Frankfurt and Germany's other financial hubs are better placed than EU rivals to capture any post-Brexit migration of business and jobs from the City of London, new data compiled by the Financial Times suggests.
The information, which aggregates the existing subsidiaries and branches operated by banks and insurers across the euro zone’s top eight financial hubs, is a proxy for the groups’ most likely choice of venue for expansion.
"Across financial services, most organisations [that are] assessing options start where they already have a presence," says Bill Michael, a partner at KPMG.
This view is echoed by a legal specialist at one big bank, who says: “The first consideration for any institution is what they already have in the various EU locations. Then you look at your client base, then at employment law.”
According to the FT data, 70 per cent of the EU’s top 10 banks and 60 per cent of the top 10 insurers have head offices or regulated subsidiaries in Frankfurt, Munich or another German city. In banking, the closest rival is Luxembourg, with a 50 per cent share, followed by Dublin and Paris (both on 40 per cent). In insurance, the spread of business across EU financial centres is more even. Dublin is out in front: eight of the top 10 have head offices or regulated subsidiaries in the city. Germany and Madrid are home to six each, while Milan and Luxembourg boast five apiece.
Many large multinational banks and insurers at present use London as a base from which to access the rest of the EU. Groups have spent the summer scrambling to ensure they have the right infrastructure to keep their businesses operating smoothly in the event of a “hard” Brexit. From March 2019, unless softening transition arrangements are negotiated, they may be barred from “passporting” their operations across the EU single market from a regulated entity in London.
Starting points
Banks are coming at the problem from radically different starting points. Deutsche Bank already has locally licensed subsidiaries in four of the eight big continental financial centres, as well as branches in the other four. Country branches allow banks to operate there under passporting rules from a subsidiary located elsewhere in the EU.
Morgan Stanley and Goldman Sachs, on the other hand, have licensed banking subsidiaries in just two of the eight cities, though they have bank branches and broker dealer branches in several others.
Banks present in a country are likely to be at the top of the queue when it comes to asking the regulator for permission to expand their activities.
Cities that already host multinational banks and insurers have proved they can supervise large complex entities, and are likely to have the expertise and infrastructure to expand. That favours a location such as Frankfurt – all 10 large international banks have some presence in the city.
The overall size of the existing financial centre also plays a role. Germany has nearly 2,500 banks and branches in total, though that number includes hundreds of state-owned Landesbanks and savings banks. Luxembourg scores highly for representation of the top banks, but has fewer than 200 fully licensed banks and bank branches in total.
Many banks are also drawn to Frankfurt because of a perception that the German regulator "is in good standing with the Frankfurt-headquartered European Central Bank and is more likely to have the know-how to get the application through", says one consultant whose company works with most large global banks.
Employment lawyers caution, however, that Germany’s biggest stumbling block is its labour law. Without changes or exemptions for high-paid financiers, the country is unlikely to attract large slugs of business.
Insurance
Among insurers, Frankfurt or Munich are also natural choices, because of existing subsidiaries, regulatory expertise and the availability of specialist staff.
But there is no shortage of other options. The FT data show that France, like Germany, has more than 500 registered insurers. Many counted in those totals are small, unsophisticated mutuals. But the countries are also home to their own big multinationals – Axa and Scor in France, and Allianz and Munich Re in Germany.
But when asked about possible alternatives to the UK, insurers more frequently mention Dublin. Zurich Insurance runs its EU property and casualty business from Dublin.
George Swan, a partner at Freshfields, the law firm, believes the Irish capital may also be flexible on the location of roles. "Although the 'mind and management' of the company will have to be in Dublin," he says, "it will be interesting to see how much [they] will allow other processes to be outsourced back to London."
– Copyright The Financial Times Limited 2016
