- By David FrancisDavid Francis is a senior reporter for Foreign Policy, where he covers international finance. An award-winning journalist, David has reported from all over Europe, Nigeria, Kenya, Mexico, and Afghanistan on terrorism, national security, the geopolitics of energy, global economics, and the European financial crisis. His work has been published in outlets including the Christian Science Monitor, the Financial Times Deutschland, Slate, and SportsIllustrated.com.
One of the few upshots for Europe after Britain decided to leave the European Union was the possibility that London’s financial center, know as The City, would relocate to the European mainland to avoid the regulatory nightmare to come. Paris, Amsterdam, and Frankfurt were all possibilities. However, as the aftermath of the Brexit vote unfolds, it appears as if the real beneficiary from financial services departing the U.K is on the other side of the Atlantic.
As global investment banks like Goldman Sachs and Morgan Stanley consider how to deal with Brexit, it’s becoming clear that only one city has the regulatory framework necessary to handle the complexities of international finance: New York City. As Bloomberg recently noted, London is typically an investment bank’s largest or second-largest headquarters. The same can be said of New York. Rather than move operations to Europe, it makes more financial sense to simply move to New York, because it would be cheaper to move operations than set up new ones.
British Prime Minister Theresa May has promised to invoke Article 50, the clause that would actually start unwinding the U.K.’s legal ties with the EU, by May of next year. If she does so, she risks losing a sector that accounts for 8 to 10 percent of national GDP.
Industry insiders already sense the move to the States rather than mainland Europe is coming. Speaking at a conference in Washington earlier this month, Morgan Stanley CEO James Gorman said, “The big winner from Brexit is going to be New York and the U.S. You’ll see more business moving to New York.”
He was joined by Xavier Rolet, the London Stock Exchange chief, who said recently that Wall Street was the only place with the capacity to handle clearing of the 17 major world currencies. “Very little of that [ex-London] business is likely to go to Europe,” Rolet claimed.
Part of the reason is regulatory. It’s not clear whether the EU’s massive bureaucracy would be able to cope with an influx of applications to move investment banking operations to Europe. This is one reason, among so many, that banks were anti-Brexit before the June vote. There is now uncertainty about how the European Union will work with Britain to finalize the divorce, and what that will mean for how banks will do business there and in Europe. There is no such worry in the Big Apple.
Another part is cultural. According to the Global Financial Centres Index, published by the consultancy Z/Yen Group, London ranks first of the list of places where financial workers want to live. New York ranks second, while Frankfurt comes in at 19th and Paris at 29th. In a report published Monday, Open Europe, a think tank that did not take a stance on Brexit, found that for finance types, New York, Singapore, or Hong Kong would be preferable to moving to mainland Europe.
And another reason is that London could lose access to the European common market, which allows good, services, and people to flow across Europe without restriction. Many in Europe, including Germany, want to restrict access to it post-Brexit. Without it, banks would lose easy access to a market with 500 million customers.
May doesn’t have to look further than Sir Jon Cunliffe, a deputy governor of the Bank of England, to know where such a financial capital might migrate.
When asked earlier this month whether banks will likely depart the U.K for the United States, he said, “Could it be transported to New York? Well of course, it already exists in New York.”
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