European General Affairs Council decides to relocate the EBA to Paris

The European Banking Authority (EBA) is moving from London to Paris. This was decided by the European General Affairs Council in a secret ballot on 20th November. The German government had also applied to host the EBA in Frankfurt am Main. The transfer of the EBA from London to another EU country is a direct consequence of the UK decision to leave the EU.

“We congratulate Paris on the relocation of the EBA, but we would have preferred a different decision because we believe that Frankfurt, all things considered, best meets the criteria stipulated to achieve the award,” says Dr. Lutz Raettig, President of the financial centre initiative Frankfurt Main Finance. “The award of the location to Paris means a greater decentralisation of financial market regulation and, in our view, signifies a political decision in favour of the principle of an EU-wide distribution of agencies and institutions. We remain optimistic about the future development of Frankfurt as a hub of financial activity.”

In addition to the Main metropolis and Paris, six other cities had applied to become the headquarters of the institution. The decisive criteria for the European General Affairs Council decision included a smooth continuation of operations, the timely provision of a suitable building, the transport infrastructure and international accessibility, the availability of living space, and the job, school and healthcare services available for the families of the employees.

Deutsches Aktieninstitut presents its second Brexit position paper and claims: Transitional arrangements now!

The Deutsches Aktieninstitut (DAI) presents its second position paper. The paper on the exit negotiations between the European Union and the United Kingdom complements the first position paper from February 2017 and covers further relevant topics, e.g. clearing, benchmark and rating. In the light of proceeding negotiations, the position paper claims to find transitional arrangements that prevent Europe from a Cliff Edge Scenario.

Under the slogan “Exit negotiations between the European Union and the United Kingdom: Minimise Brexit risks and strengthen the European capital market”, the analyses of financial and capital market legislation and concrete examples from practice, illustrate which topics deserve particular attention due to their significance for business and society in connection with the Brexit negotiations.

No deal is the worst deal for all parties affected

“The United Kingdom’s departure from the European Union will have considerable consequences for the European economy and society”, Dr. Christine Bortenschläger, Chief Executive of DAI mentions in the paper, “It is not yet possible to predict how those will look like in detail since the outcome of the ongoing negotiations between the United Kingdom and the European Union is still completely open. This means that companies are losing valuable time they need to adjust to the new situation.”

Risk and consequences of a hard Brexit can be reduced with transitional arrangements

The third country regimes in financial -and capital markets law won’t serve as a sufficient basis to regulate the relations between the 27 EU-states and the United Kingdom, as the second position paper shows. Therefore, the European Union needs a new and broad trading agreement that complements first transitional arrangements. “Transitional arrangements are of decisive importance to buy more negotiating time, enable businesses to prepare for the new situation, and avert a no-deal scenario”, is one of the first position paper sentences.

Brexit

German trade associations publish Brexit Compendium

Renowned German trade associations today have published a digital, cross sectoral Brexit Compendium, with the aim of bundling the interests of the German economy. The position papers of participating trade associations on Brexit can be found on the respective website http://brexit-kompendium.de/en/, sorted by relevant topics.

The United Kingdom’s departure from the European Union will have far-reaching consequences on the European economy and society. In this regard, the concrete impact depends on the result of the Brexit negotiations.

The objective of the Brexit Compendium is to aggregate topic areas with high relevance for the economy in a reference work. To do so, the position papers of the participating trade associations have been pooled in one location. That way, political decision-makers and the interested public are provided with an easy access to problem analyses and solution proposals.

The trade associations contribute their specific topics and expertise to the project. They are independent in terms of content and stay responsible for their topics and publications.

The website of the Brexit compendium can be found here.

Finance Minister Altmaier & Hesse Prime Minister Bouffier meet in Brussels to discuss future of EU financial markets after Brexit

The Federal Government and the Hesse State Government are convinced that the financial hub of Frankfurt will take on a more prominent role after Brexit based on its outstanding qualities. At the same time, they emphasise that Frankfurt should be the home of the relocated European Banking Authority after the United Kingdom has left the European Union. Hesse Prime Minister Volker Bouffier joined Federal Minister of Finance Peter Altmaier, and the special representative for the EBA bid, former Federal Finance Minister Dr. Theo Waigel, in Brussels on Tuesday to present the German bid to host the European Banking Authority.

“Frankfurt is the main financial hub on the Continent and it is only logical to have the European supervision where most of the trading and exchanges actually takes place,” said the Hesse Prime Minister at the event held at the Representation of the State of Hesse. “I deeply regret Brexit, and I am convinced that it is neither a positive development for the United Kingdom nor for Europe. We are determined however to use the opportunities which do arise for the benefit of our country.”

The European financial market will be completely reshaped by Brexit, explained Peter Altmaier, Federal Minister of Finance and head of the Chancellor’s Office. For example, banks are required to have established offices in the European Union, if they want to be able to offer their products in the European Union. They are therefore currently looking for the ideal location to establish such subsidiaries. The Frankfurt bid to host the EBA signals our clear intent to other EU Member States that we are focused on planning for the future and that stability will be our watchword.

