So, 2017 it is then. As we pass from the coming winter solstice (December 21st) to the next summer solstice (June 21st 2017), banks in London are going to undergo a celestial transformation.
We all knew there were dark forces at work beneath the twinkling of the bells and the chinking of the glasses, but it’s taken the likes of Nomura, Mizuho and Daiwa to make it clear that this can’t go on. In 2017, contingency planning becomes reality.
In banking terms, it’s called “optionality”. Optionality is simply a bankery way of saying you’re keeping all your options open. Optionality is what banks had for a long time with their Asian equities businesses, before deciding to close them down. It’s also the approach they’ve been taking to their London operations since the Brexit referendum: keeping their options open, waiting to see how things settle before choosing a definite course of action. However, there becomes a point when inactivity becomes more costly than activity, and the Japanese seem to think that point will arrive next June.
The Financial Times reports that Japanese banks have informed the British government that they will start moving jobs out of London in June 2017 if the UK has not made progress in its negotiations with Brussels and replaced the current passporting system with something similar. In combination they employ more than 5,000 people.
Theresa May’s conspicuous snubbing at this week’s Brussel’s summit doesn’t bode well for the Japanese stipulation. Nor does the fact that, as Politico pointed out yesterday, other EU countries are more interested in Theresa May’s trousers than the UK’s Brexit agonies. In the EU Brexit has been lumped together with the other troubling issues of day, like instability, terrorism, refugees and populism. There’s simply not the commitment required to negotiate with the UK and formulate the kind of bespoke plan the UK requires.
Brexit, in a single shot. This morning at the EU summit. pic.twitter.com/1WlKeekRQy
— Daniel Sandford (@BBCDanielS) December 15, 2016
This is a problem for banks, who’ve been hanging on for a continuation of passporting, or some kind of “equivalence plus”. The first would require the UK to capitulate on immigration quotas unless EU partners are willing to negotiate Norway-style access to the single market in return for a fee. The second would require EU partners to engage strongly with the UK and for the two parties to negotiate an arrangement whereby EU finance regulations can’t be altered overnight in a way that would damage the City. Both will require considerable input from negotiating partners in the EU. Unfortunately, other members of the EU are going to be busy with other things next year.
The chart below, from banking analysts at J.P. Morgan, shows just how many other issues EU leaders will have to deal with next year – and their potential outcomes. Add in President Trump, and Brexit couldn’t be happening at a worst time.
You could argue that the Japanese banks are a special case. As we’ve consistently pointed out, banks like Nomura aren’t profitable in Europe: they can’t support one large European office in London, let alone a London hub and an EU hub. For them, it’s therefore all or nothing.
However, it would be deeply wrong to assume that other more profitable U.S. banks aren’t watching costs too. We’re in the age of banking efficiencies and nowhere can afford to rack up costs unnecessarily. Why would any bank want two large European hubs (one in the EU and one without) when one could do?
Add to this the fact that it takes years to shift banking operations from one country to another (HSBC said it took three years simply to move a thousand people from London to Birmingham), and the Japanese won’t be the only banks starting to make hard decisions about the future of their London operations next year. Christmas 2016 is still buzzing in the City of London. Christmas 2017 might be a lot more subdued.