Statement on the agreement between the EU and Great Britain

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The European Union and the United Kingdom have agreed on a Brexit extension until January 31st, 2020.

Hubertus Väth, Managing Director of the Financial Centre initiative Frankfurt Main Finance, says:

“Frankfurt Main Finance welcomes the European Union’s decision to agree to an extension of the United Kingdom’s withdrawal from the EU. The chances of an unregulated Brexit to occur are now considerably reduced after the approval of the current agreement. We understand this to be a victory of reason.”

FMF welcomes agreement between the European Union and the United Kingdom

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“Frankfurt Main Finance welcomes the agreement reached between the European Union and the United Kingdom. This forms a basis for limiting the economic damage that could be caused by the withdrawal, creates clarity and reduces associated risks. At today’s annual meeting of the IMF and the World Bank, there is a palpable sense of relief in Washington amongst the banks who’ve long hoped for an agreement.

The compromise demonstrates that diplomacy between Brussels and London is intact, despite the intense arguments concerning an agreement over the past weeks and months. However, it remains to be seen whether the current agreement can be implemented.

The question of the backstop makes it clear that pragmatic solutions in the interests of both sides can be reached. This gives reasons to hope that that yet another victory in the negotiations can be reached in the near the future.”

Hubertus Väth, Managing Director of Frankfurt Main Finance

CFS survey: German financial industry now clearly expecting a “no-deal” Brexit

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The new UK government under Prime Minister Boris Johnson is preparing to leave the EU on 31 October, with no agreement in place. Now the majority of the German financial industry is also expecting a “no-deal” Brexit. This was shown in a recent survey by the Center for Financial Studies. Of those surveyed, 55% consider a disorderly Brexit to be probable, and 31% even see it as very probable. Only 11% are more optimistic in this regard.

The majority of respondents (63%) believe the German financial sector is sufficiently prepared for a “no-deal” Brexit, while 36% see a need for further measures.

“Considering how likely a ‘no deal’ Brexit has become, the survey results are rather worrying, as there is little time left for market participants to make adjustments,” Professor Volker Brühl, Managing Director of the Center for Financial Studies, interprets the survey results.

The EU has ruled out any renegotiation of the Brexit deal and should not offer any further compromises in the hope of avoiding a “no-deal” Brexit. This opinion is held by the majority (70%) of the German financial sector. Nonetheless, the respondents also agree (61%) that the financial markets have not yet fully anticipated a “no-deal” Brexit scenario and that market distortions may therefore occur.

“The survey indicates that the financial industry is prepared to accept the potential drawbacks of a ‘no deal’ Brexit if it means finally obtaining clarity about future framework conditions,” Professor Brühl adds.

There is also a broad consensus among respondents (88%) that if the UK leaves the EU in a disorderly fashion, more business activities and employees will be relocated to continental Europe.

Hubertus Väth, Managing Director of Frankfurt Main Finance e.V., highlights: “Should there be a Hard Brexit, which the majority of respondents assumes is the most likely scenario, it will be important for the Financial Centres in continental Europe to demonstrate their efficiency. If we succeed in cooperating across borders, Europe could emerge from the crisis even stronger.”

 

 

Helaba Financial Centre Study: Brexit Banks are packing their Bags

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Brexit is looming, and many banks are preparing to relocate their business activities from London to other financial centres. Frankfurt is the favourite in this regard and the list of newcomers to the German banking centre is getting longer and longer. “Brexit banks are gradually packing their bags and many of them will be heading for the Rhine-Main region in the future. To date, 25 Brexit banks have opted for the financial centre of Frankfurt, including many well-known institutions. Paris comes some way behind, followed by Luxembourg, Dublin and Amsterdam. This is the result of our current Brexit Map,” explained Dr. Gertrud Traud, Chief Economist and Head of Research at the presentation of the study in Frankfurt.

Some large corporations have designated Frankfurt as their most important EU hub in the future and, in so doing, have made a fundamental strategic decision in favour of the city, which will also be reflected in corresponding staffing levels. On the one hand, some jobs will be transferred to Frankfurt, which will be accompanied by the employees concerned either moving completely or commuting between the two financial centres. On the other hand, a certain number of new employees will be hired here or Germans who have worked with banks abroad will be recruited for the new jobs in Frankfurt. Since the beginning of the year, more and more Brexit banks have been making firm plans to relocate their activities. Additional institutions are still in talks with the local supervisory authorities. All in all, an accumulation of Brexit banks can be observed in Frankfurt that is unparalleled in Europe.