“Frankfurt offers outstanding infrastructure in the heart of Europe, an unrivalled network linking all the key players in the financial world, and an internationally-oriented environment,” stressed Bouffier. This includes international schools, 34 universities within 1 hour’s drive and 100,000 people working in the finance industry who bring a wealth of expertise to the table. “This is the ideal basis on which to relocate international authorities such as the EBA quickly and seamlessly, and to hit the ground running immediately. Any argument based on the facts and on industry requirements clearly points to Frankfurt as the ideal location,” said the Prime Minister.

“The financial markets are traditionally very sensitive to change, and Brexit is a change of quite epic proportions. It is therefore all the more important that we ensure stability and reliability for Europe in this vital sector by relocating the European Banking Authority to Frankfurt,” said former Federal Minister of Finance Dr. Theo Waigel, who is supporting the German EBA bid as a special representative. “Looking at it objectively, Frankfurt is the most suitable location for the European Banking Authority, because it links the body to the European Central Bank and the insurance regulatory authority, EIOPA, both geographically and with regard to personnel, and will therefore allow the close collaboration which will be absolutely crucial to the future of this sector.”

“In our view, Frankfurt is the logical location for the European Banking Authority,” said Hesse Minister for European Affairs, Lucia Puttrich. This opinion is often repeated in meetings with representatives of other Member States. Nevertheless, Frankfurt’s bid is by no means a foregone conclusion, as political considerations may also play a role in addition to purely technical criteria when the decision is taken on 20 November.

Alongside many other benefits however, the relocation of the EBA to Frankfurt also provides an opportunity to improve efficiency and increase political clout, since much of the EBA’s remit overlaps with that of the European Central Bank, the single EU banking supervisory mechanism SSM, the European insurance supervisory authority, EIOPA, and other European financial institutions. Deutsche Bundesbank and the Federal Financial Supervisory Authority also have their headquarters in Frankfurt.

“The State Government and all relevant partners in Frankfurt and the Rhine-Main region have a shared vision and are working together closely on the Brexit issue,” said Puttrich. Frankfurt is set to benefit from Brexit. A number of banks and other financial institutions have already announced plans to relocate there, or to expand their existing operations. Others seem sure to follow. “We are therefore planning for the future positively and with confidence.”

Background

Following Brexit, the European Banking Authority (EBA) will have to relocate within the European Union. Alongside the Frankfurt bid, there are a further 7 bids from other EU Member States. The bid documents for Frankfurt can be viewed on the internet at www.ready-to-host-eba.de. The decision regarding the future EBA location is due on 20 November.

Frankfurt Office Market heats up as banks firm up Brexit relocation plans

Analysis from leading real estate firms and investors shows demand and prime-rents in the Financial Centre Frankfurt reach record highs, while the vacancy rate steadily declines to its lowest point in years. Nearly sixteen months after the Brexit referendum, developments in the Frankfurt Office Market clearly reflect Frankfurt’s popularity amongst banks leaving the United Kingdom. As an estimated 10,000 jobs relocate to Frankfurt over the next four years, numerous construction projects will help to meet high demand for premium office space.

Increased demand in the market has driven investor confidence and analysts report a notable increase in transaction volume in comparison to 2016. Additionally, Frankfurt has also seen larger deals exceeding 10,000 square meters as firms seek larger, contiguous office space to accommodate their expanding operations and personnel. Despite increases in demand and prime-rents, the Financial Centre Frankfurt remains competitively priced relative to other European financial centres.

These developments are discussed in detail by the branch heads Frankfurt Main Finance member BNP Paribas Real Estate, José Martinez and Oliver Barth. Additional observations and perspectives are given by real estate experts from KGAL, Savills Investment Management, and Jones Lang LaSalle (JLL).

Download the Press Release as a PDF here

José Martinez and Oliver Barth, Managing Directors and Frankfurt Branch Heads of BNP Paribas Real Estate

The Frankfurt office market is continuing to expand rapidly. With a take-up of 477,000 square metres, it achieved its best result of the last 15 years. This outstanding performance puts the city third behind Berlin and Munich. Remarkably, demand is spread relatively evenly across all size classes and market segments, thus testifying to the broad basis for this demand. On a particularly encouraging note, several large-scale deals in excess of 10,000 square metres emerged again at last. After the shortage of the last few years, they are currently accounting for 20% of total volumes. One of the largest contracts (around 27,500 square metres) was signed by Helaba in Kaiserlei.

Supply is keeping pace with the robust demand of the last two years. Currently, 1.51 million square metres of office space are vacant, down 10% on the third quarter of 2016. However, only around half of this floor space, namely 749,000 square metres, exhibits the high-quality modern fittings being sought by tenants. At 9.8%, the vacancy rate across the entire market has now dipped below the 10% threshold. At this stage,

the extent to which Brexit leaves traces on future trends in the Frankfurt commercial real estate market still remains to be seen. The fact is that, although Brexit is being felt on the Frankfurt market, it is not a dominating factor. BNP Paribas Real Estate is in initial, good and promising talks with potential relocators. The fact that something is going on is also reflected in the deals by Morgan Stanley and Goldman Sachs that have secured substantial floor space in Frankfurt. If all current inquiries in the market coincide with signings by Brexit banks, this could theoretically cause a bottleneck situation in the Frankfurt CBD, where currently only 120,000 square metres of modern office space are available. In fact, in the banking district, only about 66,000 square metres are vacant. An estimated 150,000 square metres are required for the 10,000 employees expected to additionally come to Frankfurt. However, on the basis of total vacancies, Frankfurt would not experience any problem offering suitable office space if push comes to shove, although not all of this would be in the CBD. The situation will be eased by a number of attractive development projects that are currently under construction such as WINX, Omniturm and Marienturm, which will be completed in time in 2018/2019 and still have vacancies.

