Banks braced for pain after Brexit bombshell

By Steve Slater

LONDON, June 24 (IFR) - Thousands of bankers in Britain are fretting about their job security as the industry faces upheaval in trading operations and regulations in the wake of Britain's decision to quit the European Union.

Britain employs 2.2m bankers and other financial and professional services staff, and banks including HSBC and JP Morgan (Other OTC: MGHL - news) had warned they could move thousands of jobs to Europe in the event of a Brexit.

Bankers privately fear London could bear the brunt of investment banks cutting staff given the pressure to slash costs, especially if a slump in capital markets activity continues or Britain's economy slows.

While the Brexit news rocked European financial markets, cities including Dublin, Paris, Frankfurt and Amsterdam are hoping to take advantage of a power shift, or at least an erosion of London's status as Europe's dominant financial hub.

"Inevitably there will be a shift. I think London will get an element of dilution in the coming months and years and no doubt there will be another financial centre that will benefit from it," said Etay Katz, financial regulatory partner at law firm Allen & Overy.

More than three-quarters of capital markets business across the EU is conducted out of Britain.

"In the months ahead  we may need to make changes to our European legal entity structure and the location of some roles," JP Morgan boss Jamie Dimon said in a memo to staff shortly after the Brexit vote was confirmed.

JP Morgan employs 16,000 staff in Britain, and Dimon had already warned that leaving the EU would be a "terrible deal" for the UK economy and up to 4,000 jobs could move. In addition to its European headquarters in Canary Wharf, it employs thousands more around the country, including in Bournemouth.

HSBC CEO Stuart Gulliver has said it would probably move about 1,000 investment bankers to Paris if Britain quit the EU. That would affect a fifth of its 5,000 investment bankers in London - mainly those involved in operations linked to Mifid II, the EU market rules covering a range of products from derivatives trading to bond pricing.

Morgan Stanley (Xetra: 885836 - news) could move around 1,000 of its roughly 6,000 employees in Britain elsewhere in Europe, a source at the bank previously said.

PASSPORTING

The crucial issue for financial firms relates to "passporting", the rules that enable banks in one EU country to provide cross-border services to clients elsewhere in the single market. Those arrangements could now be scrapped outright, or be the subject of renegotiations over several years.

Analysts at Keefe Bruyette & Woods said that such issues leave the big US banks heavily exposed to Brexit risk. Based on JP Morgan's guidance that a quarter of its UK staff could be at risk, they said that called into question 2,000 jobs at Citigroup (NYSE: C - news) and 4,200 across Goldman Sachs (NYSE: GS-PB - news) , Bank of America (Swiss: BAC.SW - news) Merrill Lynch and Morgan Stanley.

Analysts warned that Brexit would also make London less attractive for overseas banks if it restricts the free movement of labour for EU workers.

WORRY

The regulatory framework governing the banking industry is another major worry. While Britain has often been at odds with the EU over regulations (for example, over bankers' bonuses), bankers said the framework of EU financial rules provided a broadly supportive environment for the industry, even if it could be frustrating.

Those issues will be hammered out over the next two years, although banks are unlikely to wait until such rules are decided before acting.

"Banks can't just wait for clarity on what the government wants to do, on the negotiations - they need to ensure they can continue to serve clients," said a senior banker at a US bank involved in contingency planning.

"The only sure way of doing that right now is moving large parts of your business to another EU country. They can't risk negotiations turning out badly."

That may involve shifts in structure rather than people, and also less dramatic transfers of where trades may be booked. Even (Taiwan OTC: 6436.TWO - news) so, being outside the EU is likely to add more costs and complexity for banks, bankers said - not to mention potentially reducing the tax banks pay in the UK.

"People are not going to wait two years until they put the fire into the engine," A&O's Katz said.

"The boards of the large banks in Europe will need to take decisions based on certain assumptions. They will not be able to wait for crystal clarity on how the scene is going to play out in practice."

COMPLEX

Major banks have said contingency plans have been in place for months, and Britain's financial regulators have been in frequent contact. In the last two weeks, the US Federal Reserve and ECB also stepped up their scrutiny of how banks were preparing. But bankers said most of the focus had been on liquidity and it was only about two weeks ago that many thought there was a realistic chance the back-up structural plans might be needed.

Banks sent emails to rattled staff saying there would be a period of "complex" and "time-consuming" issues to resolve, and advised them to think about clients first.

The British Bankers' Association said a significant amount of contingency planning had been done and the industry was well prepared.

The BBA, which represents 200 UK and foreign banks in the country, remained neutral during the debate, saying most of its members did not take a formal position.

But a BBA survey in March showed 57% of banks thought leaving the EU would have a negative impact on Britain, compared with just 4% who said it would be positive.

Banks employ about 417,000 people in Britain. Adding in insurance, fund and asset management, legal and accounting services, management consultancy and other financial services swells the number of employees to 2.2m, or 7% of UK employment. (Additional reporting by Gareth Gore)