The main lobby group for the City of London has urged British authorities to adopt a more “muscular” defence of the UK’s financial sector as it warned that the deepening of the eurozone’s regulatory architecture was a serious threat.
There is a “credible fear” that the new mechanisms to support the eurozone’s single supervisory mechanism, part of the region’s post-crisis “banking union”, will damage the City’s role in Europe, according to a research paper from The City UK.
The report, authored for the lobby group by consultants Oliver Wyman and due to be published on Wednesday, calculates that more than three-quarters of Europe’s £58bn of total investment banking and capital markets revenue is transacted in the UK. An estimated 55 per cent of the UK’s £45bn share is for continental European clients.
But the report warns that the empowerment of the European Central Bank as a single eurozone banking regulator will see banks from outside the UK come under pressure to repatriate much of that business to the eurozone.
The focus of concern contrasts with the City’s generally enthusiastic view on the UK’s continued membership of the EU.
Danièle Nouy, head of the ECB’s single supervisory mechanism, denied the claims of repatriation in a hearing in Brussels on Tuesday.
But bankers say ECB officials have already begun signalling that certain trading and risk management functions would be better conducted from within the eurozone. In particular the ECB wants to be in “very close personal contact with risk takers”, one banker said.
Chris Cummings, chief executive of The CityUK, said: “The status quo is a dangerous place. The UK needs to develop a more muscular approach.” He said the Treasury and Bank of England needed to “engage even more” with the EU authorities to make the case that having business located and managed within Europe’s single market, rather than within the eurozone, is what matters. “Europe needs to work better as a multicurrency union,” Mr Cummings said.
The situation sets up a potential tussle between the BoE, whose Prudential Regulation Authority supervises banks operating in the UK, and the ECB, which later this year formally takes on its bank supervision powers from national regulators across the eurozone. The UK regulator has traditionally pressed banks to locate their global business heads and risk management functions in London, if those units are predominantly active in the UK.
Most US and continental European banks have made London their European hub for the bulk of trading activity.
FT In depth
European banking union
The EU’s banking union plans seek to place eurozone banks under the overarching supervision of the ECB
Mr Cummings warned that unless there was an amicable, reciprocal agreement reached between the UK and the eurozone over the matter, the whole of Europe risked losing out. “Global business can easily be booked through New York or Singapore,” he said. “The danger is that European banks lose out to US or Asian rivals.”
According to the report, the biggest concern among the banks and investors that make up the membership of the CityUK is that regulators in all jurisdictions including the UK would become increasingly hostile to the booking of global business through domestic legal entities, especially with respect to derivatives exposure.
The report warns that “any activity which disturbs [London’s] ability to serve [its] non-domestic client base would result in a strong erosion of UK activity, and would also likely result in a strong erosion of European clients’ access to [funding]”.
At least 200,000 jobs – principally at banks and investors – are involved in such business and are therefore potentially at risk, the report says.
The ECB is also using Oliver Wyman to consult on its comprehensive assessment, an ongoing health check of the bloc’s biggest lenders.
In response to an MEP who asked whether the consultants should be used given the nature of The CityUK report, Ms Nouy said: “I’m not certain we had any other choice. When Oliver Wyman was chosen, there was no supervisor at the ECB. The knowhow of this company was vital.”