In the starting blocks for a Super-Singapore?

Brexit and the finance sector

By: Peter Wahl

The Brexit has been a historic break for the EU. It will also have major consequences for the financial sector, both in Britain and in the EU. Some also say that the finance industry will only be slightly affected by the Brexit. Others fear that it may lead to a race to the bottom in terms of financial regulation, in order to protect national interests and competitiveness.

A historic break

The Brexit vote on 23 June 2016 is a historic break in many respects: for the idea of European integration as such, for the balance of power inside the EU, for geo-politics, for the domestic future of the UK, and, not the least, for the financial world. Many questions remain: how will the financial sector be affected? Will “the City”, London’s world financial centre, lose its exceptional position or will business go on as usual? Will the finance industry, freed from regulatory pressure from the continent, become a kind of Super-Singapore?

The majority of the City’s financial players were part of the Remain camp. There was also an outspoken minority for the Out, including some hedge funds who found EU regulations to be too restrictive. Forecasts that the Brexit would lead to a financial crash proved to be wrong. Immediately after the referendum, there were some downward trends in the equity and currency markets. By11^th July, many assets had recovered, as could be seen on the UK stock exchange indicator, the FTSE 100 – which even reached an eleven-month high. The same trend could be seen in other share trading indexes, including the Euro Stoxx 50, NIKKEI, DAX and the Dow Jones. Even the British pound, which had seen an 8% fall against the euro, has been recovering. Overall, the Brexit will require a particular adaptation from the financial sector, which will not come without costs.

Big changes for the EU institutions

There will be changes in European institutions dealing with finance. The European Banking Authority (EBA), based in London, will move to the continent. The EBA had already been marginalised since the European Banking Union, and its single supervisory structure moved the ECB to take over the supervision of all Eurozone banks with a balance sheet above € 30 bn.

The EU Commissioner for Financial Services in Brussels, the UK’s Jonathan Hill, resigned the day after the Brexit vote. He had been the driving force behind the action plan of the Capital Markets Union (CMU). His exit could throw some sand in the wheels of the CMU, and make it more difficult to orient the EU’s financial sector on the City’s interests as he himself admits (login required)(opens in new window) .

Banks will have to shift some of their business models, and move departments and personnel to the continent. For instance, the clearing of derivatives denominated in euro, with trillions of euros in turnover, will have to leave London, according to the ECB.

An EU passport

The main discussion has been about the EU “passport” for UK financial institutions, as well as foreign ones that are based in the UK. Once approved to operate in the UK by the UK financial authorities and thus receiving an EU “passport”, financial players have been allowed to operate automatically or very easily in other EU countries under EU regulations. However, financial businesses from outside the EU that do not have a “passport” are generally approved by various financial authorities in the EU for EU operation, depending on the home country rules and supervisory structures, among other factors. This is a much more burdensome process to receive the authority to operate.

Brexit will not make a difference

There are arguments that the finance industry will only be slightly affected by the Brexit. For instance, the London and Frankfurt stock exchanges are negotiating a merger. The new stock exchange will be designed as a bridge between the EU and the UK. The UK’s financial sector is the most globalised sector of the UK economy, and has long been expanding its global reach. London holds 48.9% of the global trade in derivatives and 40.9% of the currency trade, and is a global hub for bonds trading. Compared to this, Frankfurt, Paris and Luxemburg are dwarfs. The UK’s huge dependency on the financial sector will not change easily, although the new Prime Minister Theresa May seems to be hinting at some change. Since the day of the Brexit, steps have been taken to retain the competitiveness of the financial sector by announcing tax deductions of 15% and lowering bank capital requirements by the Bank of England. There are even voices arguing that the City could turn into a Super-Singapore and bypass Wall Street as the world’s N° 1 financial location. Some fear that a financial centre with lower standards might weaken EU regulations in order to remain competitive. The fact that Goldman & Sachs has hired José Manuel Barroso, the former President of the European Commission (EC), shows the well-known lobbying power of the financial sector. Since this move would have made the collusion between EU top personnel and finance capitalism all too visible, the current EC and the French government appealed to Barroso not to take the job – without success.

40 years of neo-liberalism

Although the Brexit has been a heavy and unexpected blow for pro-Europeans who believe that the EU is the best of all possible worlds, once the negotiations concerning the modalities of the Brexit start, pragmatism will prevail and economic interests and geopolitical might will converge. German Chancellor Merkel has already set the tone with a sober reaction to the UK referendum. Probably there will be an arrangement similar to those that exist with Switzerland or Norway, with concessions on the migration issue.

Nevertheless, independent of the Brexit, there had already been many economic and social challenges in the UK: a budget deficit of 4.4%, a current account deficit of over 6%, a largely de-industrialised country, a huge real estate bubble, an unhealthy dependence on the financial sector and tremendous inequality, to name only a few. But these problems are due to 40 years of neo-liberalism and not to the Brexit. In that respect, being in or out does not make much difference.