Europe's financial lifeline from London in doubt

A bus passes the Bank of England in the City of London

A bus passes the Bank of England in the City of London

Published Mar 24, 2017

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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.

Read also:  Brexit already having a negative effect in UK

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.

REUTERS

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