The Brexit exodus that never was

Frankfurt – not as appealing as it first appeared
Doom-mongers predicted a massive flight from the City. But it simply didn’t happen.

The banks were meant to be heading to Frankfurt. The hedge funds were off to Paris. The fintech stars would decamp to Berlin, and the traders would create new bases in Brussels or Barcelona, or anywhere where they could stay within the EU’s single market.
When the UK voted to leave the EU in 2016 one of the more plausible warnings, amid some fairly wild and hysterical ones, was that our massive financial services industry would take a huge hit. After all, the City had prospered over the last three decades from turning itself into the key finance centre for the whole of Europe. If British firms were no longer allowed to market themselves across the continent, they would suddenly look a lot weaker.
The Europeans make their move
The German and French governments sensed weakness, and saw a once-in-a-lifetime opportunity to persuade a lot of highly paid jobs to move to their countries. The French sent ministers and officials to tour City boardrooms, selling the virtues of Paris; the Bank of France even swallowed a little Gallic pride and started printing its regulatory forms in English to make it easier for our firms to apply for a licence. Berlin set up a dedicated office in London to sell the German capital to financial businesses and answer questions. It was, without question, the biggest challenge to its core business the City had faced in half a century.
Yet with Brexit now just months away, it is Europe’s banks that are looking weaker than ours. Societe Generale is planning to close its $5bn proprietary trading unit. Its shares have dropped from €47 a year ago to just €27 now. Its main rival, BNP Paribas, is not looking much healthier. It is also planning to close its proprietary unit, Opera Trading Capital. Its shares are down from €68 a year ago to just €41 now.
In Germany, it is even worse. Deutsche Bank has been floundering for years now, and shows little sign that it can turn itself around. Last week, its shares went below €7 for the first time, and the price is down from €16 a year ago (and, remarkably, down from €116 before the financial crash). With a market value of a mere €16bn, it hardly counts as a major bank any more. In the last week, the German government has started dropping hints that it wants a foreign takeover of Deutsche Bank. Why? Because, shockingly, its domestic rivals are considered too weak to take it on.
Both financial centres are being hollowed out. Germany no longer has any major bank to speak of – Deutsche’s main rival Commerzbank doesn’t look much healthier – and France’s national champions are struggling to stay competitive. If any major British financial institution has decided to relocate in full to Paris or Frankfurt, then they are keeping the news to themselves.
No room for complacency
The City should not be too smug about that. Our banks are not doing fantastically well either. But they have not been hit nearly as hard as their main rivals across Europe. Overall, employment has held up remarkably well, there have been no widespread job losses, and new firms are still investing in building their operations in London. The City still faces plenty of challenges, and Brexit, especially with no deal to soothe the transition, may still cause a lot of disruption, especially if governments on the other side of the channel decide to use regulations to make it harder for British firms to operate in their market.
Yet the important point is this. As in so many industries, the EU is fairly marginal in terms of how the financial sector operates. Membership doesn’t actually make a huge difference to most businesses one way or the other.
What really counts are the skills of the workforce, the tax and regulatory regime, and the network effect of having lots of firms all clustered in the same place. And on all those counts, the City is still doing fine, and arguably growing stronger – while its main European rivals are getting weaker. Lots of things might happen as a result of Brexit. But it is now clear that a mass movement of the finance industry to Germany or France won’t be one of them.

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