“In principle, our ranking of Europe’s major financial centres continues to apply: London before Frankfurt before Paris”, explains Helaba’s financial centre expert, Ulrike Bischoff. The only aspect that has meanwhile narrowed is the gap between the relative attractiveness of these locations. Frankfurt has been able to improve its competitive position to a greater extent than Paris.

In view of the sometimes very assertive marketing campaigns of other locations, it is vital that the German financial centre presents itself in a self-confident, concerted manner. Since the referendum, for example, the Hessian state government has accompanied the Brexit process with a variety of activities. There is also a network made up of the various players in the region. In addition, Frankfurt is increasingly receiving verbal backing from the federal government. Now, in view of the short time remaining until Brexit, it is important, for instance, to rapidly implement the planned easing of rules on protection against dismissal for top bankers.

The Frankfurt office market is in good shape shortly before the conclusion of the Brexit negotiations. Vacancy rates have fallen significantly, and rents are approaching their previous highs, although they are still well below the level of competing financial centres. Additional demand by Brexit newcomers and an increase in jobs in other sectors should not lead to bottlenecks thanks to a range of project developments. In contrast, the situation on the housing market remains under pressure despite higher construction activity. The shortage of housing can therefore only be overcome in the long term in collaboration with the surrounding area.

Frankfurt’s Brexit banks come from ten counties; most already have a branch office in Frankfurt or are represented via subsidiaries. In addition, many banks would like to establish a presence in Frankfurt for the first time. Together, Brexit banks of foreign origin in Frankfurt had an estimated 2,500 employees here at the end of 2017. In the scope of their Brexit-related adjustments, they are expected to almost double this number by the end of 2020.

Dr. Traud points out that Helaba has adhered to its Brexit forecast ever since the referendum: “At least 8,000 financial sector jobs will be created over the next few years”. Until the end of 2020, the Brexit effect should have a clearly positive impact on Frankfurt’s banking employment and, ultimately, more than offset on-going consolidation processes in the German banking industry. This suggests a total of 65,000 bank employees in Frankfurt, representing growth of around 3 % or an increase of almost 1,800 bankers.

You can find the complete study as a download here [in German].

Brexit

Deutsches Aktieninstitut – Brexit: it is five to twelve!

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Deutsches Aktieninstitut calls upon the European and British negotiating parties to finally place their trade relations on a new sustainable basis. In its third position paper on the Brexit negotiations Deutsches Aktieninstitut shows using as examples tariffs and product approval as well as derivatives and data protection that companies cannot solve all the problems arising due to Brexit on their own.

The position paper can be downloaded here.

Brexit

The risk of a hard Brexit puts businesses in a tight spot – stormy autumn is approaching

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Companies on both sides of the channel are hoping for clarity on the impact of Brexit on their businesses by the EU summit in October, and no later than the possible EU special summit in November. To what extent the autumn will bring a transition agreement setting the status quo until the end of December 2020, remains unclear. Although this transitional period is foreseen in principle, it is highly dependent on conditions that remain unfulfilled which pose considerable obstacles. This is especially true for the Irish border issue.

Whether there will soon be clarity is still uncertain. From September onwards, the management of Frankfurt Main Finance expects a stormy autumn. Banks will have to make important decisions about their set-up over the next few weeks, as the time to prepare for Brexit at the end of March 2019 will otherwise be too tight. Just a few months before the UK’s exit from the European Union, the risk of a relatively hard Brexit has not been averted. This brings trade, industry and financial services alike under time pressure and pressure to move.

In the coming weeks, financial institutions expect not only increased inquiries from their customers, but also to decide for themselves which of the scenarios they are preparing for. “Time is running out,” says Hubertus Väth, Managing Director of Frankfurt Main Finance. “We’re expecting a stormy autumn: industrial and trade companies, as well as the asset management industry, must now seek to make the necessary arrangements with their financial services providers. It is important to Brexit-proof their financing and investments. That does not work at the touch of a button. We’re heading for a mass start which will lead to a bottleneck for those late to the line.”

Therefore, Frankfurt Main Finance advises companies from trade and industry as well as asset managers to actively pursue dialogue with their financial services providers to Brexit-proof their financing. This applies in particular to the clearing for euro-denominated interest rate derivatives. “Companies must take initiative themselves and approach the banks,” says Väth. “It is in their own interest, for example, to hedge their financing and hedge their interest rate risks even for a hard Brexit. Unfortunately, this case can still not be ruled out. The sooner they talk to their banks, the better the preparation will be, because companies will be the main victims in any case of doubt.”

