One things people worry about is how well will The City, the wholesale financial markets in London, do after Britain leaves the European Union. The dire warnings are that by being outside the European system of financial regulation then the markets will be disadvantaged. The more cheerful view is that by being outside the European system of regulation then they will thrive. It has to be said that I take that second view: the idea of being free of those idiot regulations from Brussels should be making market participants ecstatically happy.
And so it is with Osborne and several of the big banks today saying that they don't see any reason why The City won't thrive:
George Osborne says the UK’s financial industry will look for “new opportunities” opened up by Brexit despite the clear “challenges” posed by the referendum result.
The chancellor released a joint statement with bosses from six international investment banks to make reassurances that London will remain “a world leading financial centre.”
It was the big banks too:
Four U.S. investment banks promised British finance minister George Osborne on Thursday that they would help London keep its top spot as a global financial center following the country's vote to leave the European Union.
Since the June 23 referendum there have been fears of an exodus from the City of London if access to the EU's single market becomes significantly harder. Banks like JPMorgan have said they could move thousands of jobs.
On Thursday JPMorgan, Goldman Sachs,
Bank of America Merrill Lynch andMorgan Stanley , as well as Britain's Asia-focusedStandard Chartered said they would try to support London's financial sector.
Yes, it's entirely possible that some jobs will move into the EU again in order to maintain the passport rules (these mean that if you're an EU regulated institution then you can sell and work anywhere in the EU). But the actually valuable part of the business, the markets themselves, is highly likely, if not certain, to remain in London.
Goldman Sachs, Morgan Stanley, JP Morgan and Bank of America all put their names to a statement Thursday promising to work with the U.K. to help London “retain its position as the leading international financial center.”
Last month’s vote to leave the European Union has cast a deep shadow over the financial and related services industry in the U.K., which accounts for 7% of all jobs and makes up 12% of the economy.
Those numbers aren't quite right. That's the whole financial services sector, not just the wholesale markets. And people are still going to want car insurance and pensions whatever Britain's EU status. The sector under discussion here is more like 4% of UK GDP. The statement itself is here and this is by far the most interesting comment:
Privately, several executives are already drawing up lists of current banking rules they hope can be watered down in return for pledging to remain in the U.K., bankers say.
That is, which rules will Brexit free those markets from? I can think of at least one which will be near the top of the wish list, the absurd limits upon bankers' bonuses. But Craig Pirrong, with his vastly more detailed knowledge of these markets, can think of others:
One of the ideas that I floated in my first post-Brexit post was that freed from some of the EU’s zanier regulations, it could compete by offering a saner regulatory environment. One of the specific examples I gave was position limits, for as bad as the US position limit proposal is, it pales in comparison to the awfulness of the EU version. And lo and behold! Position limits are first on the list of things to be trimmed, and the FCA appears to be on board with this.
And the former Governor of the Bank of England (and thus the market regulator in chief in reality if not entirely so de jure) is thinking along the same lines:
Those who fear for Britain’s future outside the EU worry particularly over the fate of London as Europe’s pre-eminent financial center, with officials from Paris, Frankfurt and Dublin all seeking to lure banks and other financial services firms.
But Mr. King said the City’s longstanding ties to the rest of the world and its accumulated expertise in a wide variety of areas, such as fund management, insurance and legal services, should enable it to survive any post-referendum setbacks.
“I don’t see London losing its role as the financial center of Europe,” he said. “The City is strong, it’s always changed. I’m sure that will happen again, but the underlying strengths of London will remain.”
My reading of this is that there are indeed, as there so often are in economics, two forces here pushing in opposite directions. One is the concern over that lack of access to Europe if The City is outside the EU's regulatory embrace. The other that being outside the EU's regulatory embrace allows sensible regulation instead of the usual nonsense from Brussels. And my estimation of the overall effect is that the freedom to regulate well will be vastly more important. The City will thrive that is, almost as an offshore financial centre. Which, if we're honest about it, is what it is anyway. There's a reason why a Kazakh miner is listed in London, why Russian commercial cases go through the London courts, why the world's shipping business runs through the Baltic Exchange even as many of the shipowners are Greek. Simply because it's not in any of those places and so can be run well and properly rather than by local politics. Being out of the EU will just make that effect stronger.
