THE IMPACTS OF BREXIT ON THE EUROPEAN FINANCIAL SERVICES ECOSYSTEM INSTITUT THE IMPACTS OF BREXIT 1 ON THE EUROPEAN FINANCIAL SERVICES ECOSYSTEM EXECUTIVE SUMMARY / KEY MESSAGES TOPICS KEY MESSAGES ◆ Eurogroup Consulting and Institute Louis Bachelier (ILB) have combined to produce a study that focuses on the impacts of Brexit in relation to the European fi nancial services ecosystem. It involves a particular focus on the UK fi nancial services STUDY ecosystem as well as the EU fi nancial centres that could benefi t from the outcome of Brexit. The study encompasses both OVERVIEW qualitative and quantitative work as well as primary and secondary research ◆ The six fi nancial services ecosystem actors surrounding Brexit (Corporate & Investment Banking (CIB), Retail Banking, Asset & Wealth Management, Insurance / Reinsurance, Stock Exchange including Clearing and Other Financial Ecosystem Services including FinTech) have a UK annual revenue of GBP 197bn and 1.05 million FTEs ◆ The latest Brexit developments will cause seven core issues for the UK: • Negative: Macroeconomic impacts – lower growth for the UK, loss of passporting rights/no equivalence, human resources/immigration – harder to attract top talent, fi nancial ecosystem actors with no contingency plan (not Day 1 post-Brexit ready), loss of Euro Clearing • Positive: Less UK regulations and tax could attract business, London’s history and traditions ◆ A � Hard Brexit will cause the whole UK fi nancial ecosystem to decrease by 15-25%, reducing UK revenue to within the MACRO-ECONOMIC range of GBP 170-150bn and FTEs down to 890-790k, although London will continue to be one of the leading fi nancial centres post-Brexit with the amount of relocation dependent on the severity of Brexit. A medium to hard Brexit is predicted currently, but it is very diffi cult to forecast ◆ Of all the European fi nancial centres, Paris, Frankfurt, Dublin and Luxembourg are in the strongest position to benefi t post-Brexit according to the new amended Financial Centre Ranking Index, which includes the embedded hard and soft drivers of Business Environment, Human Capital, Reputation, Infrastructure, Finance Sector Development and Tax ◆ Of the six fi nancial ecosystem actors, theCIB actor will probably be the most impacted due to its international focus. The CIB market will become fragmented, additional capital (up to GBP 40bn) will need to be invested in new EU units (for licensing and operating reasons), and profi tability and ROE will fall with both revenue decreasing and costs rising (around GBP 10-15bn structural costs) due to restructuring and services being duplicated in both new EU entities and London ◆ Among the seven core issues for the UK, the CIB actor has identifi ed the following 2 factors as the most critical for their KEY FINDINGS ongoing operation and what could potentially cause a Hard Brexit: • Loss of passporting rights/no equivalence (UK fi nancial services groups will lose the right to serve EU clients after Brexit) • Loss of Euro Clearing (collateral posted would rise by 40-60%, default fund contributions would increase and banks would hold more equity capital) ◆ There is currently a great deal of uncertainty regarding the outcome of passporting rights and Euro Clearing. EU fi nancial institutions are pushing to relocate Euro Clearing into Continental Europe, and current sentiment appears to be the that the ECB will not allow Euro Clearing to remain in the UK post-Brexit. The European fi nancial services ecosystem will have to monitor the developments of these two topics closely going forward ◆ Many UK, USA and European CIB banks are still developing their own activities in the UK, however dependent on the severity of Brexit there will be relocation of CIB activities outside the UK due to Brexit over time. In a Hard Brexit scenario the CIB market will become a lot more fragmented with a few leading European fi nancial centres (as well as non-European CIB home bases, e.g. New York) benefi tting ◆ In a Hard Brexit, the UK CIB actor will decrease by 20-30% from GBP 44bn UK revenue and 110k FTEs currently to GBP 35-30bn and 90-75k respectively ◆ Quantifying UK CIB Brexit Revenue at Stake (GBP 11bn) induces market share re-distribution, however via potential CORPORATE AND INVESTMENT BANKING remediation the net UK CIB Brexit Revenue at Stake is estimated to be GBP 7bn THE IMPACTS OF BREXIT 21 ON THE EUROPEAN FINANCIAL SERVICES ECOSYSTEM AGENDA 01 INTRODUCTION 02 BREXIT: IMPACTS ON THE UK (LONDON) 03 EU FINANCIAL CENTRES: BREXIT IMPACTS AND RESPONSE 04 FINANCIAL ECOSYSTEM’S RESPONSE TO BREXIT SCENARIOS 05 APPENDIX THE IMPACTS OF BREXIT THE IMPACTS OF BREXIT 3 ON THE EUROPEAN FINANCIAL SERVICES ECOSYSTEM ON THE EUROPEAN FINANCIAL SERVICES ECOSYSTEM INTRODUCTION THE IMPACTS OF BREXIT