Banks may need to find $30 billion to $50 billion of additional capital to support new European units in the aftermath of a hard Brexit, and some smaller firms may abandon their operations on the continent altogether as profitability plunges, according to Oliver Wyman Inc.
The extra money is equivalent to 15 percent to 30 per cent of the capital wholesale banks commit to the region, the management consultant said in a report Tuesday. In addition, operating costs could rise by $1 billion as functions currently handled in London are duplicated on the continent as banks scramble to establish new hubs to ensure prized access to the European Union’s markets.
A hard Brexit, where banks lose privileges access to the European Union’s single market, would “fragment European wholesale banking,” Oliver Wyman partners including Matt Austen and Lindsey Naylor said in the report. “It will also make it significantly less profitable. Banks could see two percentage points knocked off their returns on equity.”
The report is the latest warning about the ramifications of Brexit
for the region’s financial system since the UK voted to leave the EU
last June. HSBC Holdings Plc was the first bank to spell out the cost of Brexit, forecasting Monday it will have to pay as much as $300 million in relocation and legal costs as it moves 1,000 investment bankers to Paris, about a fifth of its London workforce. Chairman Douglas Flint also warned fragmentation of the industry could mean financing for countries and corporations is will be harder to find and more expensive.
With returns already depressed after the financial crisis, “these new challenges from Brexit
will raise difficult questions about the viability of some activities,” the consultants said in the report. “Some banks may even choose to withdraw capacity from the European market as a whole and redeploy to other regions, such as Asia or the US.”
Banks, concerned by the lack of progress in talks and the potential for London to be shut out of the single market, have started activating their worst-case contingency plans and are establishing hubs on the continent.
While Frankfurt and Dublin are getting the lion’s share of banking jobs relocated from London, some have predicted the ultimate beneficiary will be New York as banks strive to recapture the efficiency of having operations in a single city.
Oliver Wyman estimates lost links to the EU
could drive as many as 35,000 financial-services jobs from Britain, including up to 17,000 from wholesale banking. There’s also the question of whether London can continue to provide clearing services for the rest of Europe, Oliver Wyman said.
“HSBC’s initial estimate of for Brexit-related costs will likely be followed by many more detailed plans from peers as the need to prepare for a worst-case scenario grows,” said Bloomberg Intelligence analyst Jonathan Tyce. “Oliver Wyman’s estimate will be proven appropriate should a hard Brexit
necessitate significant duplication of functions currently located in London, as well as staff hiring and relocation.”
The pressure for banks to boost their operations on the continent will likely build as the European Central Bank’s desire for tougher banking supervision across the euro zone forces lenders to show they’re self-sufficient and have strong governance, according to the report.