(Bloomberg) -- London has flourished as a financial center for decades in part because global banks, from offices around the bustling City of London district, could sell their services freely around the European Union. With the clock ticking on Britain’s exit from the 28-nation trading bloc — the complicated international divorce known as Brexit — the city’s status as a banking hub is under threat. If U.K. firms lose easy access to Europe’s $19 trillion economy, which seems likely under the terms laid out by Prime Minister Theresa May, Britain becomes a far less attractive place to do business.
1. How big a loss is this for London?
London could lose 10,000 jobs in banking and 20,000 roles in the larger field of financial services, according to Bruegel, a Brussels-based think tank. Other estimates range wildly from as many as 232,000 jobs to as few as 4,000, so view them with some skepticism. Executives at banks including Morgan Stanley, Citigroup Inc., Deutsche Bank AG and JPMorgan Chase & Co. have said they will move staff and operations out of Britain to service their EU clients. The top five U.S. investment banks keep about 90 percent of their EU-based employees in London.
2. Which businesses might be on the move?
No one really knows, but potentially any front-office or back-office operation with customers in the EU could have to pack up. One likely target is euro clearing, a service to help traders complete transactions safely and at the executed price. The EU is seeking to retake control of a function traditionally handled by London-based clearinghouses: settling derivatives trades denominated in Europe’s common currency, the euro.
3. So when might this start?
It already has. Global banks aren’t waiting around to see what Brexit deal May will strike with her EU counterparts. They have already begun the process of shifting some U.K.-based operations to new or expanded trading hubs inside the EU, and have started recruiting locally for staff. Some non-British traders have returned home; others, tired of wondering whether their jobs will be moved or cut, are volunteering to transfer to their native EU countries should their employers need to relocate staff. European regulators are pushing financial firms to establish full-scale, standalone operations inside the trading bloc staffed by significant numbers of both front- and back-office people as well as senior employees by the time the U.K. leaves in March 2019.
4. Is there another way?
Not really. Though May has said she wants a “bold and ambitious free-trade agreement” with the EU — one that would safeguard the rights of banks to provide services across the continent — EU regulators have indicated that they won’t tolerate fly-in, fly-out arrangements with bankers commuting from London.
5. Would a post-Brexit transition deal ease concerns?
The financial industry has long pushed for a so-called “standstill” arrangement between the U.K. and EU that would preserve existing rules for a few years until new regulations take effect. While banks welcomed a deal reached by the two sides in March for a 21-month post-Brexit transition period, they need more clarity on the terms of the agreement before changing their plans or slowing their departure from the U.K. Barclays Plc Chief Executive Officer Jes Staley said in March that a transition arrangement can’t be relied upon until Britain reaches a final deal with its European partners.
7. What sort of new system do they want?
Bank executives long ago gave up hope of preserving so-called passporting rights, which allow global banks with bases in London to provide services to the rest of the EU. Instead, they have focused on securing a version of regulatory “equivalence,” or a formal recognition by the EU that the U.K.’s rules and oversight of specific businesses are as tough as its own. That would pave the way for a continuation or resumption of cross-border business, on a case-by-case basis. It is a far from ideal arrangement, as the EU would be able to withdraw that recognition with a few months notice.
8. Where will London’s bankers go?
Most of them will be going to Frankfurt. Goldman Sachs Group Inc., Bank of America Corp. and Standard Chartered Plc have picked the German financial hub for their new EU trading headquarters. Barclays has opted for Dublin, Ireland’s capital, while HSBC Holdings Plc is heading to Paris. Most banks are planning to boost various offices across the region. But no other European location quite matches London’s depth of markets, breadth of expertise or regulatory appeal. While banks will move some operations to the continent to ensure access to market activity in European time zones, they could ultimately move even more across the Atlantic to New York, which could be the only genuine one-stop shop for finance after Brexit.
9. So how many people are we talking about?
If the high estimates are correct, the number of bankers on the move would account for about 10 percent of the 2.2 million people that lobby group TheCityUK says work in finance and related professions in the U.K. Sam Woods, Britain’s top banking regulator, said it was plausible that as many as 75,000 jobs might be lost if the U.K. exits without a trade deal. About 10,000 U.K.-based jobs are probably at risk on “day one” of Brexit, Woods said.
The Reference Shelf
- A QuickTake on Britain’s bid to keep post-Brexit access for banks.
- A QuickTake on London’s dominance of the clearing business.
- The Boston Consulting Group’s white paper on the impact of Brexit.
- Oliver Wyman’s report on the impact of Brexit on U.K. financial services.
- The big winner from Brexit could be New York.
- Bloomberg View’s Mark Gilbert says London bankers might like Paris.
- Sign up for Bloomberg’s Brexit Bulletin newsletter.
- Follow @Brexit on Twitter for full coverage of Britain’s exit from the EU.
©2018 Bloomberg L.P.