Europe’s largest financial groups face a big increase in the cost of running and regulating their investment banking businesses from London post-Brexit.
Some of the City’s biggest institutions, including Deutsche Bank, have begun negotiations with the Bank of England about their status when they lose their privileged access to London.
More than 70 major EU banks operate British branches, which allows them to provide a range of investment and commercial banking services while being relatively lightly regulated.
Brexit will end this arrangement and banks have begun to take steps to ensure that they can continue to operate in the City. However, with no sign yet of what type of deal the UK will be able to negotiate, banks are looking to begin the authorisation process early.
Some are in discussions with the Bank of England about re-registering as “third-country” branches; this is one of the routes by which the big Wall Street and Swiss investment banks do business in London.
However, this is more expensive than the current deal for EU banks and requires more intensive supervision of their operations.
Most major EU banks have UK branches for their investment banking arms, including BNP Paribas, Commerzbank, Société Générale and Unicredit. Others operating branches include the banking arms of some of Europe’s largest carmakers, such as Renault and Volkswagen.
Paul Sharma, managing director at Alvarez & Marsal and the former deputy head of the Prudential Regulation Authority, which regulates the banking industry, said that the ultimate arrangement would depend on how the UK and EU ended up treating each other’s financial institutions. “I think they can make this process as easy or as difficult as they want to,” he said.
The Bank of England’s most recent policy paper on the treatment of European Economic Area branches grants considerable latitude to EU banks and effectively gives any bank in the bloc a cheap and easy process to set up even quite significant trading and lending services in the UK.
The Bank takes a much deeper look at banks from outside the EU; they require authorisation from the regulator, and the whole business must meet the threshold conditions.
Some industry experts believe that if the expense and difficulty of maintaining a UK branch becomes too great marginal players may abandon the City. For larger banks this is unlikely to be an option because London is considered too important a financial centre. “If you had a small operation here you may decide that it is not worthwhile to go through an expensive and intensive new registration process,” a senior executive at a large European bank said.
A spokesman for the Bank of England declined to comment.
