What would Brexit mean for London as a financial centre?

Patrick Jenkins has a superb article wondering role of London as a financial centre post Brexit (HT: MR blog).

If there is one activity that the City of London dominates it is foreign exchange trading. Bankers are split over exactly how endangered London’s crown would be in the event of Brexit — the City had been dominant for decades before the creation of the EU. But its continued claim as the world’s principal location for trading the euro — a $2tn-a-day market — looks vulnerable.

The European Central Bank has already attempted to bar clearing houses outside the eurozone from handling the euro. Last year, it failed, thanks to a ruling at the EU’s highest court. But many in the City and in policymaking circles believe the UK only prevailed thanks to its membership of the EU. Outside the gang, it would rapidly be stripped of euro business, they believe. Other connected trading activity could follow.

Paris recently made a bold pitch to woo City of London bankers in the event of Brexit. But, HSBC aside, most banks scoff at the idea that Paris would be a natural venue. Frankfurt, home of the European Central Bank and the financial capital of Europe’s biggest economy, is also problematic. As a small city with a population of less than 700,000 people, it is seen as provincial and unpopular with staff. Dublin is English-speaking and attractive on tax grounds, but it is a relative backwater. The most likely outcome is that foreign banks with large operations in London would shift their staff to a spread of eurozone locations where they already have operations — including Frankfurt, Dublin, Paris, Warsaw and Lisbon. That would fragment the financial services industry in Europe, potentially weakening the continent’s ability to compete internationally.

In insurance, another sector whose European activity is highly concentrated in London, there have been predictions that Asian financial centres, such as Singapore and Tokyo, would steal business from the likes of Lloyd’s of London, the insurance market, if the UK capital could no longer claim special access to Europe.

Fascinating to say the least. How political events shape the destiny of financial markets and centres.

It all started with Amsterdam before shifting to London. Paris etc tried to compete but could never overcome London’s legal and commercial infrastructure. It all looked a London story till NY came in the picture in the early 20th century.  NY also replaced London as US replaced UK as the supreme economic power as well. Then the financial currents came back to London due to Eurodollar market concentrating in London in 1950s. Since then we have had two major financial centres of London and NY with regional ones like Tokyo, Singapore and HK. It is super interesting to see how Asia ended up supporting three of the major regional financial centres in the world.

The emergence of the name Eurodollar is also interesting:

Various history myths exist for the first Eurodollar creation, or booking, but most trace back to Communist governments keeping dollar deposits abroad.

In one version, the first booking traces back to Communist China, which, in 1949, managed to move almost all of its U.S. dollars to the Soviet-owned Banque Commerciale pour l’Europe du Nord in Paris before the United States froze the remaining assets during the Korean War.[1]

In another version, the first booking traces back to the Soviet Union during the Cold War period, especially after the invasion of Hungary in 1956, as the Soviet Union feared that its deposits in North American banks would be frozen as a retaliation. It decided to move some of its holdings to the Moscow Narodny Bank, a Soviet-owned bank with a British charter. The British bank would then deposit that money in the US banks. There would be no chance of confiscating that money, because it belonged to the British bank and not directly to the Soviets. On 28 February 1957, the sum of $800,000 was transferred, creating the first eurodollars. Initially dubbed “Eurbank dollars” after the bank’s telex address, they eventually became known as “eurodollars”[2] as such deposits were at first held mostly by European banks and financial institutions.[2] A major role was played by City of London banks, as the Midland Bank, now HSBC, and their offshore holding companies.

🙂

I don’t think Brexit will change things much. These things are far more entrenched than we can imagine. Unless there are policies which undermine financial sector deliberately or economy loses significance, do these things shift from one cenre to other.

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