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CommentP&M Notebook

P&M Notebook: All Brexit, all the time

It’s been hard to concentrate on anything but Brexit for the last week. All the predictions of doom and gloom seemed overblown on Thursday night, but it’s been wall to wall chaos since Friday morning. Now the very future of financial markets in the UK is in question, with thousands of jobs, bank structures, and financial regulation all hanging in the balance.

Despite the spanking bank shares received at the market open on Friday (Barclays and RBS down more than 30%), it’s how the exit works that will define what happens to the UK’s capital markets, and London’s historic role as the financial centre of EMEA. Though bank shares bounced back a bit on Friday, Monday saw another bloody session, with Barclays and RBS suspended from trading.

Bank bosses are taking a cautious line in public. The UK remains in the EU for at least two years, pending negotiations, and EU law still applies to the financial industry. Trade associations and regulators alike have rushed to tell their members and firms that nothing has changed... yet.

But some, including JP Morgan, have already suggested Brexit means a review of the bank’s legal entities, and the likely moving of jobs away from the UK. Others chose to emphasise their continued commitments to the UK and strength of contingency planning.

Recruiters have a different perspective, however, with plans already apparently afoot to shift 37k jobs to countries that actually want to stay in Europe. Investment bank bosses, if they needed any more excuses, are likely to use Brexit as another reason to cut staff and cut pay.

It’s not at all clear where the finance industry ends up though. European and Swiss banks might bring businesses back to their HQs, but it’s harder for US firms, many of which use their London subsidiaries as the main European entrepot. Citi has a bunch of entities across Europe; Goldman mainly uses its London entities, while JP Morgan, Bank of America Merrill Lynch, and Morgan Stanley are somewhere in between.

Some of these are more likely to lean on Ireland, with its English-speaking population and extensive existing financial services industry, but no other country has the deep pool of financial services talent that the City relies on today. By the time banks make their plans, they could also have the option of a move to Scotland — First Minister Nicola Sturgeon announced a second Scottish independence referendum in a speech on Friday.

The BBC reported on Friday that Morgan Stanley was already moving 2,000 front office staff from London to Dublin, beginning with those involved in euro clearing. This spooked markets further, but the bank denied the story with vigour. Although euro clearing is unlikely to remain outside the eurozone in the long term, it’s unlikely that any bank would have pulled the plug that quickly. But any sensible firm will have contingency plans, and done a certain amount of war-gaming of different scenarios — the Beeb surely picked up part of Morgan Stanley’s strategising and ran with it.

The UK’s decision to the Union also throws several of the European Union’s financial reform projects into disarray.

Commissioner Jonathan Hill, for example, who led the capital markets union brief at the European Commission, resigned on Saturday, while the UK’s moderating influence on legislation from MiFID to banking structural reform and the financial transaction tax is expected to fall away, meaning a tough time even for those firms without domicile issues to sort out.

How much of the above has to be applied in the UK, and how much access the UK’s financial services industry will have to the EU after an exit, is totally up in the air — EU bosses want to start negotiating now, while senior Conservatives in the UK on both sides of the referendum debate argue (delusionally) that the discussions can wait.

It’s a huge long term decision, with lots to unpick, but in the short term, it’s certainly going to hit primary market earnings — the pipeline of issuance which had been waiting for the reassurance of a Remain vote will stay on the sidelines, and then summer will shut the markets.

GlobalCapital published a special edition looking at the reactions to the decision from the markets we cover, from ABS to Asia and from CEEMEA to covered bonds. The rest of the market reaction can be found on our Brexit special page.

Back on planet earth, other bits of the European project keep sputtering fitfully. The European Commission has been trying to impose some kind of cohesion on bail-in debt, with a review of the different national solutions, and a marked preference (from the ECB) for the “Italian solution”, which raises deposits up the capital structure. As GlobalCapital argued before the referendum, financial regulation shows what’s wrong with Europe — but also, why the UK should have stayed in.

Italian authorities have found some sort of silver lining in the Brexit-inspired chaos, as it gives a legitimate excuse to bail out its small banks, which it has been itching to do for years while

UniCredit, another great pan-European institution, is also on the brink of a big change — international investors are backing Corrado Passera to become the new chief executive.

Passera has form grappling with the Italian banking establishment, facing down the foundations to bring about the merger that created Intesa Sanpaolo. But he is also a little more establishment than some hoped for at first, being an Italian that has already run Italy’s second largest bank, rather than a non-Italian “voice of change”.

Other strategic changes include Rabobank’s tie-up with Kepler Cheuvreux, the third JV deal that the equity brokerage has signed, following deals with UniCredit and Crédit Agricole. The UniCredit deal which kicked it all off was controversial at the time, but has widely been judged a success which allowed the firm to cut costs at a troubled time.

The question, really, is how many other banks can sign deals with brokerages? Exclusivity deals with Kepler are probably the top of the tree — few other equity brokers have the same reach — but it doesn’t have many jurisdictions or sectors left.

Other news of note includes a new M&A head at BAML, the former co-chief executive of Greenhill International , and some long-overdue consolidation among the gulf banks, with FGB and NBAD exploring a merger.

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