Tomorrow marks the fourth anniversary of the Brexit referendum. The United Kingdom is no longer a member of the European Union, and the dispute over the conditions of withdrawal still drags on and could even be extended. Read more
The German-British Chamber of Industry and Commerce invites you to a webinar series and online discussions.
It starts with the topic “UK – The Corona-crisis and the impacts on Brexit” on friday, May 15th 2020, 8.00am UK time. Read more
Kazuo Teranishi, correspondent for Asahi Shimbun, one of the oldest and largest national daily newspaper in Japan, interviewed Hubertus Väth during his visit in Tokyo in March 2020, which took part in the FinCity Global Forum (hosted by FinCity.Tokyo).
The countdown was projected on to the side of Prime Minister Boris Johnson’s office and residence at 10 Downing Street until Brexit’s completion on 31 January 2020, midnight Brussels time. Negotiations on future relations are underway. However, regulatory questions for the financial sector remain largely unresolved. London will – also in the well-understood interests of the EU – remain the leading financial centre in Europe for a long time to come. This does not mean, however, that the UK’s withdrawal will be without consequences. The cake will be newly cut, and Germany should use this opportunity to establish Frankfurt as the leading financial centre in the EU, all the while striving for constructive cooperation with London and Paris.
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.”
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].
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.
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.
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.
As an economist, you calculate a lot of numbers in your life. As a communicator, you learn to value them as carriers of messages. But none of “my” earlier numbers have stirred minds and the media as much as my forecast for the “morning after”. 10,000 – calculated weeks previously for the worst-case scenario, published for all the world to see the day after the Brexit referendum, this number has been roaming around the media landscape ever since.
It could mean 10,000 jobs ending up in Frankfurt, if… (followed by a whole host of conditions). London’s City could lose as many as 20,000 to 25,000 jobs. Not a lot really, considering that the London financial centre employs 700,000 people, but a big deal for Frankfurt.
The number was a message: a great deal for Frankfurt, not so much for London. It was a broad definition, including as it did all support industries. And the number also had conditions attached: Brexit is coming, passporting is going, the EBA is coming and euro clearing won’t stay in London, the relocation will last for more than five years and – it’s gross, i.e. doesn’t make allowance for any job losses in Frankfurt.
So you can see: all of the key areas of discussion to date had already been highlighted on the “morning after”. But the spotlight was on it alone, the One. The Number. Such complex material, so nicely rounded.
Since then, it has appeared in around 90 countries. You hear it, see it, read it. Journalists from all over the world made the pilgrimage to this beautiful city on the river Main, full of self-doubt, but ready to be convinced. By now I’ve talked to more than 800 of them.
Frankfurt as the big Brexit winner? The doubters were not hard to find. There are no schools, no offices, no apartments. There was even carping about the food and beer, not to mention the quality of the locally available coffee, and a damning indictment of the cultural landscape. The image was frightful, according to harmonious souls in Munich, Dusseldorf, Cologne, Hamburg and Berlin, and the City and its competitors for London jobs in Paris, Dublin and elsewhere cited them with relish.
It will be 2,000 to 3,000 jobs at most, it was said, quietly and in confidence. A forecast that has since been increased several times in the same place. The Frankfurt School of Finance & Management saw 20,000 bankers on their way across the Channel. By contrast, supposedly sober-minded people held any forecast at all to be frivolous (the who’s who of the consultant scene however did exactly that in London: forecast. But in Frankfurt we were serious, oh yes!) But around 15 months later, the same source felt able to report about 5,000 jobs net. In other words, there were now forecasts of an influx from London and job losses in Frankfurt at the same time. Despite every effort to do so, we cannot figure out the two components of this number to this day.
Helaba leaped to our defence early. The always well-received, annual, and in contrast to us as a lobbying association (more disparaging would hardly be possible), always considered respectable study on the situation in the financial centre came up with 7,000 London jobs in 2016, before going on to see a lower limit of 8,000 a year later in 2017.
No sooner were the first names of the financial institutions coming out in favour of the location known, and scarcely had it been made public by the board that in the worst-case scenario up to 4,000 jobs are under scrutiny at Deutsche Bank in London, than the calls came for us to increase the number. The decision to relocate the EBA in favour of Paris had barely been reached, and many people already wrongly believed Frankfurt to be playing a losing game.
No, we stuck with and are sticking with the 10,000. Are we not capable of learning? Yes, we are, but if you think ahead, you don’t have to up the ante: to this day, we still don’t know exactly what Brexit will look like. Although many things are a lot clearer than a few months ago: Brexit will come. That can be considered very certain. A transitional period of 21 months has been agreed. The five-year period in which the 10,000 jobs we forecast would relocate to Frankfurt has proven to be far-sighted, as has the thesis that euro clearing would become an issue and will be decisive in terms of the outcome.
So yes, we are undeterred, because 21 months after the referendum, our scenario is still intact. The transitional period cannot be prolonged. The exit from Brexit that some believe they can see will turn out to be a mirage. Only the EBA didn’t come, giving us the perfect excuse if the number doesn’t quite reach 10,000.
And one more thing: you can take advantage of opportunities, or you can fail to do so. 10,000 is absolutely possible for the Financial Centre Frankfurt. If we don’t reach it, the question must be: why did they not come? We think it’s better to now ask the question: what else do we have to do to reach it? Plenty! The 10,000 is still feasible. Because many people have very quietly done a great deal of good. If you consider the use of the (modest) funds with which everything so far has been achieved, the result is sensational. Simply Frankfurt.
This guest contribution was first published in the daily newsletter at Finanz-Szene.de.