THE IMPACTS OF BREXIT 45 ON THE EUROPEAN FINANCIAL SERVICES ECOSYSTEM 01ON THE EUROPEAN FINANCIAL SERVICES ECOSYSTEM 01. INTRODUCTION THE LATEST BREXIT MACROECONOMIC, FINANCIAL SERVICES AND CIB DEVELOPMENTS FOR THE UK ARE EVER CHANGING FOR THE UK ARE EVER CHANGING FINANCIAL SERVICES AND CIB DEVELOPMENTS BREXITTHE LATEST BREXIT MACROECONOMIC, BREXIT LATEST UK MACROECONOMIC LATEST UK FINANCIAL SERVICES DEVELOPMENTS AND CIB DEVELOPMENTS AS OF SEPTEMBER 2017 AS OF SEPTEMBER 2017 EUROPEAN PARLIAMENT � ◆ London and Brussels have been urged to strike a Brexit ◆ Donald Tusk, the European council president, recently transition deal by Europe’s top fi nancial lobby groups reminded London that article 50 of the Lisbon treaty amid warnings banks will be unprepared for the UK’s had already been triggered and talks would have to secession from the EU be concluded by March 2019 �◆ London remains the world’s Top Financial Centre ◆ Brexit discussions between the EU and UK have according to the GFCI 22 Ranking, announced September progressed slowly so far. Before agreeing to talk 2017 trade, the EU wants “suffi cient progress” to be made �◆ It is forecasted that the UK’s financial services will addressing citizens’ rights, the Irish border and the Brexit experience slower growth over the next two years bill. Both sides had initially aimed for that milestone to be owing to Brexit pressures, but will start to recover by 2020 met in October 2017, however Slovenian Prime Minister ◆ � Private wealth in Western Europe is set to fall behind Miro Cerar states that the “process will defi nitely take the Asia-Pacifi c region for the fi rst time this year, partly more time than we expected” as a result of the political and economic uncertainty ◆ MEPs in Strasbourg approved a resolution setting out unleashed by Brexit MACROECONOMIC the parliament’s red lines in the forthcoming Brexit talks by 516 votes to 133, with 50 abstentions, comfortably FINANCIAL SERVICES exceeding the two-thirds majority sought by parliament leaders to show unity behind their approach � ◆ There are two main impacted areas for CIB: activity ◆ In September 2017, Angela Merkel won a fourth term conducted in London serving clients in the EU (e.g. as German chancellor in a victory that was marred by CIB GBP 1-1.2 trillion bank assets (loans, securities and the hollowing out of support for the two main parties derivatives) and GBP 350-400bn total RWA exposure in Germany and a surge for the populist AfD party in currently booked by UK based banks to EU clients) and a clear rebuke to her open-doors immigration policy EU products traded in London � � ◆ The CIB market will become fragmented geographically BRITISH PARLIAMENT across Europe, with the level of fragmentation ◆ In August 2017, the UK government published the latest dependent on the severity of Brexit in a string of position papers aimed at fl eshing out its � ◆ � It is predicted banks may need to fi nd up toGBP 40bn ambitions for future relations with the EU. This was of additional capital to support new European units further developed in September 2017, when the UK in the aftermath of a hard Brexit government proposed that a 2 year Brexit transition period would be its preference for leaving the EU from � ◆ � Profi tability and ROE will fall with revenue decreasing March 2019 onwards and costs rising (GBP 10-15bn structural costs estimated) due to restructuring and services being ◆ Due to the loss of a majority of the Conservative Party duplicated in both new EU entities and London (e.g. in the House of Commons, Minister Theresa May’s compliance department) Conservatives have signed a confidence deal with Northern Ireland’s Democratic Unionist Party (DUP) that � ◆ � For the main UK, USA and European CIB banks, it is will allow them to form a minority government leading forecasted Frankfurt, Paris and Dublin will be the the UK over the next 5 years biggest winners from CIB relocation ◆ Prime Minister Theresa May promised to listen more � ◆ � However main UK, USA and European CIB banks are closely to businesses’ concerns about the UK leaving still developing their own activities in the UK: the EU as she set out a new Brexit-focused government • Barclays CEO sees no reason for Brexit jobs shifting program, pared-back to refl ect her weakened authority to the EU • Goldman Sachs is building a new 1.1m square foot offi ce and Deutsche Bank is completing a 25-year lease for a new building (both in London) 6 THE IMPACTS OF BREXIT 5 THE IMPACTS OF BREXIT ON THE EUROPEAN FINANCIAL SERVICES ECOSYSTEM ON THE EUROPEAN FINANCIAL SERVICES ECOSYSTEM 01. INTRODUCTION PASSPORTING RIGHTS ARE SIGNIFICANT WITHIN THE LATEST BREXIT UK & EU FINANCIAL SERVICES DISCUSSIONS & EU FINANCIAL SERVICES DISCUSSIONS WITHIN THE LATEST BREXIT UK BREXITPASSPORTING