Frankfurt Main Finance sees the Financial Centre Frankfurt as the logical first choice in the reorganization and orientation of the financial sector after Brexit. However, to make use of these opportunities under increasingly intense international competition requires further substantial effort.

Euro-Clearing after Brexit – Hubertus Väth in BBC Radio 4 Interview

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The Economic and Monetary Affairs Committee of the European Parliament just released a statement on the future regulation of Central Counter Parties (CCP). The euro clearing by CCPs is an important part of the financial architecture of the European Union following Brexit. At the moment, the majority of transactions is handled by a London-based company. Currently, it is up for debate whether this will continue to be the case. In an interview with Dominic O’Connell on BBC Radio 4 Hubertus Väth, Managing Director of Frankfurt Main Finance, discusses the recent ECON statement, which is an indicator for how the EU might eventually decide.

While it is not certain what the consequences of Brexit will be for the financial centre London, it can be assumed that euro denominated interest swaps will be under heightened supervision by the European Securities and Markets Authority (ESMA) and the European Central Bank. Second to London Frankfurt is the most important centre for euro clearing and generally, having more than one euro clearing institution is of importance as it allows for more stability in times of a crisis. While a relocation might have some economic impact, research conducted by asset managers found that a relocation promises to be beneficial to pensions.

Listen to the full interview!

2018 Europe – US Symposium: How will Brexit change the map of global finance?

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Dr Andreas Dombret
Member of the Executive Board
of the Deutsche Bundesbank

Speech at the 2018 Europe – US Symposium
of the Harvard Law School Program on
International Financial Systems in Armonk, New York Wednesday, 11 April 2018

Read more

Andreas Dombret – Living with Fragmentation: Post-Brexit Realities in Financial Services

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Keynote at the AIMA Global Policy and Regulatory Forum in Dublin on March 20, 2018

Introduction

Ladies and gentlemen

Thank you for the kind introduction. It is a pleasure to be in Dublin and at the 2018 AIMA Forum.

“Managing a fragmented world” is, in my view, a well-chosen topic. Most economic policymakers currently have their hands full trying to escape the doom loop of a trade war and a potentially hard Brexit. At the same time, banks, investors and most other firms have to prepare for these worst-case scenarios – not least, because supervisors urge them to.

And of course such fragmentation in financial services and its regulation may cause nightmares for many in the industry as well as for policymakers. And I do understand that – because it implies a great deal of uncertainty.

But we should not, I believe, panic: greater fragmentation seems inevitable after Brexit. Though, repercussions will not be as bad, as some fear, when we succeed in managing this greater fragmentation constructively – that means without resorting to nationalism that would just be destructive for all of us.

My topic today, then, is to look at the estimated extent of fragmentation in regulation of financial services after Brexit and what we should do about it.

Brexit and financial services

In Brexit negotiations common ground still seems hard to find. Even the basic principles of a new partnership remain vague. Given that and because time for preparation is running out for firms, uncertainty among businesses weighs heavier every day.

From an economic and financial market perspective, the two most important questions probably are:

  • Will there be a free trade or a comparable agreement?
  • Would a possible free trade agreement also include financial services?

In my view, there is substantial scope for a general free trade agreement. The main question to me is therefore how far-reaching can this future relationship be. For example an agreement without tariffs would be of high value and is possible. Another, less clear and highly complicated question is how to deal with non-tariff barriers like product standard regulations.

However, with a view to the financial services sector, a far-reaching free trade agreement is rather unlikely given the UK’s aspired exit from the single market and the customs union.

Likewise, I am rather sceptical about the approach via mutual recognition or about similar approaches based on regulatory harmonisation through technical committees and independent arbitration mechanisms.

Approaches of this kind could well undermine the ability of jurisdictions to set their own rules and the ability to safeguard financial stability.

The options that remain on the table are a “no deal” scenario or one with quite limited freedoms for financial services, as in the case of CETA. What would such scenarios mean to financial transactions between the UK and the EU?

First, the “no deal” scenario would mean that the EU and the UK would trade under rules set by the World Trade Organization – where services sectors are only thinly covered.

Service providers would then have to apply for comprehensive licenses in both jurisdictions and have all the necessary elements of a fully functioning bank ready in both places.

And second, even a CETA-like deal would most likely not mean far-ranging freedoms to provide financial services in the respective foreign jurisdiction.

