In a private meeting of German banks and businesses, Dr Andreas Dombret, executive board member of the German central bank, warned the UK that it is likely to lose its role as “the gateway to Europe” for vital financial services.
While Mr Dombret made it clear that he was not seeking confrontation, he also argued that there was “intense uncertainty” about the progress of Brexit negotiations and the significant hurdles to overcome. He expressed concern that a post-Brexit UK may start cutting taxes and relax financial regulations in order to encourage banks and businesses to invest in the UK.
Mr Dombret said, “Brexit fits into a certain trend we are seeing towards renationalisation. I strongly believe that this negatively affects the well-being of us all. We should, therefore, invest all our efforts in containing these trends. This holds for the private sector as well as for supervisors and policymakers in the EU and the UK.”
Some voices are calling for deregulation after Brexit,” he added.
“One such example is the ‘financial centre strategy’ that is being discussed as a fall-back option for the City of London. Parts of this recipe are low corporate taxes and loose financial regulation. We should not forget that strictly supervised and well-capitalised financial systems are the most successful ones in the long run. The EU will not engage in a regulatory race to the bottom.”
London is the financial services capital of the European Union and handles over one-third of all wholesale banking between large companies, governments and pension funds.
Approximately 80% of all EU foreign exchange transactions are carried out in the UK, with billions of pounds being traded every day to insure companies, for example, against the risks of interest rate changes, currency fluctuations and inflation.
There are approximately one million people employed in the financial sector in the UK. Any major changes to the present free-trading agreements between Britain and the EU could have a serious impact on employment and the value of the financial services.
The UK government is seeking some kind of post-Brexit agreement that would enable the UK and the EU to maintain a level of cross-border transactions to continue with few regulatory hurdles in what could be termed as an “equivalence regime”.
However, Mr Dombret said that equivalence had “major drawbacks” and was not an “ideal substitute”.
Concluding his speech, he said, “Let me say that I expect London to remain an important financial centre. Nevertheless, I also expect many UK-based market participants to move at least some business units to the EU in order to hedge against all possible outcomes of the negotiations.”
“I see strong arguments for having the bulk of the clearing business inside the euro area,” Mr Dombret said.
“I am very sceptical about whether equivalence decisions offer a sound footing for banks’ long-term location decisions. Equivalence decisions are reversible, so banks would be forced to adjust to a new environment in the event that supervisory frameworks are no longer deemed equivalent.”
Whatever arrangements are eventually reached, Mr Dombret said that a “transition period” would ease the pressure of change and reduce the “earnings risk”.