London is likely to lose its revered position as the world’s leading financial center as the recent Brexit vote means losing its privileged access to the EU, the world’s largest trading bloc. Major U.S. banks located in Britain have already begun preparing for the possibility that they will no longer be able to provide financial services to EU clients from their current geographic location.
Until now, banks around the world have been able to conduct business in the EU by setting up shop in the U.K., which has ‘passport’ privileges to the other 27 member nations. This is one of the primary reasons London has become not only the EU’s financial capital, but the world’s financial capital as well. (See also: The Top Three Financial Centres in the World).
Big U.S. banks were able to take advantage of the EU’s passport rules by setting up subsidiaries in Britain, offering financial services to the rest of the European continent and providing thousands of jobs in the process. In the city of London alone, Goldman Sachs Group Inc. (GS) employs 5,500; Bank of America Merrill Lynch (BAC), 4,500; Morgan Stanley (MS), 5,000; JPMorgan (JPM), 8,000; and Citicorp Inc. (C), 7,000.
As banks have been warned by lawyers that they will need to begin looking for a new legal base to conduct EU operations, they have begun turning to regulators for securing licenses and lining up executives to relocate, according to the Financial Times. Possible destinations could be Paris, Dublin or Frankfurt.
While banks have begun the process of looking into licensing there have yet not been any confirmed statements of how many jobs will have to be relocated. BBC reported on Friday that Morgan Stanley had already begun moving 2,000 investment-banking jobs out of London, but that report was denied by Morgan Stanley, according to Bloomberg.
Banks are likely still waiting to have a clearer picture of what Britain’s new relationship with the EU is going to look like. There is a possibility that Britain could secure a special passport relationship with the EU that could allow the rules to remain in place. (See also: How Bad Will Brexit Be for British Trade?).
However, this is unlikely considering that neither Switzerland nor the U.S. has such privileges. Norway, which is a member of the European Economic Area but not the EU, poses a potential model for Britain to follow, but it means accepting all the EU rules while having no influence in constructing them.
Going forward, the U.S. banks will have to continue to assume that at least some of their operations will have to be located within the EU in the near future. However, there is still a lot of uncertainty and they will likely hold off on committing to any definite relocation as long as possible, as such moves can be costly and complex.