as a result of Brexit. Such costs would equate to an average 2 percent of the banks’ global annual expenses, JP Morgan said.

Banks say most of those extra costs will end up being paid by customers.

“If the cost of production goes up, ultimately a lot of our costs will get passed on to the client base,” said Richard Gnodde, chief executive of the European arm of Goldman Sachs. “As soon as you start to fragment pools of liquidity or fragment capital bases, it becomes less efficient, the costs can go up.”

UK-based financial firms are trying to shift some of their operations to Europe to ensure they can still work for EU clients, but warn such a rearrangement of the region’s financial architecture could threaten economic stability not only in Britain but also in Europe because so much European money flows through London. European countries, particularly France and Germany, don’t share these concerns, viewing Brexit as an opportunity to steal large swathes of business away from Britain and build up their own financial centres.

Britain alone accounts for 5.4 percent of global stock markets by value, according to Reuters data. Valdis Dombrovskis, the EU financial services chief, said the EU will still account for 15 percent of global stock markets by value without Britain, and that measures were being taken to strengthen its capital markets. But he added: “Fragmentation is preventing our financial services sector from realising its full potential.”