Background
On March 29, British Prime Minister Theresa May gave formal notice to The European Council of the UK’s intention to leave the EU, under Article 50 of The Treaty of the European Union. Under Article 50, once this formal notice is given, the UK has two years to negotiate its new relationship with the rest of the EU. If the deadline is not met, the EU may vote to provide an extension. If the EU doesn’t provide an extension, then the UK achieves “Most Favored Nation” status under World Trade Organization (WTO) and trade agreements would fall under WTO rules. More importantly, passporting rights would disappear.
Passporting rights are rights given to businesses within the European Economic Area (28 EU members and Norway, Iceland, and Lichtenstein) that allow them to provide services anywhere in the EEA while under the regulations of one EU country, the one in which they are headquartered. Thus, a bank with European headquarters in the City of London, may provide financial services anywhere in the EEA while having to comply with only one set of regulations, those imposed by the UK authorities. Therefore, it may have smaller satellite offices in other EU countries without having to follow the larger set of regulations for each of these countries. Passporting rights cover financial services in virtually all areas including deposits, derivatives, debt, asset management, insurance, and mortgages to name a few.
These passporting rights save banks millions of dollars in costs. Banks don’t need to set up headquarters in each country with the EU and comply with each country’s regulations in which they provide services. Further, banks can offer services from their headquartered country as they don’t need an office in the other EU countries to operate there.
Simultaneously, the banks can take advantage of opportunities to participate in the EU economy. According to Bloomberg, these banks rely on passporting rights to obtain access to the integrated EU economy which represents $19 trillion dollars and 500 million citizens.
Current Situation: U.S. Banks in the UK
– There are several U.S. banks (Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America Merrill Lynch, The Bank of New York Mellon, Citigroup etc.) that are headquartered in London, subject to UK regulation, with small satellite offices in places like Paris, Frankfurt and Dublin.
– According to Oliver Wyman, the consulting firm, £23 billion – £27 billion of UK’s banking revenue is due to passporting rights to the integrated EEA, of which U.S. banks have a substantial part.
– According to New Financial, a consulting group, 87 percent of the employees of these banks live in the UK, contributing to its local economy.
Preparing for the Worst: Passporting Rights Fall Away. Who wins?
Facing uncertainty, a slowdown in the European market as all of Europe figures out its new relationship with the UK, and an imminent loss of passporting rights, U.S. banks are preparing for the worst. However, given the money to be made in the EU, U.S. banks are reluctant to leave the EU altogether. Most banks are drawing plans to reduce staff and operations in the UK and move staff and operations out of London to Frankfurt and Dublin, all of which will cost millions. Indeed, Citigroup’s two-fold strategy includes moving back office and middle office operations to Dublin and front office operations (sales, investment banking, and trading) to Frankfurt. Goldman Sachs is also considering movement to Frankfurt for some of its front office operations. If other U.S. banks follow suit, Frankfurt may soon become the European financial center, a prestigious title that London has held for eons. If this plays out, Germany’s Chancellor Angela Merkel will be laughing all the way to the banks, you can be sure UK PM Theresa May will be crying all the way to the bank.