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12 October 2016

Guest blog by Phil Molyneux, Dean of the College of Business, Law, Education and Social Sciences and Professor of Banking and Finance at Bangor University.

It’s not looking good in the City or anywhere within the UK financial services sector. The sector contributed £66 billion in tax revenues to the UK Exchequer in 2015 – around 11% of total income – so this is potentially a concern for all of us.

Just as the banking industry is grappling with a barrage of regulatory reforms arising from the global financial crisis of 2008, along comes Brexit. Tougher regulatory requirements incorporated in Basel 3 rules (to be in place by 2019), coupled with other reforms, mean that all big banks have had to ‘de-risk’, pulling out of investment banking and shutting ‘peripheral businesses’. HSBC and Barclays have been selling big portions of their international activities as well as the riskier areas of their wholesale banking and trading.

The last thing the sector wanted was a Brexit vote to add to the pain, not least because the outcome is so uncertain.

Profitability is at historically low levels and is expected to stay that way until at least 2020. Some investors are now even talking about banks resembling public utilities rather than freewheeling enterprises (FT, 2016). The last thing the sector wanted was a Brexit vote to add to the pain, not least because the outcome is so uncertain.

A big worry is that banks and other financial firms will not be able to operate as easily throughout the EU, if the current system of passporting is replaced with a much tougher regime.

At present, if a bank obtains a licence to do business in the UK it can then easily obtain a passport to operate anywhere in the EU, thanks to regulations having been harmonised and made equivalent in all EU jurisdictions. UK financial firms currently have over 330,000 such passports in place for around 5,500 firms.

If the UK simply withdrew from the EU and broke all current ties, these licences would all need to be renegotiated or firms may relocate their corporate operations to elsewhere in the EU (e.g. Frankfurt) in order to preserve their passporting rights. Either would be costly and disruptive for the banks and the latter a major blow to the City.

At the other end of the spectrum, a very ‘soft’ Brexit could allow many of these arrangements to stay in place, with most of the current passporting arrangements and regulatory framework maintained. There are a range of other possibilities in between these opposites.

Banks are concerned about the lack of detail available on what Brexit will entail, and whether the UK government is able and/or willing to negotiate a suitable deal for them, given its lack of negotiators. They argue that a ‘hard’ Brexit would impose large losses on banks and, collaterally, on the UK’s fiscal position.

Oliver Wyman (2016) estimates that a ‘hard’ Brexit (where the UK becomes a third country and arranges deals according to the EU’s WTO commitments) could cost the financial sector up to 70,000 jobs and the Exchequer £5bn-£10bn lost tax revenue.

Full passporting, regulatory equivalence and access to the EU Single Market (‘soft’ Brexit) will obviously have a much less dramatic impact – a loss of 2,000 to 3,000 jobs, and about £2bn in tax revenue. Although the latter is the position preferred by the banks, they recognise the difficulties of achieving it, given the UK government’s apparently uncompromising position on labour mobility and the fact that several EU member states will be happy to pick up any business that flees London.

Trading in euro-denominated securities is another issue that directly impacts the City of London. The City is the capital for euro-denominated swaps, options and other derivative trading. Over 90% of the £440bn traded each year is processed in London.

As uncertainty continues, financial activity will slowly look to leave the City

The European Central Bank (ECB) has long argued that having a massive euro-denominated market outside the Eurozone is a potential threat to stability, as it may be unable to provide the necessary support if problems were to arise. The ECB tried to wrestle this business back to the Eurozone in 2015 but was thwarted by the European Court of Justice. However, with the UK out of the EU nearly all commentators accept that this business will now move.

All in all, the situation is not promising. Banks and other financial firms are struggling. They need to plan to mitigate the operational and other risks brought on by Brexit, but in order to do so they require more certainty as to whether it will be a ‘hard’ or a ‘soft’ Brexit (or something in the middle), as well as details of any transition arrangements that may be agreed. As uncertainty continues, financial activity will slowly look to leave the City (and the rest of the UK). This trickle is likely to become a flood if plans are not set out sooner, rather than later.


Jenkins, Patrick (2016, September 6) Banks: Too dull to fail? Financial Times. Retrieved from:

Wyman, Oliver (2016) ‘The impact of the UK’s exit from the EU on the UK-based financial services sector’. Retrieved from:


The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.

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