At this stage, all signs are pointing to continued brisk demand until the end of the year. Accordingly, total take-up for the year as a whole should come to between 750,000 and 800,000 square metres, resulting in one of the best years ever. Simultaneously, we expect vacancy rates to continue shrinking, meaning that rents will probably rise to some degree.

Gert Waltenbauer, CEO of KGAL

Frankfurt can strengthen its post-Brexit role as a leading financial centre and additionally enhance its appeal, as the decision made by a number of London banks to base their EU headquarters in Frankfurt shows. The airport is conveniently located near the city centre and is a genuine Frankfurt asset, the importance of which will continuously increase with growth in trade and European integration. Office buildings in Frankfurt in particular are rising substantially in value as a result. However, what we are also noting is that residential quality has improved in Frankfurt over the last few years and this is having a corresponding effect on the intrinsic value of residential real estate.

Andreas Trumpp, Savills Investment Management

From our point of view, Frankfurt offers a wide range of affordable office space both in the CBD and in B locations and could effortlessly absorb a further 10,000 office workers. The inflow could only be limited by the lack of available housing. In any case, the retail and food sectors would profit from the influx of well-payed bankers. As one of the world’s major financial centres, Frankfurt boasts outstanding accessibility, i.e. an airport which is close to the city and superbly integrated in the public transport system as well as the short routes within the city and the entire region. The local companies, political and research institutions attract highly qualified specialists from all around the world, thus contributing to diversity in the city.

Markus Kullman, Associate Director Office Leasing Frankfurt am Main, JLL

Brexit has reached Frankfurt. Preliminary signings have been completed over the last few weeks.

JLL is in constant close contact with a very large number of companies that expect Brexit to impact some of their business segments. Service providers addressing the financial sector are also exploring the market for suitable floor space. However, the Frankfurt office real estate market is not an unknown quantity for most potential tenants as they already have at least a small representative office in the city.

In addition to an available selection of potential high-quality alternative spaces, they especially appreciate the excellent infrastructure, for example the airport.

After already becoming evident last year, one fact has been confirmed in our recent talks, namely that it is not a question of a full-scale relocation of a large number of jobs from London to Frankfurt but of incrementally building up the necessary capacity. And in the most important cities of Europe. Apart from Frankfurt, Paris, Amsterdam, Dublin and Luxembourg also play a role. We expect around 100,000 square metres of office space to be absorbed above and beyond customary market demand in the wake of Brexit.

True, there are some signs of a shortage of floor space in some parts of Frankfurt. For example, we can only offer a small selection of legacy properties in the traditional banking region. This particularly applies to high-quality contiguous floor space of more than 5,000 square metres. That said, the large number of new construction projects, such as OmniTurm, MarienTurm and the Four project at the former Deutsche Bank site, will push more than 250,000 square metres of new office space onto the market between 2019 and 2022. Accordingly, we do not expect the recent rise in demand to trigger any massive increase in prices in the Frankfurt market in the medium term. At the moment, the top rent is at EUR 37.50/m²/month, the highest among the Big 7 and at a vacancy rate of 8.2%, also the highest among the German real estate hubs. However, in the areas where the focus of the companies in question is located, it is significantly less. Depending on submarket and quality, it may currently only be 4-6%.

Hubertus Väth, Geschäftsführer, Frankfurt Main Finance e.V.

The availability of commercial real estate is the least of Frankfurt’s concerns. Over a period of 5 years, 250,000 square metres of new office space will be created in several new high-rise buildings. Currently, 19 buildings are under construction and 26 in the planning phase in Frankfurt. As it was, there was already need for action in the residential market. Now conditions have worsened. The situation with respect to micro-apartments for commuters and high-rise living is better than with affordable housing for the mass of interested parties. However, the problem is known and there is still some lead time. Accordingly, it should be manageable with combined forces.

The Financial Centre Frankfurt is in the pole position to win banking business from London following the results of the UK’s referendum. Noted for its strong economic and political stability, Frankfurt and the region offer a top infrastructure, a deep talent pool and an extremely high quality of life. Financial services moving to Frankfurt will find a competent, helpful and welcoming regulator in BaFin, who will accept large portions of applications in English. The Financial Centre is already home to more than 150 foreign banks and 75,000 people employed in financial services.

Download the Press Release as a PDF here

CFS Index: Service providers expecting huge revenue growth in fourth quarter

Service providers expecting huge revenue growth in fourth quarter, despite a previous sharp decline. Job cuts at financial institutions on the rise again

CFS Index rises by 2.5 points; considerable movement at sub-index level

The CFS Index, which measures the business climate of the German financial sector on a quarterly basis, rises by 2.5 points to 114.1 points. The positive development can be primarily attributed to the unusually high revenue expectations of the service providers for the fourth quarter. In addition, the financial institutions report that their revenues, earnings and investments have developed positively in the third quarter, while the service providers record declining growth in these areas. Employee numbers are also on a downward trend. Following a brief pause in the second quarter, the financial institutions step up their job cuts again and the service providers limit their recruitment.

