Thanks to Brexit, investment banks have that been based in the City of London for decades are looking at alternatives. UBS and Citigroup are both choosing Frankfurt. Goldman Sachs was rumoured to be choosing Frankfurt, but insists it's still sitting on the fence. French banks will be retrenching to Paris.
There's a good reason though, why American banks in particular have avoided the two continental European cities until now: they're expensive.
Two charts from Morgan Stanley illustrate the problem. Costs in German and French banks are 2,400 and and 1,500 basis points higher respectively than costs at banks in the UK.
As the second chart below (exhibit 38) shows, this is mostly because of higher labour costs. If banks want to cut costs (they do), moving to Madrid makes more sense than Frankfurt or Paris.
The two European cities are aware of their weakness. Paris is offering an income tax break of up to 50% on foreign executives who relocate there, and is promising to waive a wealth tax on foreign assets for eight years. Frankfurt is considering changing its labour laws, so that employees earning more than €100k or €150k will have less employment protection.
Even so, the Frankfurt proposals aren't a done deal and five years is a blip in a banker's career. When banking executives look at the charts below, they're likely to feel sorry that they can't just keep all their operations based in London.