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.

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

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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 decision regarding the future EBA location is due on 20 November.

Felix Hufeld addresses Association of Foreign Banks in Germany

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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.

Brexit bankers bring more welfare effects to Financial Centre Frankfurt and the region than just their jobs

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New jobs in the banking sector – this is the expected result of relocations from London to Frankfurt. Well-founded estimates speak of ten thousand additional jobs within the next four years. The overall increase in job growth associated with Brexit is significantly higher because multiplier effects cause growth in other industries as well, according to the findings of an academic study conducted by WHU – Otto Beisheim School of Management on behalf of Frankfurt Main Finance.

“We investigated the effects of the relocation of banking jobs as a result of Brexit on the entire labour market for the city of Frankfurt, the neighbouring cities and the Rhine-Main area,” says Prof. Dr. Lutz Johanning, one author of the study. “Our study shows that the multiplier effect is between 2.1 and 8.8, depending on the area examined. If we consider adding 10,000 new jobs in the banking industry over the next four years, then, according to our prudent estimate, an additional 21,000 jobs could be created in Frankfurt City. In the optimistic case, this could result in up to an additional 88,000 new jobs in the Rhine-Main region.”

Moritz C. Noll, co-author of the study, says, “With our models, we demonstrate that the long-term growth trajectory is changed by an initial shock, in other words, the additional jobs in the finance sector due to Brexit. Thus, we argue that the growth effects on the labour market can be significantly higher than the initial effects suggest. There’s still room for further gains.”

Hubertus Väth, Managing Director of Frankfurt Main Finance, says, “The job growth will further advance the economic strength of Frankfurt and the region. A real success story for all parties involved. Now, it is important to absorb and shape this growth positively. That is a challenge. However, the additional jobs also bring the funds to invest and master the challenge.”

Based on the assumption that 10,000 financial sector jobs will relocate to Frankfurt due to Brexit, this also results in additional tax revenues for the city of Frankfurt. In the conservative scenario, the net gain from income, value-added and local business taxes is around 136 million euros per year, while the optimistic scenario would yield nearly 192 million euros.

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