Frankfurt - For companies in the
European Union, London is the chief gateway to finance.
Rerouting the financial lines that run through London will be
complex, experts say.
London dominates wholesale banking in Europe, a 5.8 trillion
euro ($6.2 trillion) industry that includes financing for
companies from big multinationals to family-owned firms that are
the backbone of Germany's economy.
London is also the first port of call for companies, such as
Italian lender UniCredit, selling shares or raising debt. This
is because many fund managers and asset managers have a base in
Britain.
The Bank of England estimates that half of the debt and
equity issued by EU borrowers involves financial groups in
Britain. This could be a London bank organising a sale of
European company bonds, for example.
And London houses the bulk of Europe's derivatives market,
where car makers buy protection against swings in the U.S.
dollar or airlines guard themselves against a spike in the price
of oil. More than 7 trillion euros of trading in such
instruments is processed in London daily.
Experts expect EU firms and banks gradually to reduce their
reliance on London. Governments in France and Germany want to
establish alternatives to London in Paris and Frankfurt.
Over time, some of London's wholesale funding will move to
other centres in Europe. Thinktank Bruegel predicts that
London's share of this market will eventually shrink from 90
percent to 60 percent.
If mismanaged, however, the migration could raise the cost
of funding for European companies, the thinktank said.
Bruegel's Dirk Schoenmaker said that if wholesale funding
operations are spread across several locations that could lift
costs by between 6 billion and 12 billion euros each year
because of the expense of using multiple financial centres. That
is equivalent to up to 0.1 percent of the remaining 27 EU
countries' economic output.
Shifting the multi-trillion euro derivatives business would
be difficult, regulators and bankers said. Some derivatives have
a term of many decades. It is unclear, bankers said, what will
happen when Britain, where the contracts were drafted, leaves
the European Union.
They said that the cost of holding such instruments could
rise sharply for European banks if a clearing house in London
that processes the deal, for example, is not recognised in the
European Union.
A transition period, after initial exit talks of two years,
could win extra time. But many bank executives, speaking
privately, have said they are working on the assumption that
there will be no transition.
EU officials familiar with the bloc's preparations for
negotiations have told Reuters that they too fear a "cliff-edge"
departure of Britain from the bloc. They are pinning their hopes
on banks moving to the continent in time and believe this will
minimize any fallout for their economies.