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Will London Remain the European Financial Capital?

London is currently the financial center of Europe. However, with recent Brexit negotiations, this is now under threat. Amidst all this, the Bank of England is aiming to retain its status as one of Europe’s most powerful banks.

In December, the Bank of England said it will give commercial banks and big European investment an easy way to stay in London once Britain quits the European Union. It will offer them the same terms that big U.S. and Swiss banks get. It warned, however, that this setup will require deep cooperation between EU and U.K. regulators.

Brexit will affect the financial industry. The financial sectors is a big source of exports to Europe, representing 90% of Britain’s trade surplus in services with the Eurozone. It also provides more than a 10th of all tax revenue in the U.K.

Currently, London’s role in Europe relies on passporting. This allows any bank in one EU country to sell products and services in any other. That is what lets banks from all over the world use London as a base to serve European investors and companies.

The passporting regime will end with Brexit, and European legislators say it is unlikely to ever be replaced by a free-trade deal for services. The Bank of England’s decision can be seen as a gesture of goodwill. It does nothing to actually ensure that Europe will give banks in London future access to the EU.

If London preserves its financial hub status after Brexit is entirely implemented, this could stir up trouble for later. The U.S. and EU are already moving in a different direction by forcing foreign banks to set up onshore holding companies that require their own funding, capital, regulation.

This leaves Britain potentially at a disadvantage when banks fail. Allowing all big banks to operate as branches means that when financial trouble strikes, the U.K. will have no choice but to rely on the cooperation and forgiveness of overseas regulators.

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