“For the banks there are recognizable signs of improved productivity; reducing costs is the first priority here, and the service providers are feeling the effects,” Professor Jan Pieter Krahnen, Director of the Center for Financial Studies, interprets the results.

The future international importance of the Financial Centre Germany is rated even more positively than immediately after the Brexit vote a year ago

Since the Brexit vote, the future international importance of the Financial Centre Germany has been rated very positively. In the fourth quarter of 2017 the corresponding sub-index falls by 3.2 points to 135.5 points, which is just under the historic high reached in the last quarter.

Hubertus Väth, Managing Director of Frankfurt Main Finance e.V., points out: “The results of the survey show very clearly that the increasingly positive expectations for the Financial Centre Frankfurt run counter to the uneasy atmosphere within the German financial industry as a whole. In this respect, there is a rare unanimity among the market participants.”

Revenue and earnings growth positive among the financial institutions and declining among the service providers

There are contrasting developments in the growth in revenues/business volume among the surveyed financial institutions and service providers. The financial institutions report a clear increase of 5.1 points to 111.5 points and expect this trend to continue in the current quarter. Meanwhile, the service providers report a strong decline in the growth of their business volume, though not as drastic as they had predicted in the last quarter. The corresponding sub-index falls by 7.3 points to 117.2 points. However, the service providers are anticipating a huge increase in revenues in the current quarter.

The earnings figures also reveal contrasting trends. For the financial institutions, this sub-index rises by 2 points to 107.4 points. The service providers, on the other hand, record a sharp decline of 12 points. Their earnings sub-index now stands at 106.7 points, which is its lowest level in five years, though the service providers are significantly more optimistic about the current quarter.

Service providers’ investment volume takes a downturn following previous high

Having reached its highest level since the survey began in 2007 in the last quarter, the investment volume sub-index for the service providers now falls by 6.9 points to 116.7 points, thus returning to the level of the previous quarters. By contrast, the corresponding sub-index for the financial institutions gains 2.3 points to reach 118.9 points. Both groups expect to retain this level in the current quarter.

Job cuts at financial institutions on the rise again

After being curtailed in the last two quarters, job cuts at the financial institutions are being stepped up again. The employee numbers sub-index falls by 3.7 points to 95.3 points. Even among the service providers, the trend to recruit new employees has diminished. The corresponding sub-index falls by 5.3 points to 113.3 points. Both groups expect this downward trend to persist in the fourth quarter.

CFS survey: Financial industry believes bubbles are likely to form on the European financial markets

Financial industry believes bubbles are likely to form on the European financial markets due to QE measures and the ECB’s zero interest rate policy. Rapid departure from expansive monetary policy is favored, yet not expected. This is cause for alarm.

According to a recent survey by the Center for Financial Studies, there is firm agreement within the German financial industry (92%) that bubbles have formed or will form on the European financial markets (e.g. stock markets, real estate markets) due to the ECB’s expansive monetary policy if this strategy is maintained.

Since 2015 the European Central Bank (ECB) has pursued a policy of quantitative easing (QE). In addition, the key interest rate of the eurozone, which is the main refinancing rate paid by banks when they borrow from the ECB, has been kept at zero since March 2016. Aside from the feared negative impacts, opinions in the financial industry are split as to whether these measures have brought about the desired results in terms of increasing the rate of inflation and boosting economic growth. Half the survey respondents (49%) regard the ECB’s expansive monetary policy as partially effective, whereas 38% believe the stated goals have not been reached. Just 12% of the respondents regard the expansive monetary policy as clearly effective.

“The survey illustrates the scepticism of market participants about the effectiveness of the ECB’s monetary policy strategy. In particular, the ECB should take the concern about bubbles forming in particular asset classes very seriously,” Professor Volker Brühl, Managing Director of the Center for Financial Studies, interprets the survey results. “A further cause for alarm is the prevailing opinion of market participants that a departure from the expansive monetary policy is called for, yet not expected. This could mean the markets will be caught wrong-footed if the ECB, contrary to market expectations, does initiate a change of direction. It is crucial that the ECB communicates its intentions clearly and in good time,” Professor Brühl adds.

On 26 October 2017 Mario Draghi will announce the next key interest rate decision that will determine the future direction of ECB monetary policy for 2018. The majority of the financial industry (78%) favors a decision to rapidly depart from the expansive monetary policy (by Q1 2018 at the latest). However, hardly any of the respondents (2%) anticipate this outcome.

“The disparity between the desire for an exit from the expansive monetary policy and the low expectation that this wish will be fulfilled is, in itself, a clear warning signal. Real market prices have now been lacking for a considerable period of time,” says Dr. Lutz Raettig, Executive Chairman of Frankfurt Main Finance e.V., commenting on the survey results.

Felix Hufeld addresses Association of Foreign Banks in Germany

The following is an excerpt from a speech by Felix Hufeld President of the Federal Financial Supervision Authority (BaFin) concerning, amongst other things, Brexit and financial services moving from Longon to mark 35 years of the Association of Foreign Banks in Germany on 30 August 2017 in Frankfurt am Main. The complete transcript can be found here.

