Banking Industry Eyeing Transition Price Tag of $50b as Brexit Looms

The banking industry could require upwards of $50b in additional costs to install new units and HQs within the bloc.

Lenders operating in the UK have already begun rolling out their plans ahead of Brexit, laying out relocation strategies to within the EU itself. However, the flow of personnel and operations out of London could be painful for both sides, with banks potentially looking to soldier a heavy burden of additional capital.

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According to a recent report from Oliver Wyman Inc., Banks may require upwards of $30 billion to $50 billion in capital to pay for a move into the bloc – this includes the installment of new European headquarters, units, regulatory costs and licensing bids, office space, and hiring new workers.

The collective task and costs associated with this effort is massive, and varies from lender to lender. For example, many banks may see small-scale moves numbering roughly 100 workers into a newly shrined unit in the bloc, whereas Deutsche Bank is coming home en-masse to Frankfurt, which will justify a much larger transition.

Profit losses?

Of note, the extra capital garnered could reflect a sizable portion of funds that banks are presently reserving for Europe itself, i.e. between 15 and 30 percent of total funds. This could also see a stark rise in operating costs as well to the tune of $1 billion or more, given the need to replicate existing functions in London. The juxtaposition of operations could also come with increased costs as well in the short-term.

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This tone was echoed not just from the banking industry but by the entirety of the financial services sector. Brexit uncertainty has certainly loomed at the forefront of the financial services industry, with a high number of variables weighing on venues, banks, and asset managers.

Indeed, a recent survey from the Confederation of British Industry (CBI) captured this trend, showing that nearly 40 percent of UK businesses believe that Brexit has hurt their investment plans. The CBI survey encompassed 357 companies in the UK – of these, nearly 42 percent felt that Brexit was affecting their investment plans.

To date, the most popular destinations for banks relocating their EU headquarters out of London has been Frankfurt and to a lesser extent Dublin. These two cities have long remained as the frontrunners, with the former seeing far more activity and prospective banks applying for licenses.

The end result could hit banks’ returns on equity, perhaps seeing the loss of profits in the near-term, per a Bloomberg report. This is certainly unwelcome news for many European lenders looking to garner momentum in H2 and beyond, many of which themselves already in restructuring plans after years of painful cuts.

One of the other lingering influences over the entire process has been the ambiguity over the Brexit talks, which have rapidly led to a softening tone in recent months as the UK’s Theresa May loses sway. Passporting rights were universally seen as on the proverbial chopping block, though even these are not potentially in the cards. Any clarity from the UK would make banks’ jobs easier to navigate ahead of an eventual Brexit, regardless of its severity.

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