Europe's financial lifeline
from London in doubt
Send a link to a friend
[March 24, 2017]
By John O'Donnell
(Reuters) - For companies in the European Union, London is the chief
gateway to finance. Rerouting the financial lines that run through
London will be complex, experts say.
London dominates wholesale banking in Europe, a 5.8 trillion euro ($6.2
trillion) industry that includes financing for companies from big
multinationals to family-owned firms that are the backbone of Germany's
London is also the first port of call for companies, such as Italian
lender UniCredit, selling shares or raising debt. This is because many
fund managers and asset managers have a base in Britain.
The Bank of England estimates that half of the debt and equity issued by
EU borrowers involves financial groups in Britain. This could be a
London bank organizing a sale of European company bonds, for example.
And London houses the bulk of Europe's derivatives market, where car
makers buy protection against swings in the U.S. dollar or airlines
guard themselves against a spike in the price of oil. More than 7
trillion euros of trading in such instruments is processed in London
Experts expect EU firms and banks gradually to reduce their reliance on
London. Governments in France and Germany want to establish alternatives
to London in Paris and Frankfurt.
Over time, some of London's wholesale funding will move to other centers
in Europe. Thinktank Bruegel predicts that London's share of this market
will eventually shrink from 90 percent to 60 percent.
If mismanaged, however, the migration could raise the cost of funding
for European companies, the thinktank said.
Bruegel's Dirk Schoenmaker said that if wholesale funding operations are
spread across several locations that could lift costs by between 6
billion and 12 billion euros each year because of the expense of using
multiple financial centers. That is equivalent to up to 0.1 percent of
the remaining 27 EU countries' economic output.
[to top of second column]
Canary Wharf is seen at sunrise from the Sky Garden of 20 Fenchurch
Street, nicknamed the Walkie-Talkie building, in the financial
district of the City of London, February 19, 2016. REUTERS/Eddie
Shifting the multi-trillion euro derivatives business would be
difficult, regulators and bankers said. Some derivatives have a term of
many decades. It is unclear, bankers said, what will happen when
Britain, where the contracts were drafted, leaves the European Union.
They said that the cost of holding such instruments could rise sharply
for European banks if a clearing house in London that processes the
deal, for example, is not recognized in the European Union.
A transition period, after initial exit talks of two years, could win
extra time. But many bank executives, speaking privately, have said they
are working on the assumption that there will be no transition.
EU officials familiar with the bloc's preparations for negotiations have
told Reuters that they too fear a "cliff-edge" departure of Britain from
the bloc. They are pinning their hopes on banks moving to the continent
in time and believe this will minimize any fallout for their economies.
(Edited by Janet McBride and Richard Woods)
[© 2017 Thomson Reuters. All rights
Copyright 2017 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.