Living with fragmentation

Therefore, it is – like it or not – quite likely that we will see greater fragmentation in financial regulation and supervision in Europe. What exactly that will mean is, however, unclear up to now.

It is this uncertainty about the exact nature of fragmentation post-Brexit that makes it so hard to assess the costs and benefits of more fragmentation.

Financial firms highlight that fragmentation is likely to mean organisational inefficiencies and higher organisational costs. And there can be no doubt that at least the transition to a new regime and new organisational structure will be costly. However, these costs may be less substantial in the long term – once firms have adapted to the new regime, clever managers will find new organisational solutions that integrate new compliance realities with organisational efficiencies.

Significant as these costs may be, politicians, regulators, and supervisors nevertheless have to take a broader perspective, one that is in line with the changed democratic preferences.

Thus, from the UK perspective, a far-reaching free trade agreement for financial services – and services in general – could be considered an obstacle to taking back legal and regulatory power.

At the same time, from the EU perspective, we cannot accept a liberalised common market, without a common supervision. Otherwise, as a supervisor, I would be concerned about financial stability. It seems therefore that some degree of fragmentation is almost inevitable.

But, should we simply wait for the end of EU-UK financial relations? Should we simply hope for the best?

Of course not. We have to manage fragmentation constructively –  we have to find innovative approaches for a new reality.

But let me make one thing very clear: this must not result in a race to the bottom. Fragmentation should not lead to competition through lax regulation or supervision. Such policies may seem to be in the best national interest, but ultimately they represent special interest politics. We must expose these policies for what they really are: threats to financial stability.

And that is why politicians, firms and supervisors have to deliver on three crucial points: first, a transition agreement; second, pragmatic supervisory cooperation; and third, managerial innovation.

Let me take each of these briefly, starting with the transition – or implementation phase, as it is now called.

The need for a transition phase

A transitional deal between the UK and the EU was agreed yesterday on negotiators’ level. During the implementation phase, which is to last until end 2020, EU rules would continue to apply in the UK and the exact terms of the future partnership shall be worked out. It is of utmost importance in order to give firms more time to adjust to the new realities.

It furthermore can reduce the long-term costs of Brexit. Firms can weigh up their options and decide which markets they want to serve and with which organisational design. They have now time to re-arrange their organisations on the basis of an analytical and forward-looking approach, rather than an approach of simply minimising uncertainty. The inefficiencies and potentially higher costs of financial intermediation can be reduced with this agreement.

I am confident that both sides have apparently recognised the importance of a transition phase in making Brexit less abrupt and, in the long run, less painful.

Despite all this positive news, it is still too early to lay back. Many issues are still to be discussed and the transitional period is still not fully guaranteed. It remains to be subject to a successful conclusion of an Article 50-deal within the next twelve months. For instance, the Irish question – i.e. keeping the border between the Republic of Ireland and Northern Ireland invisible – needs to be resolved. Hence, the recently widely used phrase that “nothing is agreed until everything is agreed” still holds true.

Managing financial firms in a fragmented world

But even after a transition phase, Brexit and fragmentation would mean two things. First, future access to financial services markets would be more like the access given to a third country. Second, a successful conclusion of the Brexit negotiations is not guaranteed as it depends on whether a fully-fledged long-term agreement is achieved and ratified.

This is why I see no alternative to timely preparation, and to preparing for the worst-case scenario of a hard Brexit without any free trade agreement.

Looking at banks, proper preparation would include establishing at least basic entities in the other economic area – that is, the EU27 or the UK – in order to continue doing business there. The concept of a “basic entity” is not easy to define. As far as we are concerned, I can repeat that we will certainly not accept empty shells or letterbox companies where the business effectively continues to be run from London. For critical functions such as management, controlling and compliance, qualified personnel need to be present at the EU entity at all times. We expect any branch or subsidiary to retain chief responsibility for its business.

And banks have to begin implementing their plans and submitting their license applications no later than at the end of the second quarter of 2018. Otherwise, it will be very difficult to prevent a cliff edge.

Firms have a lot to complain about with regard to Brexit, and I do not mean to play this point down. But if the UK and the EU are attractive markets, I think there is something to be said for innovative approaches to comply with this new regime. That’s why firms will have to find new, efficient organisational strategies. For example, I am convinced that profitable business models can be organised with two independently licensed entities.

Managing regulation and supervision in a fragmented world

But don’t get me wrong: regulators and supervisors, too, have to be pragmatic and innovative to achieve our goals of efficiency, stability, and ensuring the real economy is provided with credit.

