European banks are privately warning they will have to shift thousands of people out of Britain if Brexit negotiations push the Bank of England to demand that they reinforce London operations with fresh capital, executives have told Reuters.
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These capital demands, which could amount to an estimated 40 billion euros ($43.73 billion), threaten to accelerate an exodus of bankers from the City of London that has been triggered by Britain's vote to leave the European Union.
Three big European banks Deustche Bank, BNP Paribas and Societe Generale currently operate some of their sizeable activities in Britain through a branch structure, which requires lower capital requirements.
British regulators have been comfortable with this situation with Britain as part of the EU, but once Britain leaves they will want these banks have enough capital to support their business and ensure that British taxpayers are not left footing the bill in a crisis.
The regulators have said European banks should be ready to set up full-blown subsidiaries in Britain and submit to Bank of England regulation if Britain and the EU cannot reach a Brexit deal. A report from Boston Consulting has estimated the switch to a full subsidiary structure could cost European banks around 40 billion euros in extra capital.
Several European banks base the bulk of their investment banking activities, such as sales and trading, in London, which Bank of England Governor Mark Carney has dubbed the "investment banker of Europe."
Deutsche Bank has 9,000 staff based in Britain, BNP Paribas has around 6,500 staff in the country, where it bases the bulk of its investment banking business and Societe Generale has some 4,000 staff in Britain.
U.S. banks have until now been at the center of speculation about the impact of Brexit. Many of them have already warned of the need to potentially move thousands of staff out of London to maintain EU access after Britain leaves the EU.
But attention has shifted to the European banks following comments in April by British regulators that European banks which operate in London using EU "passports", which give EU-wide market access, should set up separately capitalized subsidiaries in Britain if Britain and the EU cannot reach a deal on financial services.
EU passports enable banks to operate throughout the bloc but be regulated mainly by just one member country. But passporting between the rest of the EU and Britain may be lost once Britain leaves EU in two years' time.
"If Carney (BoE governor) decides to make EU banks create subsidiaries ... I will buy a one way train ticket out of London and take everyone with me," one senior executive at a European bank told Reuters, speaking anonymously due to the sensitive nature of the topic.
Germany's flagship bank Deutsche Bank has already said it is considering whether it needs to move thousands of staff from London to Frankfurt following Britain's decision to leave the European Union, if it can no longer access the single market from London.
BRANCH VERSUS SUBSIDIARY
A senior executive at another European bank said: "We would have to reassess our options here in London in that case," referring to the potential demand to set up a subsidiary.
"In the U.S., the Federal Reserve takes a lot more ownership over branch structures, it's a lot more intrusive. It's therefore natural for the PRA (Prudential Regulatory Authority) to become more intrusive. Maybe they would have to force more supervision."
Investment banking activities in particular carry a lot of risk and large balance sheets, meaning regulators will want to supervise the banks' trading models closely.
Deutsche Bank’s London operations, for example, would rank among the world’s top banks in their own right, but Britain's PRA has little say over them, a senior banking official said. This is because Deutsche Bank's main regulator is BaFin in Germany.
Carney has called for Britain and the EU to reach a deal to recognize each others' bank rules after Brexit, or risk a potentially damaging hit to financial services across Europe.
But such recognition of financial rules across borders has not been tried before on the scale envisaged by Carney, which could make negotiations tricky. The EU may also be reluctant to forgo the jurisdiction of the bloc's highest court in policing rule breaches.
Also in the mix are EU plans to force foreign banks in the bloc to convert themselves into holding companies. This would potentially require tougher capital and liquidity requirements which could bump up costs for British banks wanting to do business across Europe after Brexit. Britain is lobbying to stop this measure while it is still an EU member.
For now, EU banks are trying to keep their options as open as possible as they try to gauge the scale of their future activities in London.
"We hope it's a warning and that it will not translate into anything," a senior executive at an EU banking lobby said.
"The transformation to a subsidiary has a lot of consequences, on the liquidity side, capital. It will create more costs for banks. We are sure that London will remain an important financial market and it (requirements to set up subsidiary) will not probably lead banks to leave London. But it's not an incentive to expand business there."
(Additional reporting by Huw Jones and John O'Donnell, Editing by Jane Merriman)