London ‘to continue as major financial centre despite Brexit’

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Study says that in case of the worst possible outcome for Brexit, the impact on the financial service industry of London could be very small.

A new study has predicted that London will continue as the major financial centre in Europe, even in the case of a no-deal Brexit.

The Future of Global Financial Centres after Brexit: an EU Perspective was undertaken by the Central Bank of Ireland to answer the question of what will happen to London’s status as a global financial centre (GFC) and to its role as the primary GFC of the European Union post-Brexit?

After running a number of simulations investigating the future of London after Brexit, the research says that London is likely to remain a major GFC, even in the event of an adverse Brexit outcome.

The authors of the research, Silvia Calò and Valerie Herzberg commented: “We find that given the sizeable gap between London and other financial centres in Europe, and London’s international orientation, London is likely to remain a very large global financial centre even in more adverse scenarios.”

The research also cautions other EU centres, saying that a poor Brexit outcome could negatively impact them, including Dublin, with the visible fragmentation of finance in Europe raising questions about future financial stability risks.

London’s status

When the research compared London to other European financial centres, the city stood out both in terms of size and range of services offered.

The research noted that in non-bank finance, London leads by a big margin in many sectors, especially in market infrastructure. The prominent role of London in FX transactions and OTC derivatives is well established, accounting in 2016 for nearly 40% of global interest rate derivative turnover.

When it came at calculating the scenario’s effect on the banking sector, the research observed that while the UK and some continental centres share certain characteristics, they differ in their international profile. The UK reports domestic banking assets of over 6 trillion euro versus roughly 5.5 trillion for France or Germany.

Where London and other centres differ is in relation to being a hub for foreign branches and subsidiaries.

The impact could be very small

The research report concluded: “London displays all the main features that characterised financial centres over centuries. It has a large population, with a high share of foreign workers. It is hosted in a large economy open to trade in goods and services. It has a large and connected banking sector and it provides a broad array of financial services, from banking to insurance and FX trading. It is also at the edge of the technological frontier in many of these sectors.”

However, the report cautioned that London’s current status could be dented by both a possible deterioration of perceptions and any abrupt changes in regulation and centrality due to new trading arrangements.

The report further added: “How Brexit will eventually affect the City of London remains uncertain, even if several firms have already relocated from London to other EU countries in the aftermath of the vote. While a less open, productive and rich UK might influence the future path of the City, according to our analysis, the impact of fundamental factors could be very small.”

The full report can be accessed here.

Similarly, the UK’s alternative finance industry remains bullish despite the spectre of Brexit. With sterling volatility picking up as concerns over the outcome of Brexit begin to take hold, there are steps that can be taken by businesses to shelter themselves from the collateral damage of a breakdown in negotiations.

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