FMF welcomes Brexit agreement – Relocation of €750 to 800 billion in assets to Frankfurt expected

The Financial Centre initiative Frankfurt Main Finance (FMF) welcomes the agreement reached last weekend between the European Union (EU) and the United Kingdom (UK). For it provides much more clarity, albeit not yet definitive. FMF also hopes, in the interests of all concerned, that the British Parliament will ratify the treaty on 11 December. However, a ratification is not certain, and a hard Brexit has not yet been averted. In addition, the European Court of Justice (ECJ) will have to decide whether Article 50 can be revoked before the end of its deadline. Thus, there is still hope that the UK could remain if the ruling of the European Court of Justice confirms this. Still, the probability is rather low.

“This makes it clear for financial institutions that the Brexit is coming. While it has become somewhat less likely, the extreme scenario of a hard Brexit without a deal in place cannot be ruled out due to the uncertain majority in the British Parliament. On the other hand, it cannot be completely ruled out that the UK will remain in the EU, but this should be regarded as highly unlikely. The path is now set for the financial institutions. The Brexit plans are being implemented,” says Hubertus Väth, Managing Director of Frankfurt Main Finance.

Based on a speech by Danièle Nouy, President of the Single Supervisory Mechanism of the European Central Bank (ECB), we know that 37 financial institutions, banks and securities trading banks have applied to the ECB for new licences or extended existing ones and have already received them or are likely to receive them shortly.

30 of these institutions have chosen the Financial Centre Frankfurt for their European headquarters. Since several of the banks will establish branches in multiple locations, FMF believes the actual figures will ultimately add up to more than the 37 mentioned by Ms Nouy. However, Frankfurt also benefits from this distribution since around half a dozen financial institutions that have opted for locations in other EU countries are nevertheless significantly expanding their presence in Frankfurt.

“All in all, we expect a transfer of 750 to 800 billion Euros in assets from London to Frankfurt, the majority of which will be transferred in the first quarter of 2019,” says Väth. “It will not remain that way.”

“As it currently stands, banks face the decision of either relocating only what is absolutely necessary or preparing for the relocation of their entire business,” Väth continues. The institutions have found different answers to this question. “As long as uncertainty persists, most institutions are likely to prefer the minimum solution. In any case, it is clear that considerable second-round effects will follow.”

FMF sees the bill to relax dismissals protections for high-income risk carriers as an important step. “Politicians made promises and delivered on them. Internationally, this is being observed very closely as it shows that the Financial Centre is being supported.”

“Accordingly, Frankfurt Main Finance believes that the second-round effects will be significant. We stand by the potential of up to 10,000 jobs moving to Frankfurt which we estimated on day 1 after the Brexit referendum. However, there are signs of a second transition phase, which is expected to last until the end of 2022, and thus a further delay. The originally expected 5 years for the relocation of jobs from the time of the referendum in June 2016 will now become 8 years.”

A significant factor in financial institutions’ decision to relocate business to the Financial Centre Frankfurt was the willingness signalled by German politicians to reconsider the issue of labour protection for risk carriers. Following its inclusion in the coalition agreements, the draft law, which is tailored specifically to risk carriers, is being consulted in the ministries. “Politicians have listened, promised and delivered,” says Väth. “This is a clear sign that the banks’ relocation to Germany is desired. It is a sign that is seen and appreciated.”