While some smaller firms may abandon their operations on the continent altogether as profitability plunges, banks may need to find $30 billion to $50 billion of additional capital to support new European units in the aftermath of a hard Brexit, believes Oliver Wyman Inc.
The management consultant said in a report on Tuesday that 15 percent to 30 percent of the capital wholesale banks commit to the region is equivalent to the extra money that the banks would have to add. In addition, as banks scramble to establish new hubs to ensure prized access to the European Union’s markets, operating costs could rise by $1 billion as functions currently handled in London are duplicated on the continent.
Oliver Wyman partners including Matt Austen and Lindsey Naylor said in the report that a hard Brexit would “fragment European wholesale banking” as the banks would lose privileges access to the European Union’s single market. “It will also make it significantly less profitable. Banks could see two percentage points knocked off their returns on equity.”
Since the U.K. voted to leave the EU last June, this report is the latest warning about the ramifications of Brexit for the region’s financial system. As HSBC Holdings Plc as it moves 1,000 investment bankers to Paris, about a fifth of its London workforce, it will have to pay as much as $300 million in relocation and legal costs, the bank forecast on Monday and it was the first bank to spell out the cost of Brexit. Financing for countries and corporations will be harder to find and more expensive by the fragmentation of the industry, warned Chairman Douglas Flint.
The consultants said in the report that with returns already depressed after the financial crisis, “these new challenges from Brexit will raise difficult questions about the viability of some activities”. “Some banks may even choose to withdraw capacity from the European market as a whole and redeploy to other regions, such as Asia or the U.S.”
Banks activating their worst-case contingency plans and are establishing hubs on the continent as they are concerned by the lack of progress in talks and the potential for London to be shut out of the single market. Some have predicted the ultimate beneficiary will be New York as banks strive to recapture the efficiency of having operations in a single city even while Frankfurt and Dublin are getting the lion’s share of banking jobs relocated from London.
As many as 35,000 financial-services jobs from Britain, including up to 17,000 from wholesale banking, would be driven away by lost links to the EU, Oliver Wyman estimates. Oliver Wyman said that the question of whether London can continue to provide clearing services for the rest of Europe also lingers.
“HSBC’s initial estimate of for Brexit-related costs will likely be followed by many more detailed plans from peers as the need to prepare for a worst-case scenario grows,” said Bloomberg Intelligence analyst Jonathan Tyce. “Oliver Wyman’s estimate will be proven appropriate should a hard Brexit necessitate significant duplication of functions currently located in London, as well as staff hiring and relocation.”
(Adapted from Bloomberg)