The cost faced by UK banks of restructuring operations because of Brexit could be as high as €15bn (£13.1bn) and is likely to put a “material strain” on those institutions' earnings over the coming years, according to a new study.
Research commissioned by the Association for Financial Markets in Europe and conducted by Boston Consulting Group and Clifford Chance, argues that lenders operating with UK bank licences will most likely have to create subsidiaries within the remaining countries of the EU in order to keep operating as they have done up until now in the aftermath of the split.
The cumulative cost of this restructuring could be as high as €15bn, according to the research, with the bill for each individual bank depending on its current geographical footprint and client focus.
Amortised over three to five years, the financial hit could reduce return on equity for affected banks, an important measure of performance, by 0.5 to 0.8 percentage points, which the study describes as a “material impact”.
“Much has been said about the challenges of a hard Brexit for banks, but that only tells half the story,” said Chris Bates, a partner at Clifford Chance.
The latest research, he said, “shines a light on some of the challenges that a hard Brexit would present [for] business users of banking services, and how it would affect the real economy in both the UK and EU 27”.
“Measures to smooth the transition are critical,” he said. “The costs of the cliff edge have never been so clear.”
The study was based on interviews with dozens of chief executive officer and treasurers of companies of all sizes as well as investors and representatives from industry associations representing companies from a range of sectors and geographies.
It concludes that businesses may be underestimating the banking-related effects of a hard Brexit and it estimates that, in aggregate, approximately €1.28 trillion of bank assets may need to be rebooked, or relocated, from the UK to a country inside the EU following a hard Brexit, unless alternative arrangements can be agreed.
Securities and derivatives trading operations of banks are most at risk of disruption from a hard Brexit and businesses relying on those operations are vulnerable.
Around 55 per cent of respondents representing small or medium-sized companies said that they had made no plans so far for Brexit, compared with only 27 per cent who said that they had carried out some internal planning and around 18 per cent who had executed plans.
“The clear message from our report is that our interviewees, especially small firms with customers or suppliers cross-border, believe that a hard Brexit could impact their business and growth,” said Simon Lewis, chief executive of AFME.
Prime Minister Theresa May has stressed her commitment to a hard Brexit and scores of banks have already taken action to relocate parts of their business in order to be able to keep servicing clients.
Frankfurt, which is home to the European Central Bank, has emerged as one of the favoured options for those looking to shift jobs away from London.