Ladies and Gentlemen,

It is now slightly over a year ago that the decision was made in favour of Brexit. I don’t know how you felt about it, but for me Brexit felt like a turning point, possibly the biggest setback in European integration since the European Coal and Steel Community was first founded in 1951. For a long time it looked as though Jacques Delors, former President of the European Commission, had almost set the path of politics in stone with his words “Europe is like a bicycle: you keep pedalling or you fall off.” More and more countries joined the European Union, and more and more responsibilities fell within the remit of the European Parliament and the European Commission.

And not just for the fun of it, or because the political decision-makers felt like it, but because a more connected world called for European, if not global answers. This was true in particular for financial regulation, which is now undoubtedly one of the most rigorously and thoroughly Europeanised legal fields there is. And again, not without reason. In an environment of complex and globally established markets, financial regulation depends on strong European players. The same is true for the member states of the EU, which need the maximum possible level of harmonisation and protection in a single economic area. Furthermore, Europe needs a strong, unified voice in the concert of global standard setting – just think of Basel, for example. This applies all the more if the USA really does decide to proceed down a path of more deregulation and less international cooperation.

As necessary as Europeanisation is in this matter, it also creates friction. We didn’t need Brexit to see that an increasing number of people from many different places were lamenting the apparent dominance of international bodies over national interests.

It would be wrong to look only at other countries or other continents – or only at the filter bubbles on Twitter. Similar expressions of political volition and resentment can be found in Germany, too, both online and in the real world. I don’t find that surprising, either. Concepts that in some speeches are called “an ever closer union” and “European harmonisation” simply mean loss of sovereignty in everyday life at national level.

This becomes particularly relevant when individual European regulations and the national implementation thereof lead to public debates, as we saw recently in the case of the Mortgage Credit Directive, for example. A European directive, the essential goal of which was to protect financial stability, entered into a fraught relationship with the hopes, fears and concerns of individual citizens, for example young families, who expressed these concerns to their representatives in the national parliament, which in this case was the German Bundestag.

This means that even Europe’s ever closer union calls for constant tuning between too much and too little, between bold vision, feasibility and impact analysis, taking particular account of the extent to which different interest groups are affected. And maybe the approach of seeking the greatest possible level of uniformity by trying to spell out each individual detail should give way to a new European conviction of an increased focus on principles. To say it in the language of cycling: The Tour d´Europe has to make headway. But the route and pace must be chosen carefully so that the peloton does not run the risk of failing to keep pace. Or, even worse, that some might want to fall behind.

Ladies and Gentlemen,

As much as I lament Brexit, there is little point in regretting missed opportunities or engaging in Brit bashing. We should look to the future and build a foundation for the time after the United Kingdom’s departure from the European Union. Of course, that will not be an easy task. Above all else the question looms of future reciprocal market access in the relationship between the United Kingdom and the EU27 countries. For the time being we have to assume that the UK will become a third country following Brexit. And that in itself will become an exciting challenge, both for politicians and for financial regulators and supervisors.

It is clear that the existing building blocks for market access based on equivalence, as known from the relationship with Switzerland or Bermuda, cannot be applied to the departure of the United Kingdom. The size of the financial market there and the vast level of mutual economic dependency that has built up over the last decades are alone sufficient as an argument against such an approach.

Just under half of the United Kingdom’s total exports go to the European Union, making the EU the UK’s largest market worldwide. Looking at imports shows a similar picture. The issue is even more complex in the financial sector, because economies of scale caused by historical circumstances have made London the hub for capital flows to the EU. For an industry with such cross-border interdependencies and in which trillions of euros are moved around in cyberspace, dealing appropriately with a situation such as Brexit presents a significant challenge. And there is no master plan, nor an emergency handbook that companies or regulators can simply pull out of their pockets. This is uncharted territory for all of us, and we have to pave our path as we proceed along it.

If we break the bigger regulatory picture down into its individual parts, at first glance the situation looks manageable. But, in actual fact, on many issues the devil is in the detail. Scores of banks are intending to move their offices to Germany and other countries because Brexit will mean that they will lose their European passporting rights that allow them to conduct business in EU countries.

As the passport may only be used by banks authorised in the EU, some branches in EU27 countries will undoubtedly be converted into subsidiaries. In addition to this, there will also be newcomers. Our objective is to provide these banks with guidance for their projects in Germany, offer them legal certainty and, at the same time, ensure the stability of the German financial centre. Moreover, we must make certain that all institutions across the eurozone are supervised and regulated in accordance with the same standards. But another thing is clear: everything we do, we do as supervisors, not as agents for location policy. One thing that we definitely will not accept is the presence of empty shells containing nothing more than a letterbox and a telephone diverting calls to London.

However, there is a broad array of possibilities between letterbox companies and a wholesale move to Germany. We will therefore look closely into each business model and weigh up each legally possible option. We will also keep a close eye on the further development of the European Commission’s proposal to create “Intermediate EU Parent Undertakings (IPUs)”, i.e. single parent companies into which banks from third countries are supposed to bundle their EU subsidiaries in the future.

This discussion is still a long way from being over. First of all, the European legislator needs to introduce the necessary legal requirements during the review of the Capital Requirements Directive (CRD). In this respect, we, as supervisors, would also welcome an EU-wide harmonisation of the rules and regulations on third-country branches, which at present are regulated only at national level.

