This year, the City of London might get the first serious post-Brexit test of how strong its franchise really is. As Europe’s banks get ready for a new regulatory environment in the asset-backed securities market, they will have to make some decisions about staffing. How much they staff up – and where the new hires are located – will be a key strategic decision.
As some of the more aggressive predictions of tens of thousands of job losses made in the immediate aftermath of the 2016 referendum are being rolled back, the danger still remains for London that even if banks don’t move or get rid of jobs currently existing in London, they will still start creating the new jobs somewhere else. Investment banking as an industry relies on constant innovation, so losing the cutting edge of new product lines is almost worse, in the long term, than losing a few thousand jobs up front.
The relative advantages and disadvantages of the post-Brexit City are pretty clearly spelled out. In continental Europe, you have access to a continent-wide single market. In the UK, you have access to a deep pool of experience and human capital. Which is more important? Nobody really knows yet.
What would settle the question would be a big brand new market opening up – or the reopening of an old one. And it’s the latter that the European Commission hopes to be able to deliver, with the new rules on securitisation agreed last year. These are due to come into effect on 1 January 2019, and the Commission’s aim is to revitalise the securitisation market in Europe.
Obviously, securitisation got something of a bad reputation in the 2008 crisis, and the post-crisis Basel III rules were intended to bring it back under control. They certainly shook things up in Europe – having once been nearly a half-trillion euro market in terms of annual issuance, the latest statistics show a run rate of less than a quarter of that. This is a bit of a problem for the architects of the Capital Markets Union. Although nobody wants to go back to the days of CPDOs and CDO-squareds, the dependence of the European financial system on bank balance sheets has long been identified as a source of weakness.
For that reason, the Commission proposed – and the Parliament agreed – a new regime, partly deregulating the Basel III rules, but only for deals considered to be “simple, transparent and standardised”. Transactions which can show they meet these criteria will get a reduced capital treatment for bank and insurance company investors. The European authorities’ aim is to get asset backed issuance back to somewhere nearer its pre-crisis level.
Maybe it will, or maybe it won’t. But if the new rules are to achieve their aim, banks are going to need to hire structurers, lawyers, traders and salespeople. And they will have to decide whether to hire them in London, or somewhere else. Toward the end of this year, we’ll get some of the first clues about the future of financial Europe.
Dan Davies, is a senior research advisor at Frontline Analysts and a former banking analyst at Cazenove, Credit Suisse and BNP Paribas.