With financial sector firms relocating their business between London on the one hand and Frankfurt, Dublin and other cities on the other hand, close supervisory cooperation becomes even more important, especially over the coming years when we have to break new ground in supervision.

The cooperation between the EU and the UK authorities will have to be put on a new foundation. We will need to ensure information exchange, and of course we will have to think about how we can reduce unnecessary burdens from double licensing.

Whatever political decision is taken, bank supervisors will not only do all they can to make the transition to a new regime as smooth as possible; they will also, in the long run, try to reduce unnecessary inefficiencies where possible.

In December last year, the PRA published a draft proposal for a post-Brexit supervisory approach. I very much appreciate the spirit behind this approach. It reflects a solution-oriented, pragmatic, yet stability-oriented stance. In the same vein, the SSM has developed quite pragmatic, cooperative policy stances on many of the relevant issues. I am confident that this cooperative style can make an important contribution towards a smooth transition.

Conclusion

Ladies and gentlemen, greater fragmentation will most likely be an inevitable result of Brexit.

Instead of wishing to do away with what is beyond our control, we should set about finding pragmatic and at times innovative solutions to managing Brexit and the ensuing fragmentation constructively.

However, such a constructive approach will take time, because it means many complex answers have to be developed – which is why we need a sufficiently long transition phase.

And I have to say that I was really facilitated well and truly relieved when I heard the news yesterday that a transition phase had been agreed, because this could make Brexit less abrupt and, in the long run, less painful.

During that phase, supervisors will have to find solutions that enhance financial stability without undermining economic efficiency.

And financial firms will have to find innovative and pragmatic ways to comply with the new demands while maintaining their efficiency and profitability.

For all the bullet points on our to-do list, we need an honest dialogue – if unnecessary problems and burdens arise, firms and investors should always come and talk to us. Brexit is both too complex and too important to muddle through.

Thank you for your attention.

Source

Dombret, Dr. Andreas. “Living with Fragmentation: Post-Brexit Realities in Financial Services.” Speech, Dublin, Ireland, March 20, 2018. Deutsche Bundesbank. https://www.bundesbank.de/Redaktion/EN/Reden/2018/2018_03_20_dombret.html

 

Financial Centre Frankfurt

Consistent interest in Financial Centre Germany from Brexit banks

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  • Germany is an attractive location for the international financial industry
  • The new federal government can, however, increase its attractiveness even further
  • Internationally agreed and harmonised regulatory frameworks guarantee international financial stability

“We see an unbroken interest in the German financial centre among banks that are considering relocations due to Brexit. Supervisors and politics have already done a lot over the past 18 months and are well positioned, but we must continue to work,” says Stefan Winter, Chairman of the Board of the Association of Foreign Banks in Germany (VAB) at today’s press conference. Among other things, there is a need for action to limit severance payments to high earners in the banking sector and to internationalise the law. For example, German law is often not agreed upon internationally in framework agreements, because German courts also examine these in commercial transactions as well as all general terms and conditions for consumers. “As a result of the Brexit, we expect about 20 banks to expand their presence here. This will involve up to 5,000 new jobs in the next two to three years, many of which will be hired locally. Much will of course depend on whether there will be transitional periods. In fact, everyone agrees that there must be transitional arrangements. But no one can say for sure today whether there will be any. Our members are therefore still planning to have fully operational units in Germany on 29 March 2019 so that they can continue to provide financial services for their customers,” Winter emphasises.

Silvia Schmitten-Walgenbach and Guido Zoeller, the two vice-chairmen, emphasise the stable number of employees in the member institutions, which are also attributable to the good framework conditions and the still prosperous German economy. In addition to the economically stable situation, the foreign financial industry has also benefited greatly in recent years from international harmonisation, which is also an advantage for international supervision. The ECB has taken on an important role in this respect and further developed a level-playing field in the euro zone. Schmitten-Walgenbach adds: “In the interest of international financial stability, national recentering and a softening of internationally harmonised financial market regulation should therefore be avoided.”

As the financial centre becomes more international, Zoeller points out the impact on the work of the Association: “We will provide even more information in English and set up English-speaking working groups.” As the international importance of the financial centre grows in the next few years and institutions increasingly choose the place as a starting point for their financial services in other EU states, the association must also address new issues. “So far, we have tended to have an inbound view, but this will change. We will be prepared for this and we are looking forward to it,” summarizes Winter.

The complete speech can be found in the internet at www.vab.de.