Would it help financial stability if any cliff effects that might occur in spring 2019 could be effectively minimised? I think so! We are therefore prepared, for example, to relieve banks of work that at short notice is almost unachievable. For instance, we have decided, in agreement with the ECB, to permit internal models for calculating capital in sister companies for a limited time period where these have previously been authorised by the British supervisory authority, the Prudential Regulation Authority (PRA), provided that certain conditions are met. However, the institutions must first of all submit to us the applications required for this, including an action plan. And, of course, binding agreements must be reached regarding specific further activities.

Usually, several supervisory interviews and workshops will be required, in which the models that the institutions have used previously and the structure of possible transition processes will be clarified, step by step. Only after a number of checks will the bank be able to use its internal model in practice. The bank will remain on the radar of ongoing model supervision, however, with the goal of establishing, within a predetermined period of time, a model structure which we have inspected ourselves.

We have already conducted initial workshops with some institutions, and the experiences so far have been very positive. Others are taking their time in letting us know their intentions. I’m sure that everyone in Germany knows the saying “he who comes too late is punished by life”. Supervisors are not that merciless. But I would like to point out that our resources are limited, too. Institutions would do well to submit their applications for authorisation extensions or licences sooner rather than later, and rectify any potentially missing details during a dialog-oriented application process. Otherwise they run the risk of ending up at the back of the queue.

Ladies and Gentlemen,

Another hot topic is that of back-to-back models. Back-to-back here means EU undertakings concluding a transaction in financial instruments and at the same time entering into inverse trading transactions with a company based in London in order to transfer the market price risks. In principle there is no reason to object to this. However, we expect institutions to have adequately trained employees available for such transactions who are able to assess how many risks and which risks – including market risks – are actually being passed on to the UK, or, looking at it the other way around, how many are to remain in the EU. The banks must be in a position to sensibly manage the remaining risks at all times – even if a back-to-back transaction should suddenly no longer be possible or be subject to disruptions. An out of sight, out of mind mentality would be dangerous.

Many institutions find it convenient for their back office and internal control functions, such as risk control, compliance or internal auditing to be carried out largely by a company based in London. The same applies here: in principle, as in many other situations, outsourcing is possible.

As is always the case, however, it comes down to finding the right balance. If an institution goes overboard in outsourcing sensitive areas, the in-house control systems might be thinned out so much that the institution becomes disproportionately dependent on partners in the UK or elsewhere. Simply latching on to group structures will therefore not be allowed. Appropriate control units must be present within the EU undertaking, and all undertakings wishing to move into the EU for the first time should therefore prepare for the fact that these functions are to be present within an institution in the EU27 countries. This corresponds to the line taken by the Single Supervisory Mechanism (SSM), which has already stated its basic position on this – and, of course, we share that view. However, there are possible exceptions to this rule for those subsidiaries which are considered immaterial from a risk point of view.

Limits are set on outsourcing in particular where the core areas of banking and control functions are concerned. And if we look closely at the core areas and control functions, we do this all the more for the management board. The duties of a management board member cannot be fulfilled by “just dropping by”.
It must be ensured that the managers are also able to complete their on-site duties in full. “Fly and drive” might be acceptable in some cases and for a transitional period, but in the long-term we also expect the top level of management to be present in the EU27 countries with more than just a nameplate.

It is not without reason that euro clearing is a hot topic at the moment. After all, more than 95% of all interest rate swaps in euros to date have been cleared through London. If something were to go wrong, a call for help could quickly be made to the central banks to provide liquidity. For this reason, a few weeks ago the European Commission published its ideas for the stricter supervision of central counterparties domiciled outside the European Union.

It is obvious that clearing activities in euros outside the European Union cannot simply be met with a shrug; instead, EU standards for financial regulation and supervision must be enforced in one way or another.

But the question gripping us all is: how, exactly? In the end, the European Commission left this unanswered, but instead suggested a staged process. In my opinion, this is the correct approach. Before making a decision, however, we should take the time to carry out a comprehensive analysis of the systemic risks and weigh up the possible reactions and consequences, including the possible reactions of third parties.

Moreover, we must not forget that nowadays almost all business processes in the financial sector depend on functioning IT infrastructures. As such, it comes with the territory that those banks that are planning a comprehensive division of work between operating units in the UK and the EU need to place a particular focus on their IT systems. These are highly complex platforms, and platforms doesn’t just mean IT. We are talking about knowledge, processes and people which have gathered together over many years, almost like a complete work of art, and now have to be split apart.

Supervisors know the significance of this issue and are prepared to allow old IT ecosystems to continue running for the time being until it is possible for completely new structures to be built and proven to be sufficiently sound. Many a time in the past we saw large IT migration projects being met with delays and unexpected problems, simply because their complexity was underestimated. In theory it would be conceivable to leave such platforms in their former locations entirely, but I have my doubts as to whether this would be of any use in practice. New offices have to be connected to the existing infrastructure in one way or another, meaning that migration processes are likely to remain unavoidable.

The institutions therefore have to carefully weigh up which strategy they wish to pursue: partial or complete relocation. Anybody who has moved house knows that while it is inconvenient, it also offers a good opportunity to declutter. Just as private individuals might get rid of Grandma Edna’s transistor radio, banks can take the chance to modernise old IT systems and processes that have diverged over time.

Yet from the point of view of a New York head office, for example, decluttering might also mean simply focussing completely on the USA or the Far East if the disputes between the UK and the EU27 countries are too drawn-out.

