The new British Prime Minister certainly claims to be on the investment banking industry’s side – he has some big-name hedge fund backers including SRM Global’s Jon Wood, and he’s boasted that “nobody stood up for the bankers like I did in 2008.” But given that his rise to power has been driven by a policy of being prepared to countenance Brexit with no withdrawal agreement, a risk that’s generally been seen as bad for business, how good might Boris really be for the bankers?
For the time being, we’ll ignore conspiracy theories relating to people’s real or imagined long or short currency positions, and concentrate on the most likely outcomes for headcount and pay resulting from the hard, divergent version of Brexit that Mr. Johnson appears to want. And pay, at the top level at least, might be the most noticeable early effect. Boris has been a long-time opponent of the EU’s material risk takers regime, and of the rules which cap bonuses at a multiple of basic salary. We might expect that in a couple of years of the Johnson premiership, these caps would be removed, benefiting the most senior bankers and traders in London and possibly attracting a few senior managers to base themselves there, rather than in Dublin, Amsterdam or any of the jurisdictions with particularly punitive bonus rules. When coupled with his proposals for tax cuts, this could be quite lucrative for anyone who thinks they would be getting a big bonus in post-Brexit London.
But how many people would be in that situation? Perhaps not all that many. Any attempt to diverge from Europe on regulation – and certainly any attempt at a big City-friendly deregulation – would put at risk the prospect of getting “equivalence” status, which would be necessary for London firms to work with European clients. As Switzerland is currently finding out, equivalence status is dicey at the best of times, and the EU is not by any means above using it as a source of leverage to get its own way in other negotiations, something which should be borne in mind when considering Mr Johnson’s fairly unique diplomatic style and extraordinary degree of unpopularity in Brussels.
And even assuming a rock-solid equivalence deal, the UK is going to be a third country after Brexit, and this is going to make it more difficult to do business in Europe. All the big banks are setting up European offices in a variety of financial centres, and over time these are likely to become the head offices and London the branch, rather than vice versa. The European regulators have been very clear that they aren’t tolerating brass plate banks, or “back to back” operations effectively run out of London; they want to see substantial operations with management and capital proportionate to the business. The days in which investment banks were run by the biggest revenue generating trading desks are over; for the foreseeable future the kings of the universe are the risk managers in charge of capital allocation, and these jobs are all leaving; deregulation and political uncertainty will just make this happen faster.
Also likely to be in long-term decline are rates and bond trading. For the time being, London’s clearing houses are going to be allowed to clear euro-denominated trades, but in the long-term, it’s clear that the ECB’s ambition is to bring its currency’s clearing squarely into its own control. If the clearing house and the central bank are all in the Euro area, then slowly but surely (or possibly quickly, like the Bund futures contract) the liquidity and volume are likely to migrate there too.
Are there any bright spots? Possibly equities. For one thing, given the importance of overseas-earnings and natural resources priced in dollars to the FTSE100, there’s a surprising inverse relationship between the value of sterling and the domestic currency performance of large cap stocks. Any depreciation as the market gets to grips with the possible combination of a deficit-busting tax cut and a hardcore Brexiteer and Boris fan like Gerard Lyons at the Bank of England could show up as a stock market rally, which Prime Minister Johnson would be unlikely to take less credit for than his counterpart in the White House. Any moves aimed at making housing more affordable could also shake the British middle class out of their love of buy-to-let residential real estate and channel their savings back into the stock market. Since the kinds of capital markets and investment banking business based around the London Stock Exchange are relatively intensive in personal franchises and relationship capital, they’re less likely to be affected by macroeconomic stresses. So if you’re looking to earn the big, uncapped bonuses under Boris Johnson, that might be the place to look.