It’s four days since Britain voted to leave the European Union and there’s already been dire speculation about the likely implications for the City of London and people saying, ‘I told you so’.
Before calling the end of London’s financial services industry, let’s take a step back and look at what this means with a cooler head.
Thursday’s vote needs to be contextualised. ‘Brexit’ comes up on the back of two existing threads for banking.
The first is the general state of the industry. Eight years after the financial crisis, many European banks still have too much debt and balance sheets they can't de-lever; the markets just aren't there for them to do so. This overhang is making it difficult to generate profits and a decent return on equity. As a result, there’s a continual effort to cut costs.
The second is regulation. Whether it's Basel III or MiFID II, the regulatory trend has been negative for the banking industry. Basel regulations require banks to hold more capital and (understandably) become more risk averse. MiFID effectively further diminishes the revenue pool for European investment banks generally. This is not a good combination.
Brexit comes on top of these existing trends. Any changes that take place in the weeks and months to come are as likely to be the result of the existing situation as the decision to leave the EU.
It makes little sense for an organisation to start laying people off on the basis of Brexit in the week after the referendum. We don’t know the outcome of negotiations to leave the European Union. We don’t know what the passporting settlement will be, whether the UK will benefit from “equivalence”, or whether labour will be free to move in and out of the UK. To me, the idea that you can stand up now and make decisions based upon an outcome that’s still unclear seems odd.
This doesn’t mean there will be no redundancies. And those redundancies may well be attributed to Brexit. It’s worth bearing in mind, however, that companies in and out of the financial sector often use exogenous shocks to announce things they were going to do anyway. Brexit or not, fixed income desks are over-staffed, banks are already moving jobs out of London to cheaper European locations, and they are already cutting costs.
These moves may have nothing to do with the UK being a part of the European Union – they’re inspired by basic P&L considerations. The cost base in the UK is too high and offshoring has been a continuous trend for over a decade. It was going to happen anyway; if some people want to use Brexit as a justification, that’s up to them.
Yes, there will be headwinds. This is an outcome that a lot of people were not expecting (me included), but I am optimistic about the impact on the UK generally and on London as a financial services centre. I don't think the British people have made some grand anti-foreigner statement. That just isn't who we are as a country. They have simply become more sceptical about the way the EU operates, the way it makes decisions and the perceived legitimacy from a democratic standpoint. The British people have, for some time now, been uncomfortable with the general direction of travel and in last week's referendum clearly indicated that they don’t think EU institutions were proactively serving the interests of the broader public. And given this growing disconnect between median income and growth in GDP and financial asset classes, who can blame them?
Events on Friday were informative. If you’d arrived from another planet on and looked at a Bloomberg screen, it wasn’t the UK that would have caught your eye but Spain and Italy. The UK was down 3% and peripheral Europe was down 10%-11%. Although it's early days, the market already seems to be saying that this looks more serious for the EU than it does for the UK.
The UK is a nation of tolerant, pragmatic people with a huge amount of intellectual capital; and that still stands. We have our own currency and central bank. We have a reputation for innovation. We have presented ourselves with an opportunity to regroup and to do what we do best. It looks like this will be the Asian century, and as a nation state I think people underestimate the benefits of being nimble and being able to make our own decisions in a timely manner.
Yes, there will be short term headwinds. Markets hate uncertainty, and this is about as uncertain as it gets. And yes, there will be some changes in the City of London. But there will remain many reasons London remains attractive for foreign investors and financial services companies. London is the financial capital of the Europe, and I suspect that in five years’ time this will remain the case.
David Mortlock is global head of equities at Berenberg and head of the bank's London office