Helaba Financial Centre Study “In Pole Position for Brexit Bankers”

The latest financial centre study by Helaba’s Research unit, which was published today, shows that the German financial centre is in pole position when it comes to competing for businesses and workers looking to relocate from London. A number of banks have already announced that they will relocate jobs from the river Thames to the river Main, which will have an impact on employment figures: “We anticipate that at least half of all financial sector jobs that are leaving London will be relocated to Frankfurt. Over a period of many years, this would equate to a minimum of 8,000 employees. Therefore, by 2019 we see employment in Frankfurt’s financial sector rising by 4 percent to around 65,000 (end of 2016: 62,400). This is despite a simultaneous consolidation process in the German banking industry that is set to continue”, explains Dr. Gertrud Traud, Helaba’s Chief Economist and Head of Research, at the presentation of the study in Frankfurt.

A novelty of Helaba’s long-running financial centre research in this study is its own regional employment aggregate – financial sector employment within “BIG FFM”, an area that was created by transposing Greater London onto the area around Frankfurt. The following picture emerges from this comparison: At the end of last year, around 118,000 people subject to social security contributions were employed in the sector of financial and insurance services, which compares to approximately 360,000 in Greater London. Employment density (in relation to the population), however, is at the same level of just over 4 percent in both conurbations.

The role of the German financial centre as the favourite in the Brexit-related restructuring process is no coincidence: Frankfurt is the leading financial centre in Continental Europe. In terms of relocating jobs from the river Thames to the river Main, the following locational qualities that Frankfurt possesses are particularly significant: the stability and strength of the German economy, the headquarters of the ECB in its dual function as central bank and supervisory institution, the role of the Rhine-Main area as a transport hub with good infrastructure, relatively affordable rates for leasing office space as well as a high standard of living that also offers a varied range of recreational activities in the city and its green environs.

“Since we created our financial centre ranking in 2016, Frankfurt’s relative attractiveness has risen even further”, explains Helaba’s financial centre expert, Ulrike Bischoff. In contrast, it is already undeniable that the City of London has been weakened by Brexit. The continuing high level of uncertainty over future arrangements in the United Kingdom means that it is losing favour among foreign financial centre participants. On top of that, the collapse of the attempted merger between Deutsche Börse and the London Stock Exchange is positive for Frankfurt, since the strong Frankfurt exchange is now able to go its own way. Furthermore, the German financial centre could become even stronger as the European centre for supervision if the EU-wide banking supervisory authority EBA is relocated to Frankfurt.

The relocation of jobs to Frankfurt is shifting the focus onto the regional property market and city’s educational infrastructure, in particular. “In view of a still ample vacancy rate and a number of construction projects underway, satisfying additional demand on the office market should be possible without any difficulty”, expects Helaba’s real estate analyst Dr. Stefan Mitropoulos. On the residential market, though, there is no appreciable vacancy rate. However, the considerable rise in new construction activity, projects planned for the next few years as well as the abundant land reserves available in the surrounding area suggest that there will not be any significant tightening on Frankfurt’s housing market as a result of Brexit. Apart from the real estate market, the range of educational facilities is a key locational criterion. The Frankfurt financial centre region already offers a broad array of international educational establishments that has visibly grown over the last few years. In view of strong demand for school places even beyond the additional demand created by Brexit, there will need to be a further expansion in the infrastructure for children of all ages, including all types of schools.

Dr. Gertrud Traud draws a positive conclusion from the study: “Despite the challenges posed by the impending influx of employees from the river Thames to the river Main, Brexit represents a unique opportunity to improve Frankfurt’s position even further in the competition between international financial centres.”

Download the full study from Helaba here (German).

 

Brexit brings up to 88 thousand new jobs in the Rhine-Main region

WHU study quantifies the Brexit impact on the employment market

New jobs in the banking sector – that’s the expected result of impending relocations from London to Frankfurt. As early as June 24th, 2016, one day after the referendum, Frankfurt Main Finance estimated the potential repercussion of a Brexit decision to be up to 10 thousand new jobs for Frankfurt within the financial sector and its directly related services. Today, some people already regard this figure as too conservative. A job motor can also be expected in other fields, according to the findings of a study by WHU – Otto Beisheim School of Management carried out on behalf of Frankfurt Main Finance. “It will be the multiplier effects on many areas of day-to-day life that will lead to a significant growth in employment above all in the Rhine-Main region,” explains Professor Lutz Johanning, who conducted the study together with Moritz C. Noll from the Chair of Empirical Capital Market Research. In this interview, both academics give us a deeper insight into the underlying calculations.

Prof. Johanning, what exactly is analysed in your study?

Lutz Johanning: We looked at the effects of the relocation of banking jobs in the wake of the Brexit decision on the employment market as a whole – for the City of Frankfurt, the towns and cities in its direct vicinity, and the Rhine-Main region. In the analysis, our focus was on the multiplier effects, i.e. what growth will result for other sectors and industries from an addition to the number of banking jobs. And the study shows that this effect is 2.1 to 8.8 times higher, depending on the area under consideration. Therefore, in the most optimistic case, if we assume ten thousand new bank jobs, up to 88 thousand new jobs can be created during the following four years in the Rhine-Main region.

Prof. Lutz Johanning: “The relocation of jobs doesn’t occur in isolation. People move their lives into a new city – with everything that involves.”

