How is Brexit Going to Affect European Financial Markets? · 2020. 3. 21. · How is Brexit Going...
12
How is Brexit Going to Affect European Financial Markets? Milan Simacek Czech National Bank 27- th Economic Forum Krynica – Zdrój, Poland, September 5 – 7, 2017 1
Transcript of How is Brexit Going to Affect European Financial Markets? · 2020. 3. 21. · How is Brexit Going...
How is Brexit Going to Affect
European Financial Markets?
Milan Simacek Czech National Bank
27- th Economic Forum Krynica – Zdrój, Poland, September 5 – 7, 2017
1
2
United Kingdom versus European Union
What will be missing in Europe after Brexit?
What banks are dominating the European wholesale financial sector?
It’s easy to say that the new financial center will be elsewhere in Europe. Will it be in Frankfurt, Paris, Dublin or Warsaw? Is it possible to designate a financial center from the table?
And can the financial center in London even be replaced at all?
3
European Investment Banking, TOP 20
banks
Source: Forbes
Rank Bank Country of
origin
Fees
(USD mil.)
Market
share (%)
1. JP Morgan US 549 6,1 %
2. Goldman Sachs and Co. US 483 5,4 %
3. Morgan Stanley US 462 5,1 %
4. Barclays UK 432 4,8 %
5. BNP Paribas SA Euro area 400 4,4 %
6. Deutsche Bank Euro area 373 4,1 %
7. Citi US 358 4,1 %
8. Bank of America Merrill Lynch US 338 3,7 %
9. HSBC Holdings PLC UK 329 3,7 %
10. Rothchild UK 246 2,7 %
11. Société Generale Euro area 212 2,4 %
12. Crédit Agricole CIB Euro area 209 2,3 %
13. UBS Switzerland 194 2,2 %
14. Lazard US 192 2,1 %
15. UniCredit Euro area 184 2,0 %
16. Credit Suisse Switzerland 151 1,7 %
17. ING Euro area 137 1,5 %
18. Evercore Partners US 129 1,4 %
19. Santander Euro area 116 1,3 %
20. Natixis Euro area 112 1,2 %
United Kingdom versus European Union
The European wholesale financial sector dominated by US
and Swiss banks located in the UK
The UK leads Europe in Euro denominated wholesale
banking, FX and derivatives trading:
43% of daily FX spot transactions,
37% of total forex derivatives trading,
75% of interest rate derivatives
48 % of direct foreign investments in the UK come from
the EU
The UK has stronger capital markets than the EU; British
markets are twice as developed as the EU markets, when
relating to GDP 4
5
The UK vs the EU or Who needs whom more?
UK is the third largest economy in EU
UK export to the EU27
Source: Thomson Reuters
0
500
1 000
1 500
2 000
2 500
3 000
3 500
4 000GDP (bln. USD)
000
050
100
150
200
250
300
350
400
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Export (bln. USD)
Import (bln. USD)
6
Brexit negotiations results still uncertain
Article 50 was triggered in March 2017, officially beginning the process of the UK leaving the European Union
Two year timeframe for negotiations
The UK is trying to negotiate a tailor made deal, which would be a combination of three alternatives:
The 3 existing alternatives being considered are:
1. Membership in the European Economic Area (EEA), like Norway
2. Negotiated bilateral agreements, such as those between the EU and Switzerland,Turkey or Canada
3. The third country status – in case of no deal, World Trade Organization (WTO) laws will apply without any form of specific agreement with the EU, like Russia or Brazil
7
1. Passporting and full equivalence will be retained for the UK:
Passporting allows financial services firms to provide services to EU
clients (either on a cross-border basis or by establishing branches)
based on their authorisation and licensing in one EU member state
Maintaining the Status quo, only if accessable to EEA
2. Partial equivalence for a third country:
Concept of equivalence of regulatory and supervisory framework for a
third country in the EU as assessed by the European Commission
Partial equivalence passporting rights may not fully cover the entire
spectrum of a firm´s activities
3. In case of no equivalence for third countries:
Case by case basis by each member state based on licencing and
other permissions
The UK need to establish subsidiaries or branches that are authorized
to provide services in the EU
Potential regulatory outcomes of Brexit
8
Possible Impacts on Financial Markets
In case no passporting rights are granted to UK financial service firms, they might relocate to where their clients are
There will not be a mass exodus of companies or of individuals from the UK
It is important for the EU to complete the Banking Union, including the Deposit Insurance Scheme (expansion of the Banking Union)
Completion of the Capital Markets Union (CMU) project, which would mean deeper integration of trading, stock exchanges and settlement of trades.
ECB may seek to move the Clearnet clearing center to the EU (clearing for 90 % of euro derivatives)
Some European institutions (e.g. European Banking Authority, EBA) will be moved to other EU countries
9
Importance of financial sector for UK
Source: BruegelCNS Book, TheCityUK
Over 2,2 million people are employed in financial and related professional services
46 % of financial industry´s GVA is generated in London
The UK the financial sector tax revenues are 100 times greater than in Germany
The UK financial sector trade balance is greater than Germany´s and France´s by a factor of 10
0
2
4
6
8
10
12
14
Employment GVA Tax
contribution
Employment, GVA and tax
contributions as a proportion of the UK
total
UK financial services export
by region
EU North America
Asia Rest of Europe
Rest of the World
10
Potential migration of financial services
POTENTIAL MIGRATION OF WHOLESALE MARKETS FROM LONDON TO EU27
Source: Bruegel
Bruegel estimates that around EUR 1.8 bln. (34 %) of wholesale banking assets and around 10, 000 banking positions might move out of the UK
The main prospective destinations for relocation are Frankfurt, Paris, Dublin and Amsterdam
90
2 1 2 1 1 3
60
14 8 7 5 2 4
0
10
20
30
40
50
60
70
80
90
100
(% o
f m
arke
t)
Current situation (% of market) Integration Scenario (% of market)
United KingdomGermanyFranceIrelandNetherlandsLuxembourg
11
Issues to be solved
UK financial firms wishing to operate in the EU will be required to comply with EU regulations
The uncertain future for euro denominated clearing and settlement infrastucture, where European institutions may require the systematicly important firms to relocate to the EU
The EU should move to a fully integrated single market for financial services in order to avoid regulatory arbitrage
Banking union and Capital market union would need to be finalized
A greater role for ESMA; to enhance ESMA´s responsibilities?
