Big Bang 2.0: The UK tries to stop the bleeding as London’s crown slips

As it happens, the easing of restrictions being mooted are at the margin, applying only to banks with smaller retail operations in the UK like Santander or Virgin Money.

The big banks like HSBC, Barclays, Lloyds and NatWest would still be structurally separated even though it could be argued that the global capital adequacy and liquidity regime that was adopted in response to the 2008 crisis and refined since is a more cost and capital-efficient way of achieving the same end-result as ring-fencing.

The cautious approach to that issue is, however, reflective of the timid approach to financial services more generally in an environment where Brexit has jeopardised London’s status as a global financial centre.

There is now more trading of European shares in Amsterdam than in London and the market capitalisation of France’s sharemarket topped the UK sharemarket’s this year.

Perhaps more threatening to London’s status is a European Union plan to demand that derivatives traders use European clearing houses for some of their transactions, which threatens London’s stranglehold on a market estimated at more than $US26 trillion ($39 trillion).

Loading

London dominates trading of the world’s interest rate swaps and currency derivatives, including euro-denominated derivatives.

Post-Brexit, some of that activity has shifted to New York and now the EU wants to force repatriation of at least some euro-denominated transactions by demanding progressive increases in the volumes cleared on EU platforms. The EU wants more European regulatory oversight of euro-denominated derivatives activity.

In the post-Brexit environment, the Europeans are chiselling away at the UK’s dominance of financial market and financial services activity and trying to force euro-denominated or based activity back into Europe.

Financial markets and services are a significant part of the UK economy, accounting for about 10 per cent of tax revenues and almost 20 per cent of all services exports and employing about 2.3 million people. It is also arguably the most internationally important and competitive sector of the UK economy.

The British have been able to offset some of the effects of the end of “passporting” (which allowed financial services companies based in the UK to operate within the EU via branches rather than subsidiaries while retaining their regional headquarters, infrastructure and the vast majority of their people in the UK) by expanding their relationships within Asia, with minimal job losses so far.

There has, however, been a significant leakage of capital, with an estimated £1 trillion of capital migrating from the UK to Europe in the aftermath of Brexit and in response to the EU’s demands that companies establish and capitalise subsidiaries within Europe and be subject to EU rather than UK regulations.

Six years after the Brexit vote the UK is still struggling to redefine its position within the global economy and financial system even as the impacts if the divorce from the EU are starting to show up.

While Thatcher’s Big Bang might have played a role in worsening the impact of the 2008 crisis on the UK financial system and economy – the UK banking system was among the hardest-hit by the crisis, with enormous costs to taxpayers – the most obvious opportunity to mitigate the erosion of the UK financial markets that the EU is pursuing and mitigate what have generally been the damaging effects of Brexit is in positioning the UK markets and regulation differently to those in the EU.

The European Commission is a heavy-handed regulator and eurozone markets are fragmented. There is still no banking union and the condition of economies within the region varies greatly. It isn’t an easy or efficient region in which to conduct financial services activity.

Loading

Sensible deregulation and markets-friendly policies could help London retain its position as the world’s number two financial centre.

The deeply recessed state of its own economy, the recent near-implosion of its bond market and pension fund sector after the short-lived Truss government toyed with more radical fiscal policies and the backlash against the more controversial foreign capital from Russia and the Middle East that flooded into London in recent decades means, however, that the Sunak government will tread warily on financial reforms.

Six years after the Brexit vote the UK is still struggling to redefine its position within the global economy and financial system even as the impacts if the divorce from the EU are starting to show up.

The tentative steps the UK is now taking towards freeing up its banking sector won’t stop the drift of financial activity towards mainland Europe – they are too limited – but at least show that the UK is starting to respond.

The Market Recap newsletter is a wrap of the day’s trading. Get it each weekday afternoon.