May 22, 2017
Excerpt: Although London has been a center of international finance for centuries and has grown with the implementation of the European Union (EU), the exit of the United Kingdom from the EU — Brexit — threatens to diminish its role in global finance. New York, long a major financial rival of London’s, stands to benefit from what might be tide ebbing from the UK’s financial center.
Although London has been a center of international finance for centuries and has grown with the implementation of the European Union (EU), the exit of the United Kingdom from the EU— Brexit — threatens to diminish its role in global finance. New York, long a major financial rival of London’s, stands to benefit from what might be tide ebbing from the UK’s financial center. A recent New York Times article put it starkly: "It (London) risks losing ground in its obsessive rivalry with New York."
Brexit Negotiation to Affect London Financial Markets
This March, negotiations began about Britain’s exit from the EU, approved last June by British voters. The negotiations are slated to last two years.
The British financial sector benefited enormously from the UK’s membership in the EU. Under EU agreements, businesses, goods, currencies, and investments moved freely across borders. As an already existing financial hub, London became a center for pan-European investment and trading.
London expanded as a result of the EU.
U.S. investment banks and trading houses set up global operations centered in London. This was done partly because of the EU agreements made, London was a natural magnet for flows of global capital, and also, partially because of the shared language with another global financial powerhouse, the United States.
Another reason, of course, was Britain’s history of empire, which has made it a preferred location for international trade. China and many Middle Eastern countries keep assets and investments in London, as well as trading operations.
Finally, the deregulation of financial markets in the 1980s and beyond sent inflows into London at a great rate. It is estimated that London does a whopping daily $2.4 trillion in foreign currency trading, and clears 20% of all worldwide banking transactions.
Losing access to EU markets certainly does not mean that the City of London will lose all its financial might. But it is estimated that 20% to 33% of London finance is centered on Europe and its businesses. Losing that would mean losing a lot. It would also mean that countries getting that business, whether the U.S. or European countries, could become more powerful. That might result in further City of London loss down the road.
Where Will Financial Markets Go?
While British bankers are expected to lobby for a continuation of access to European markets at the same favorable financial and trading terms as those assured by the EU, EU negotiators may well reject such appeals. France’s newly elected leader, Emmanuel Macron, for one, wants a piece of the now-British financial pie for France. Macron is a former investment banker.
He’s not the only one. Germany, Ireland, and Spain are lined up to get a piece of the financial business now conducted in London. The New York Times observes that one hedge fund manager says “Everyone is preparing for the worst…You will see the emergence of Frankfurt, Paris, Dublin, Luxembourg, Madrid."
Even if Britain is ultimately successful in keeping EU market access — which is far from assured, at least partly because the EU wants to ensure its stability by making clear that exiting has a price — financial markets abhor uncertainty. U.S. financial institutions with London offices have already started making plans to move to new homes.
New York City is highly likely to benefit from any City of London loss. As the New York Times puts it, "New York is bigger by some measures, but much of its business caters to the American market. London has become the ultimate international financial marketplace."
However, given its financial might and size, it’s an obvious choice for global bankers looking to relocate. It would also be a boon for jobs and growth in the New York City area.
“To the world, London now matters more than New York," one global hedge fund advisor notes. But “in 10 years' time, New York will matter more."
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