London clearout Frankfurt expecting rapid influx of Brexit bankers

There are more and more indications that London-based banks are planning to move their trading operations to Germany’s financial hub. And they’re likely to arrive sooner rather than later.
C'mon boys, apparently Frankfurt's that way.

Frankfurt, forever the bridesmaid when it comes to top spot as Europe’s financial hub. Despite the heady days of the 1990s when Germany’s top banks were swallowing up British merchant banks and the European Central Bank was being set up in the city, one rival has always stood in its way: London.

But Brexit has now given Germany’s banking center a renewed sense of optimism. Firm commitments have already been made by the likes of Morgan Stanley and Nomura to shift staff from London to Frankfurt in light of Britain’s vote to leave the European Union, and many others are expected to follow suit once details of the divorce have been hammered out. Trading departments are a particular target, as these have traditionally been based in London, the major European center for foreign exchange and bond trading.

What everyone wants to know, however, is how quickly will the moves begin? And will Frankfurt, rather than its main rivals Paris and Dublin, be the main beneficiary?

The omens for a quick banking exit from London are increasingly positive. According to the ECB, 50 London-based banks have approached euro-zone regulators about relocating key services within the block, and 20 financial services providers have already applied for a euro-zone banking license.

Deutsche Bank and US banks are considering shifting parts of their trading business to Frankfurt.

Meanwhile, the Bank of England has estimated that 10,000 jobs could leave London’s financial district on day one of Brexit, March 29, 2019, while the management consultancy Oliver Wyman predicts that 75,000 could go in the event of a hard Brexit, in which no divorce deal is agreed. Some €1.8 trillion ($2.1 trillion) of assets could move with them, the think tank Bruegal estimates.

But with a two-year transition period expected after the Brexit date to finalize a trade deal and agree on issues such as London’s ability to provide euro-zone financial services after it leaves the EU, Frankfurt may have to sit tight a while longer.

“At the moment, we’re expecting traders to come here in the course of the second wave of Brexit migration at the latest,” said a senior manager of one foreign bank in the city, who, like most bankers involved in the sensitive relocation discussions, wants to remain anonymous. “We hope that it won’t be necessary straight after the completion of Brexit negotiations between London and Brussels in 2019 if both sides agree to transition arrangements and deadlines allow us to leave the trading departments in London fairly intact for the time being.”

But a top executive at a rival bank expects the relocation to happen more quickly. As soon as the watchdogs give their blessing, the bank will start moving staff to Frankfurt, he said. “We’re not going to wait until the end of the transition period.”

Deutsche Bank and US banks including Goldman Sachs, Citi and Morgan Stanley are considering shifting parts of their trading business to Frankfurt, financial sources told Handelsblatt. The extent of the move will depend on the outcome of talks with regulators.

Initially, banks may opt to keep some trading operations in London, but that will likely prove cumbersome and costly over time because regulators will require them to maintain staff and capital in both financial centers.

“Risks that are created here must also be managed here,” said Raimund Röseler, top banking supervisor at Germany’s Federal Financial Supervisory Authority (Bafin). What that means in practice will depend on the banks’ business operations. “We’ll be pragmatic initially. We’re aware that banks won’t be able to relocate sufficient staff here from London for all areas in time for the start,” said Mr. Röseler.

But bankers agree that as soon as the transition periods end, the trickle will turn into an exodus. London has more liquid markets because more investors are based there. But Brexit will prompt more of them to move to continental Europe. “That’s a good starting point to set up a trading hub here,” said one top banker at a U.S. bank.

The trend could accelerate if Frankfurt manages to clinch the lucrative euro clearing business, a €1 trillion-a-day ($1.20 trillion) market that is currently dominated by London and consists of trading in euro-denominated financial products such as derivatives. “If that happens, there will be no question where we’ll move a whole range of trading functions,” said one executive at a foreign bank.

Katharina Slodczyk is a Handelsblatt finance reporter based in Frankfurt. To contact the author: [email protected]