Brexit Could Cost Banks EUR15 Billion

By Max Colchester Features Dow Jones Newswires

Banks in the U.K. could be on the hook for EUR15 billion in costs to relocate certain activities to Europe after Brexit, according to a study by a finance trade group--a tab that could weigh on bank profits for years and ultimately hit European Union consumers.

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The Association for Financial Markets in Europe, which commissioned the review by the Boston Consulting Group, warned Monday that the cost of creating a subsidiary in the EU would have a "material impact" on banks' bottom lines. These additional costs could be passed on to European customers, the industry group added.

British banks will likely have to shift large chunks of their operations into the EU after the U.K. leaves the trade bloc in order to continue servicing customers there. The U.K. is currently locked in negotiations with the EU to try to guarantee as much access to the EU as possible, while remaining outside the single market.

However, if a deal isn't cut and the U.K.'s financial hub is frozen out of Europe, then more than EUR1 trillion of bank assets, including loans, securities and derivatives, may need to be rebooked into European subsidiaries, according to AFME.

That could prove expensive on several counts. Not only do banks have to shuffle staff, expand offices and get regulatory approval, but they would also have to capitalize their new European entities.

Investment banks used London as a springboard to sell to clients not only across Europe but also Africa and Asia. Having capital pooled in one place made it more efficient to do business. But if the rights to sell to EU clients from London are lost, BCG estimates that EUR70 billion of equity capital would have to be pumped into these new European units. These costs amortized over three to five years could reduce the banks' return on equity, a key measure of profitability, by 0.5% to 0.8%, the report says.

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Another question is clearing. The European Union's executive arm proposed plans that could force clearinghouses that do a large of chunk of business in euros to move into the EU. BCG estimates that moving the approximately EUR83 trillion of euro-denominated interest rate contracts out of the U.K. would force European banks to hold an extra EUR30 to EUR40 billion of collateral.

Clearing is a business that depends on scale, where a mass of contracts with opposite bets can cancel each other out, reducing the amount of capital banks have to hold against the risk. Siphoning off contracts to a new location could make clearing more expensive, analysts say.

A survey showed that European businesses were largely unconcerned with the banks' plight. "Most businesses we interviewed told us that they expect their banks to address all the challenges and absorb all the costs that Brexit could create," the AFME report said. The report reiterated a point that bankers have been making to policy makers for over a year: any shift needs to be gradual to allow business to adjust.

Write to Max Colchester at max.colchester@wsj.com

(END) Dow Jones Newswires

July 02, 2017 19:15 ET (23:15 GMT)