In his first trip to the US, Boris Johnson, Britain’s new Foreign Minister and a leader in the Brexit campaign, claimed that UK financial firms will keep EU ‘passporting’, which allows banks to sell their services to clients across the EU. He claimed that the “City” (as London Financial district is called) offers the deepest pools of liquidity, talent and skill for the capital formation needs of businesses across Europe (Julian Ambrose, in Daily Telegraph, July 23rd).
The “talent and skill” is crucial. As someone who was brought up in the UK, I cannot shake the suspicion that, for every financial whizz-kid in the City, there are ten upper-class twits (good example of an upper-class twit – John Cleese in the Monty Python sketch “The Ministry of Silly Walks”).
Is Johnson’s optimism justified? Several reasons suggest that it is not:
- Financial scandals in the City
- Failure of a number of British financial institutions in the Great Recession of 2008.
- The EU’s need to “punish” Britain for Brexit
- Analogues from the past (Whatever happened to the “Gnomes of Zurich”?)
The biggest financial scandal to hit the city recently was the “LIBOR scandal”. LIBOR stands for “London Interbank Offered Rate”. Essentially, this is the interest rate that banks would charge each other for a short time, hence it is the lowest rate available. It was the primary benchmark for short-term interest rates around the world. This was set daily as an average based on what interest banks’ paid or expected to pay. Multiple criminal settlements by Barclay’s Bank revealed that there was fraud and collusion by member banks (information from Wikipedia).Even a moment’s reflection on this system suggests it was wide open to manipulation. It depended on the member banks being objective; in practice the “old boy’s club” could do what it wanted.
The list of British banks/ financial institutions which failed in the 2008 collapse includes:
- Northern Rock
- Lloyd’s TSB
- Royal Bank of Scotland
- HBOS
- Alliance and Leicester
- Derbyshire Building Society
- Cheshire Building Society
- Bradford and Bingley
- Barnsley Building Society
- Scarborough Building Society
- Dumferline Building Society
- Cheshire Building Society
Banks in other countries collapsed as well, but British banks were hit especially hard. Several ended up in government hands. Failure on such a massive scale suggests that the expertise in the City is pretty worthless.
Recent comments coming from EU leaders have been sunny – understanding Britain’s need to take things slowly, expecting fruitful and cordial discussions etc. However, this is just political posturing. The reality is that Brexit must be made painful for Britain. If Britain is allowed to pick the relationship it has with the EU, what is to prevent other EU states leaving the EU and keep what they like, reject what they don’t like? The EU cannot allow this. Previous statements imply a much tougher approach, e.g. Jean-Claude Juncker’s statement that on Brexit, Britain would be treated as a “deserter”. Brexiteers have been keen to point out that Britain is a net importer from the EU, so it needs Britain more than Britain needs the EU. This is true in some areas. For example, the EU will want to export Mercedes, BMW’s, Fiats, Renaults to the UK, while importing jaguars, Land Rovers and Nissans made in Britain. However, when it comes to financial services, the EU is a net importer and increasing the role of Frankfurt and Paris in finance is in the EU’s interest. Removing the right to “passport” financial services serves both to punish Britain and boost the EU.
Many predictions have been made about the success or failure of Britain outside the EU. With such uncertainty and lack of unanimity, it is worthwhile to look to the past to see if there is a suitable analogue. The “Gnomes of Zurich” provide just such an analogue.
Many Britons blamed Swiss bankers for possessing significant holdings of sterling. The phrase was made famous during the 1964 Sterling Crisis in Britain when Harold Wilson, Prime Minister at the time and a politician in the British Labor Party, referred to Swiss bankers and financial speculators as “Gnomes of Zurich” (Richard C. Wilson, Investopedia). In recent decades, Zürich bankers have lost the foothold they had in the global economy due to the rise of London, New York, Dubai and Hong Kong as leading financial capitals (Wikipedia). “Swiss banks do not have passporting rights and so operate their European investment banking businesses through subsidiaries in London. This may help to explain why Swiss exports of financial services have performed worse than British exports over the last 15 years, despite the outperformance of the Swiss financial sector as a whole “Investment Europe, 18 Feb, 2016)”. The decline of Zurich as a financial centre is probably due to Switzerland not having passporting rights to the EU. It is likely that the City will follow the decline of Zurich.
No matter what agreement is finally made, it may not make much difference. The Financial Times reported (26 June, 2016) that some banks were already moving some of their operations to Frankfurt, Paris and Dublin.