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CommentP&M Notebook

P&M Notebook: Brexit McBrexitface

So it’s one week after the chaotic morning of Brexit, and remarkably little has been clarified. Markets panicked then calmed down, the only grown-up left in Britain (a Canadian ex-Goldman banker) promised more cheap money, but the future of the City isn’t any clearer.

Lawyers always equivocate, but phone one up and ask about the legal implications of Brexit, and you get two words: “It depends”. How Britain leaves, when it leaves, if it leaves, what it asks for, the relative negotiating positions of each side, whether London has a separate seat in negotiations…everything is still wide open.

 So we’ve been trying to help the market work through its issues. One big one is whether front and middle office staff need to follow legal entities and trading counterparts to the Continent. Can a two traders sitting in London enter into contracts on behalf of a two French-regulated entities, and then clears the trade in Luxembourg? What about offering lending, or corporate finance advice? The answer, as ever, is “it depends”, but it’s a crucial question, and a very live one for the bank management teams which are scenario planning.

The sub-question is, “yes, but is it worth it?” – no city has a God-given right to host a financial centre, and it might just be that all the workarounds needed to carry on “business as usual” out of London add up to too much of a burden. London has a great many advantages though, and it’s a mistake to think of its just as a financial centre for the European Union.

The simplest workaround, after all, is likely to be full-scale redomiciling of operations into the remains of the EU, with a big branch in London.

UK authorities have been quite sniffy about hosting branches, with moves afoot to apply the same senior managers’ regime regulations to branches as to UK subs and UK-domiciled banks. But if Brexit negotiations go badly, one suspects they’ll offer anything to keep London running as a financial centre. They will not, however, be dropping much regulation – those hoping for a light touch offshore approach to hosting financial institutions will be sorely disappointed.

GlobalCapital also did some digging on what sort of redomiciling might be necessary — which of the big US firms, used to using London as their main European hub, are best prepped for Brexit? Citi, it seems, comes top, with a merger earlier this year between Citibank International, and Citibank Europe, an Irish entity. Citigroup Global Markets, however, remains firmly London-based.

JP Morgan and BAML sit somewhere in between – JP Morgan has substantial German and Irish subsidiaries, while BAML retains the dual structure of the merger between Bank of America and Merrill Lynch. It did, however, secure a slew of new banking branch licences in Europe for the former BoA entity last year — perhaps the plan is to split the EU from the rest of the world?

Goldman and Morgan Stanley may have the toughest task (nonsense rumours about Dublin and office space in Frankfurt aside). They run nearly all of their international operations out of chunky London subsidiaries, with few entities elsewhere, and nearly every other country operated as a branch of the UK-regulated “international” sub.

That sort of thing helps for TLAC and resolution planning – but doesn’t give them any easy back-up options if they need to leave London. None of the big US firms have an S.A. sub – suggesting that, despite French President Hollande’s overtures, Ireland is the backup option of choice. At least they won’t have to change the plugs on their Bloombergs.

Barclays and HSBC have publicly said they’ll stay in London – but nobody expected them to leave, and that doesn’t preclude setting up a big European subsidiary.

One thing that the City is unlikely to retain is euro clearing, even if the ECB does not successfully revive its euro clearing for the eurozone policy from 2011. In fact, it looks like euro clearing is already starting to drift, before exit negotiations have even started. Finance is mostly risk-averse, and why go down to the wire?

LCH.Clearnet, which dominates interest rate clearing though its SwapClear platform, already has a French subsidiary. Most of its licences and regulatory approvals sit with the UK-based LCH.Clearnet Limited, but it shouldn’t be too hard to transfer them.

The fallout from Brexit, and the brewing fight over clearing, is also likely to hit the Deutsche Borse / LSE merger. Even if the tie-up goes ahead on the planned terms, the German regulator has objected to the idea that the merged group be headquartered in London. Like euro clearing, it’s not vital to the City’s existence – but one of oldest parts of London’s financial system being managed from Frankfurt is a powerful symbol of the damage wrought by Brexit.

To GlobalCapital’s considerable surprise, UniCredit has succeeded in its mission to appoint a new CEO in double quick time, announcing on Thursday that Jean-Pierre Mustier would make a triumphant return to the bank as group chief, with the unanimous support of the board. The stock staged a short rally on the news, though it remains 30% down on its pre-Brexit vote level, and more than 60% down on December 2015. Any optimism shareholders might have felt about a safe pair of hands taking over was surely tempered by the knowledge that Mustier will be looking to do a chunky rights issue at the first sign of positive sentiment.

Mustier was, of course, the chief executive of UniCredit CIB until his departure in 2014. His tenure was generally reckoned a success, with a focus on profitability, sticking to strengths and simplification, as well as bold, controversial moves like the joint venture with Kepler Capital Markets. UniCredit’s remaining problems are more to do with its stack of non-performing loans to Italian retail and SMEs – not the hangover of investment banking expansion. So no wonder he’s seen as a strong candidate, close enough to know the business but still able to take the tough decisions.

UBS is also seeing some change at the top, with Andrea Orcel thinning the ranks of the leadership team in the investment bank. Equities and FRC (FX, rates and credit, or what everyone else calls FICC) both move from co-head structures to single heads, and have a mandate to work more closely together. That means Roger Naylor, co-head of equities, and Chris Murphy, co-head of FRC are out, leaving Rob Karofsky and George Athanasopoulos in charge of the respective divisions. Before too long, GlobalCapital expects a formal merger of the two businesses – which will then need co-heads again.

In investment banking (ahem, corporate client solutions at UBS), Matt Hanning, who ran Asia Pacific, is leaving the firm, while William Vereker and Ros Stephenson, heads of EMEA and Americas respectively, become global co-heads.

Other news of note includes Standard Chartered getting back in the hiring business, poaching Patrick Dupont-Liot from Nomura for corporate DCM. GC also hears rumblings out of HSBC – the giant reorg at the beginning of June left DCM mostly untouched, but new banking co-head Matthew Westerman is said to be going over the business with a fine-toothed comb.

Finally, it’s worth having a look at the results of the Federal Reserve’s stress tests, the CCAR exercise. US banks are doubtless more focused on it than their European counterparts, but seem to have absolutely dominated it, receiving authorisation for big buybacks and dividend increases across the board. Some of these are more impressive in percentage terms that in reality (Bank of America’s 50% boost to its paltry 5c dividend, for example) but nonetheless, the contrast with some of their European peers is stark. Deutsche and Santander, for example, stuffed their US subs with capital, but have now failed CCAR twice in a row (Deutsche) and three times in a row (Santander), on qualitative grounds, like poor controls and faulty assumptions. 

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