BoE stress tests: all you need to know

The Bank of England has released the results of its latest round of its annual banking stress tests and its semi-annual financial stability report this morning. Used to measure the resilience of a bank’s balance sheet in adverse scenarios, the stress tests measured the impact of a severe slowdown in Chinese growth, a global recession […]

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Draghi: Eurozone will decline without vital productivity growth

It’s productivity, stupid. European Central Bank president Mario Draghi has become the latest major policymaker to warn of the long-term economic damage posed by chronically low productivity growth, as he urged eurozone governments to take action to lift growth and stoke innovation. Speaking in Madrid on Wednesday, Mr Draghi noted that productivity rises in the […]

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Asia markets tentative ahead of Opec meeting

Wednesday 2.30am GMT Overview Markets across Asia were treading cautiously on Wednesday, following mild overnight gains for Wall Street, a weakening of the US dollar and as investors turned their attention to a meeting between Opec members later today. What to watch Oil prices are in focus ahead of Wednesday’s Opec meeting in Vienna. The […]

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

Royal Bank of Scotland has emerged as the biggest failure in the UK’s annual stress tests, forcing the state-controlled lender to present regulators with a new plan to bolster its capital position by at least £2bn. Barclays and Standard Chartered also failed to meet some of their minimum hurdles in the toughest stress scenario ever […]

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Barclays: life in the old dog yet

Barclays, a former basket case of British banking, is beginning to look inspiringly mediocre. The bank has failed Bank of England stress tests less resoundingly than Royal Bank of Scotland. Investors believe its assets are worth only 10 per cent less than their book value, judging from the share price. Although Barclays’s legal team have […]

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Categorized | Banks, Financial

City should stop wasting time on ‘Project Fear’

Posted on November 27, 2016

Before last June’s European referendum, David Cameron’s government was frequently accused of pursuing “Project Fear” as ministers reeled off downbeat statistics designed to show the harsh consequences that would follow if the UK to left the EU.

Now, as politicians and businesses prepare to recast the country’s relationship with Europe, it can sometimes seem as if the City of London has picked up its Cassandra-like mantle as the deliverer of ill omens and softly spoken threats.

Prominent City voices have taken to issuing bleak assessments about London’s future as a financial centre if the UK leaves the single market. There have been warnings of mass job losses, such as the eye-popping 232,000 across the UK estimated by professional services group EY at the behest of London Stock Exchange should the clearing and settlement of euro-denominated securities be lost to London.

The Square Mile’s biggest lobby group, TheCityUK, has warned that “hard Brexit” could cost between 40-50 per cent of EU related revenues, as well as billions in tax.

Alongside these warnings have come calls from some in the City for Theresa May’s government to avert the damage by cutting a deal that preserves as much access as possible, not least by retaining the “passporting” system that allows banks to operate across borders. It has been made clear by international banks that if they cannot secure something close to the status quo, then large relocations of personnel and businesses may be on the cards.

This may all make sense within the Square Mile, and, indeed, reflect a strongly held desire to stick with existing arrangements. But in the real world it isn’t a hopeful negotiating position. After all, it requires either Britain to stay in the single market as a passive rule-taker — something that Mrs May is most unlikely to agree to — or for the EU to give privileged access to its markets effectively for nothing. Even setting aside the desire not to reward Britain for Brexit, it is hard to see member states agreeing when by doing nothing they can hope to see financial jobs move across the Channel unbidden.

The resulting impasse leaves the banks contemplating the exercise of their threat — an outcome whose costs and complexities are likely to embroil them in organisational navel-gazing for years. No wonder they have taken to demanding so-called “transitional arrangements” — effectively more time to steel the “quivering finger” over the relocation button. It might be better to deploy this energy in strategies that have the merit of accepting political reality and being acted upon.

Rather than finding ways to shift wholesale financial business on to the continent, the banks should think of ways to encourage customers to continue bringing their business to the UK instead.

One promising idea is the twin track approach proposed by Barney Reynolds, head of financial services at the lawyers Shearman Sterling. He proposes seeking access to the single market through the “equivalence regimes” that already exist in many EU financial services laws and permit different jurisdictions to deal with one another without undue friction.

Unlike passporting, these do not require single market membership, or even identical rules and regulations, so allowing the UK to recover regulatory sovereignty. The deals could potentially be cut quickly. Britain would reciprocate by allowing EU institutions to operate on similar terms through branches in the UK.

True, this would in part be a political decision and the EU might balk at rewarding Brexit. In which case, Mr Reynolds argues the UK should go it alone as a free standing financial centre, using its new-found freedom from EU rules to design a more attractive and predictable regulatory framework to draw liquidity and business.

Neither of these options is without uncertainty. Banks worry that equivalence deals could be cancelled at short notice, and that EU might respond to the go-it-alone approach by imposing protectionist restrictions on its own financial businesses. UK politicians will be wary of regulatory changes that smack of a return to the pre-crisis “light touch” world. But what they share is they are at least potentially deliverable, which is more than can be said for what the banks are presently proposing.

For all the City’s blood-curdling predictions, there is no evidence that politicians will ever be persuaded into structuring a deal that involves “no change” for financial services.

Rather than indulging Project Fear, they should pursue plans that go with the political grain and might actually work.