Even If True, New Brexit Deal Too Scant for Banks to Cheer

(Bloomberg) -- Traders briefly got excited Thursday after the Times of London said an early-stage deal has been agreed giving the City of London access to the European Union after Brexit. However, both the U.K. and the EU have pushed back on the report.

The truth is that even if it’s true, a deal won’t necessarily put the City out of its misery.

According to the Times report, the U.K. and the EU have reached a non-binding agreement on how banks would access the bloc. It would be based on equivalence -- a big downgrade from the status quo -- but with some features that could make it more palatable. However, because of the way Brexit talks are structured, it wouldn’t become legal until a final trade deal is signed, which could take years. Either way, bankers and lawyers say they need to know the nuts-and-bolts of how it would work in practice.

An “indication of progress in reaching a sustainable deal between the U.K. and EU on market access is to be welcomed,” said Peter Bevan, global head of financial regulation at Linklaters LLP. He said a deal would also need to address issues such as the provision of direct electronic access to EU markets and services to retail clients.

Britain’s largest banks, including Royal Bank of Scotland Group Plc, Lloyds Banking Group Plc and Barclays Plc, all gained in early morning trade in London, while the pound also rose following the Times report. The pound pared back its gain after the report was knocked back.

Meanwhile, banks in the region are rushing to establish new trading hubs elsewhere in the region. EU regulators have made it clear they expect banks to establish full-scale, standalone operations inside the trading bloc, staffed by significant numbers, as soon as possible.

Overseas investment in Britain’s financial-services industry dropped 26 percent last year, EY estimates, the starkest indication yet of Brexit’s impact on the sector. During the same period, German experienced a 64 percent increase.

©2018 Bloomberg L.P.