British banking stocks are falling this morning. At the time of writing, RBS is down nearly 2.8% and Lloyds is down nearly 3.8%. Barclays is down a more moderate 1.4%.
It’s not hard to see why. For the second time in a year, Britain has no clear leader. Prime minister Theresa May says she has “no intention of resigning” but her only hope of governing is in forming a coalition with the ultra-right wing Democratic Unionist Party in Northern Ireland. Jeremy Corbyn’s Labour Party, meanwhile increased its share of the vote to 40%, but only won 267 seats – well below the 326 seats needed to govern, even if it enters into a coalition (which it says it won’t), with the SNP (34), the Lib Dems (14), the Greens (1) and Plaid Cymru (3).
So, what does this mean for the City of London and the 700,000 (or so) people who work there?
1. Limited bank hiring for the foreseeable future
Remember the Morgan McKinley survey earlier this week? That survey which said London banking recruitment stalled last month as banks waited to see the outcome of the election?
Today’s result suggests the hiatus could continue for a while.
Gordon Brown hung on for six days after failing to secure a majority in 2010. Like May, Brown intended to form a coalition. He failed. Brown only won 258 seats in 2010, however, while May has 317.
Even if May forms her proposed coalition with the Democratic Unionist Party (which has 10 seats), her government may not last. Jack Di-Lizia, strategist at Deutsche Bank, says the slim Conservative majority would be, “inherently unstable and increases the probability of another set of elections over the next 12 months.”
2. The political foundations for the City of London are looking shaky
Financial services firms like political stability. As J.P. Morgan’s analyst pointed out last year, U.S. banks have a lot of assets in their UK subsidiaries – Goldman Sachs alone has around $850bn of assets sunk in its UK operation. International banks don’t want this kind of exposure to countries without strong governments. If the UK’s political tumult continues, they could be encouraged to move operations and assets to more stable alternatives (eg. Germany or even France under ex-banker Emmanuel Macron.)
As the chart below (courtesy of Barclays) shows, Britain has had governments with slim majorities since 2001.
3. Even more uncertainty on Brexit
After article 50 was triggered by Theresa May in March, Brexit negotiations are due to start in 11 days’ time. Michael Roth, Germany’s Europe Minister, said this morning that the Brexit clock is still ticking. However, Michel Barnier, the EU’s chief Brexit negotiator has tweeted that there may be some flexibility on the start of negotiations.
#Brexit negotiations should start when UK is ready; timetable and EU positions are clear. Let’s put our minds together on striking a deal
— Michel Barnier (@MichelBarnier) June 9, 2017
Could the UK negotiate an extension of the two year Article 50 negotiation period? In theory, yes. But any extension would require unanimous approval by 27 EU member states individually and by the European Parliament as a whole.
The Democratic Unionist party have said they won’t back a hard Brexit in the sense that they want a porous border with Ireland. However, they do want to leave the customs union.
There are shreds of hope. In the middle of the night, Brexit Minister David Davis said a Conservative government may no longer be able to walk away from the EU single market.
Huge: David Davis concedes UK government may have lost mandate to exit customs union and single market (Sky, 2.30am). pic.twitter.com/9o9oxrvhf0
— Matthew Holehouse (@mattholehouse) June 9, 2017
Conversely, ‘Brexiteers’ point out that both the Conservative Party and the Labour Party campaigned on a pro-Brexit platform. Deutsche Bank’s Di-Lizia says the Conservative’s reduced majority could even strengthen the harder Brexit wing of the party, which will need to be placated if May is to govern. Barclays’ strategists say the election result raises the risk of a “late, disorderly Brexit” with no deal, which would be a disaster for the City of London.
4. Good news for macro desks
The upside to the unexpected result is that banks could benefit from increased uncertainty and volatility in the pound. It was only last week, after all, that bank CEOs were bemoaning the lack of action compared to 2016, which delivered political surprises in the form of Brexit and Trump.
London headhunters say sterling desks have already been bolstered with new hires this year. Macro traders in the City could be in for an interesting quarter.
5. The threat of an anti-banking Labour led coalition just got real
Lastly, although the Labour Party failed to secure a large enough share of seats to form a government, either alone or in a coalition, left wing leader Jeremy Corbyn did much better than expected. Corbyn says he’s ready to form a government, even though this may not be possible now. In the event that a second election is called in the next 12 months, will Corbyn do better still?
It’s something international banks are likely to consider when making staffing plans for the City of London. The Labour Party’s manifesto contained a host of policies that would punish banks. These include: a transaction tax of 0.2% for banks and other finance companies and 0.5% for non-financial businesses (compared to the EU’s proposed tax of just 0.1%); a proposed increase in corporation tax with an additional levy on firms with a high proportion of highly-paid employees (banks); and increases to income tax. As Bernstein Research points out, Labour has also threatened to break up RBS and “create new local public banks that are better matched to their customers’ needs.”
Most concerning, however, is likely to be the tenor of the Labour Party’s statements on the City of London. John McDonnell, who would be British chancellor under a Labour government, has spent years railing against banks, saying he wants to “teach them a thing of two”, that the City is a place of “frenetic madcap speculation” responsible for creating a “casino economy”, and that bankers are “filthy rich” and “obscene” and bonuses should be subject to an additional 10% tax rate.
With banker-bashing a thing of the past elsewhere, and both France and Germany making friendly overtures to banks in London, it’s hard to see why banks would continue to be based in the UK if Brexit goes ahead and a Labour Party led by Corbyn in McDonnell is in charge.