That’s a huge figure. How do you arrive at that result?

Moritz Noll: We extrapolated the existing statistical data on the employment market in Frankfurt and the region into the future with the help of an empirical model, taking the effects of the Brexit into account. To ascertain and arrive at meaningful figures for the purposes of further planning, we placed a high priority on two factors. Firstly, a valid data basis has been very important for us. Our study is therefore based on employment market data from the German Federal Employment Agency (BA) covering the past nine years. Secondly, we looked for statistical models that have already been effectively applied in the scientific community.

Moritz C. Noll: “Even though the Brexit is a unique occurrence, scientifically based models still exist that enable the repercussions for the employment market to be reliably assessed.”

Where did you find an appropriate solution? After all, the Brexit is an unprecedented event.

Noll: The Brexit is indeed unprecedented, but not the fact that jobs are moved to a new location as the result of changed basic conditions. There are, for instance, well-founded scientific analyses for the energy sector in the USA – bear in mind the topic of fracking. The resettlement of jobs to new locations is quite common in this context. The resulting repercussions, not only for the primary sector affected, but also in terms of the overall impact on a region have been frequently examined during the last few years. These models allow specific assumptions to be derived on which we have based our study.

Johanning: The indirect effects can be quantified with this approach. If a job at Bank X is moved from London to Frankfurt, this is not an isolated process. Rather, the person who occupies this position relocates his life into a new city – with everything that involves. He or she usually comes with a family, which means that all the corresponding needs have to be met. This begins with quite simple issues such as residential needs, schooling, training, and the requirements of daily consumption. But it also has wider structural implications – the keywords here are infrastructure, the educational system, the market for houses and flats.

Prof. Lutz Johanning: “The Rhine-Main region in particular will profit from the growth in jobs. Most of the additional jobs outside of the financial industry are more likely to occur in the areas around Frankfurt.”

Why are you so sure that the affected bankers will be transferring their primary place of residence to Frankfurt? After all, London isn’t all that far away.

Johanning: The same discussion took place a number of years ago in connection with the European Central Bank employees. The question then was also whether people will actually be moving to the Rhine-Main region or whether they will just be here to work. Experience shows that they come here to work and to live. That’s why this particular context has provided a best-practice example for many years, and this has served as an orientation for us in the study.

You have differentiated in your analysis – between Frankfurt, its immediate environs, and the region. What does this distinction reveal?

Johanning: Frankfurt will profit directly from the new jobs in the banking sector. That’s not a regional issue. The central office sites will be found in the city centre. Consequently, the effect here on other parts of the economy is also modest, around 2.1- to 3.4-fold. Bank-related services will also benefit during the course of development; but these services are often not located directly in the city, but in the immediate surroundings like Eschborn, Offenbach or other neighbouring cities. In addition, many people are looking for somewhere to live somewhat outside of Frankfurt. That, in turn, will benefit the neighbouring municipalities as well as the entire region. The larger the radius drawn, the more differentiated the effects and the greater the multiplier effect. Optimistically speaking, ten thousand new bank jobs in the city can generate up to 88 thousand new jobs in the Rhine-Main region.

The study mentions two models. What does that mean exactly?

Noll: We’ve made use of two models to assess the impact of the ten thousand new jobs in the financial sector on all the other industries. Model 1 takes a factor into account that dampens the growth effect to a greater degree. Model 2, on the other hand, does not include this factor, and the growth is estimated to be higher overall as a result. It was important for us to present the entire spectrum of possible results in the study.

You know the statistics in detail. In which industry will the effects have the greatest impact?

Johanning: It should be said to start with that Frankfurt is a region with a very high growth rate – even without the Brexit. The highest growth rates over the past few years have been recorded in the sectors of logistics, real estate and business services. These growth industries will be given an additional push through the Brexit effect. What cannot be deduced from our quantitative model, however, is which structural changes within the individual industries will lead to greater or less growth over the next few years.

Noll: In a further step, we examined with the help of our models how the long-term job growth rates differ with and without the Brexit. As a result, we were able to show that the long-term growth path is changed by an initial shock, i.e. the relatively sudden event of additional jobs flowing into the financial industry caused by the Brexit. This means that job expansion throughout the employment market as a whole can be significantly higher in the long term in the Brexit case than in a case without additional Brexit jobs. One can therefore see that the growth effects on the employment market can be markedly higher than the initial effect might lead us to expect. So there’s still room for growth and untapped potential.

Moritz C. Noll: “If we also take the long-term effects into account, even better figures are possible.”

So the upshot is even more growth for an already prospering region. Have you also been able to quantify in the study how local government tax revenues will change as a result?

Johanning: We’ve attempted to estimate this effect as well with the aid of a simple projection, at least for the Frankfurt city area. However, these results should be considered with caution since they are based on the previous results from the employment market forecasts, which inevitably results in additional inaccuracies. We looked at the local government share of the income tax, the value-added tax and the local business tax. In summary, we estimate that the City of Frankfurt will be able to earn between EUR 136.2 and EUR 191.9 million in revenue every year through the three above-mentioned tax forms as a result of the additionally created jobs.

Thank you for the interview.

Winning Frankfurt: Brexit Bankers’ Welfare Effect Beyond Bringing Their Jobs

Picture credits: fritzphilipp photography