EU to City of London: Expect No Brexit Favors, We Don't Need You

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(Bloomberg) -- The European Union’s Brexit negotiator said U.K. banks will face similar restrictions to U.S. institutions after the divorce, and issued a stark warning that markets should prepare for a messy, no-deal breakup.

“Why would the equivalence system, which works well for the U.S. industry, not work for the City?” Michel Barnier said in a speech in Sofia on Thursday, according to a text released by his office. That deals a fresh blow to the British government, which is fighting for far better access to Europe’s single market for its banks.

With 11 months to go before the U.K. leaves the EU, the government is holding out for an agreement based on “mutual recognition” of each other’s financial regulations. But the EU says that’s unacceptable due to the U.K.’s unwillingness to stick to the rules of the single market.

Instead, “equivalence” would see the EU decide unilaterally that U.K. laws are as strict as its own, but it can be withdrawn at short notice and the U.K. says it’s inadequate.

Barnier debunked the line often taken by U.K. lobbyists that the EU needs the City of London and will suffer if it’s weakened. "This is not what we hear from market participants, and it is not the analysis that we have made ourselves," he said.

Read how U.K. banks have a U.S. blueprint they can follow

With no special trade deal with the EU on financial services, U.S. banks are hardly suffering, however. Their domination of the investment-banking market was underscored on Thursday with the announcement that Deutsche Bank AG is abandoning its ambitions to be a top global securities firm.

The U.S. banks operate in Europe largely through subsidiaries and branches. Faced with the loss of the so-called single-market passport through their U.K. operations, the big U.S. firms are in the process of setting up units on the continent to ensure they can continue to serve their clients after Brexit. The biggest casualty will be the City of London, rather than individual institutions.

Prepare for Worst

Barnier warned the audience, made up of bankers and financial lobbyists, that failure to strike an overall divorce deal will mean the 21-month transition that’s planned for the period immediately after Brexit won’t happen. Banks, companies, U.K. regulators and the U.K. government are all planning on using that time to prepare for the new regime.

Financial markets should “hope for the best but prepare for the worst,” Barnier said. They should “continue to prepare for all scenarios.”

“No one should underestimate the risk of disagreement,” he said.

The Irish border issue remains a major stumbling block in divorce talks, and there’s little sign of progress ahead of an informal deadline of June. The EU and Dublin insist that without a deal on the border there can be no overall exit agreement.

Banker Bonuses

Barnier also talked about bankers’ remuneration before the financial crisis, which “set the wrong incentives and allowed excessive risk-taking.” The EU responded by imposing a controversial cap on pay, which U.K. officials have fiercely opposed. That has led to speculation that the U.K. would get rid of the cap after Brexit, a move that could complicate any equivalence determination on bank rules.

He welcomed the fact the U.K. has acknowledged that banks can’t continue to use passporting -- the system that opens markets of all the EU’s nations to firms based in just one of them. That’s because the U.K. wants to put an end to free movement and the EU says that precludes membership of the single market.

But Britain now needs to realize it will also lose the benefits of membership.

“Market participants should realize that this will not be business as usual.”

©2018 Bloomberg L.P.

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