Brexit vote: US banks reviewing Europe ops

Supporters around the "Vote Leave" bus during a nationwide bus tour to campaign for a so-called Brexit in Britain last week. Four Wall Street banks told Reuters they have been drawing up contingency plans as part of their own risk planning and at reg
Supporters around the "Vote Leave" bus during a nationwide bus tour to campaign for a so-called Brexit in Britain last week. Four Wall Street banks told Reuters they have been drawing up contingency plans as part of their own risk planning and at regulators' behest.PHOTO: BLOOMBERG

Some rethinking commitment to bloc, faced with possibly having to reorganise business

LONDON • If Britain votes to leave the European Union in June, some US banks could give up parts of their business in the bloc altogether.

The option is an extreme scenario under consideration by some Wall Street firms if the terms of an exit, currently a matter of speculation, leave financial services companies in Britain unable under their current set-ups to do business inside the EU, according to discussions Reuters had with several US banks and their lawyers.

The scenarios being studied by task forces at US banks underscore the extent to which the London operations of non-European banks are linked to business on the continent.

In particular focus are the banks' market operations, as trading of most European securities is regulated at the EU level but conducted by many investment banks mainly out of London.

The five largest US banks employ 40,000 people in London, more than in the rest of Europe combined, taking advantage of the EU "passporting" regime that allows them to offer services across the bloc out of their British hubs.

Having to reorganise business in order to set up new continental European outposts - which US banks say is a worst-case scenario that they are being forced to consider - would be so costly that it would make some rethink their commitment to the bloc altogether.

"The costs may lead some banking groups to reassess how important Europe is in the context of their global business and what sort of presence they wish to maintain post-Brexit," said Mr Edward Chan, a partner at the law firm Linklaters, which has been advising banks on contingency arrangements.

European integration has served US investment banks well. The move to a single currency made it easier to take on the bloc's own banks, benefiting from economies of scale by trading in euros rather than competing with, say, Societe Generale for franc-denominated business or with Deutsche Bank in deutschemarks.

The big five US banks have all been gaining market share while European investment banks restructure. In the first quarter, JPMorgan, Goldman Sachs and Morgan Stanley took the top three positions for investment banking fees in Europe, the Middle East and Africa (Emea), according to Thomson Reuters data.

But it is outside the euro zone, in the City of London, that they base their EU businesses. The investment bankers heading up merger and acquisition advisory teams for the likes of Italy and France tend to live in London rather than Rome or Paris.

Of the just under 6,500 staff who handle Goldman Sachs Inter- national's broker-dealer services for all of Emea, a region that brings in around 35 per cent of group revenue, fewer than 1,000 are based outside Britain. These British outposts have increased in importance since the 2008 global financial crisis, when banks tried to simplify their international structures into a few main hubs.

The major US banks also use their London entities to help them avoid the brunt of new US trading rules brought in with the Dodd-Frank regulation, booking swap trade agreements with non-US counterparties in Britain rather than in America. Now, the prospect of an exit from the European Union has spurred these banks into action, albeit only on paper for now.

Four Wall Street banks told Reuters how, with the outcome of the vote and its consequences wide open, they have been drawing up contingency plans as part of their own risk planning and at regulators' behest.

One bank said it had a central taskforce of 20 people drawn from each business unit and functions such as human resources and information technology.

REUTERS

A version of this article appeared in the print edition of The Straits Times on May 18, 2016, with the headline 'Brexit vote: US banks reviewing Europe ops'. Print Edition | Subscribe