With some mainstream media saying that Britain’s banks will leave the UK, is it time to panic?

Of course, it is never a good time for panic.  But if you are watching, often EU funded media such as the BBC or Sky News you might be forgiven for thinking we are facing a crisis.   We are, but it has absolutely nothing to do with Brexit. In fact, Brexit might be part of the solution, if handled correctly

I think that these days, most people realise that mainstream media is often biased, and at times, can even be telling you things that are simply not true at all.  You are often invited to believe that things you have seen with your own eyes, simply never happened, or are not currently happening.  

Research shows that mainstream media and particularly government and EU funded outlets like the UK’s BBC are at their lowest point in history in terms of credibility and trust.  Indeed, even given the darkly anti democratic leadership of Macron and the EU, research shows that Mainstream Media is even less trusted by the public, than politicians. 

In conversations with friends and colleagues among the banking community, including the lead economists of a bank or two, it seems to me that there is a disconnect between what people are saying to the public and that discussed in private. 

Firstly, what many people do not realise is that many banks in the UK operate under a very different legal system to that which the public believes applies to them. They enjoy unparalled advantaged and priviledges because of this. Advantages, which in some cases, do not exist anywhere else in the world. 

The square mile is NOT governed under the same law as London or anywhere else in the UK.  It is set apart.   It has its own mayor and a different jurisdictional approach.  Indeed, the title and role of the Mayor of the City of London’ is vastly different to that of the rest of London and what you be familiar with.  The present Mayor of London, Sadiq Khan, is a very visible and woebegone character in recent years, being viewed as the worst mayor the city has had in living memory by far by a large proportion of the population.

However, the City of London Corporation is headed by the Mayor of the City of London Corporation.  This role is vastly different to that of Sadiq Khan.   The role of the Mayor of the City of London, is more akin to that of a CEO, Mayor and Ambassador, some would even go far further as an Ambassador represents the Queen and the Nation.  The mayor of the City of London, represents his own jurisdiction and this means representing the corporate interests of those present in it.  

The City of London has incredible autonomy.  Nothing demonstrates this more than some of the traditions and rules governing access rights of even the British Monarch.   The Queen of England cannot enter the City of London without being met and accompanied by a City Alderman.  In council meetings, should she attend, the Queen must not be seated any higher than the council.   This gives some indication of the power represented in the room and the sheer age of this establishment.  It is the oldest continuous municipality in the world.

The Court of Common Council (100 Common Councilmen and 25 Aldermen) governs the City of London Corporation, which in turn acts as local authority for the geographic Square Mile around St Paul’s. The range of services the City provides its workers, residents and visitors and the national and international work the City is called upon to perform is unique. Common Council accomplishes this work through a committee structure. 

This very unusual situation, which has developed over centuries, ensure that the Banks operating out of Britain are able to operate under a jurisdiction with significant autonomy.  Indeed, this was and is its purpose and this unique situation is key to Britain’s broader position in world finance.  Banks around the world take advantage of this in order to efficiently transact business.  There are some aspects of EU legislation which benefit this organisation but in general it operates under its own specifc structure under a blanket of secrecy.  How it will be affected by Brexit and to what extent is somewhat debateable as an entity that sets its own laws.

So the situation is quite different from what many people might believe concerning the jurisdictions and laws involved and the extent to which EU laws apply, if they apply at all.   This incredible autonomy is often criticised as undesirable and activists do campaign for change. 

However, in terms of the present national interest this could well be a great asset. That isnt to say that the City of London could remain entirely unaffected.  The entire global financial system is increasingly interdependant.  However, it is precisely that, a GLOBAL system which does not depend on the EU’s permission to operate.

But what of the broader picture?

The banks based in London do of course have some concerns and considerations as do those in the City of London itself.  Within the EU, banks benefit from the ability to do business in Europe without additional licenses and permissions.   Losing this would mean that companies need to apply for a banking or other appropriate license in another member jurisdiction.  Some already have this and some dont.  Being designed to accomodate banking between member states without the need for permission or licenses in each state.  It is quite possible that this benefit could be lost when the UK leaves the EU.  There were some significant improvements made in how the EU works with non European banks in the 2016 reforms to the Market and Financial Instruments Directive (known as MFID) which provide for the ability to accomodate third party relationships more easily but it is relatively untested.  However it is not quite so simple as it seems (what European legislation is?) and this regulation is relatively untested,  yet Britain has had regulatory parity with Europe for 40 years so it would be somewhat unrealistic in the extreme to suggest that the problem is beyond the wit of the banks to solve.   In reality, banks are likely to end up needing to apply for a banking license in at least one EU jurisdiction.  

Fortunately, as seems likely, Britain may simply write MFIDII into British law, meaning that there would still be regulatory parity across Europe, making it far easier for banks to operate.   At this point, what is badly lacking is  a plan based upon the reality of what was voted for (ie. A clean and complete exit) and clarity to enable any business to plan effectively.   We are 2 years behind in planning and preperation thanks to the UK government’s gross incompetence in handling the mandate upon which they were elected.  

Ensuring that Britain does maintain regulatory equivalence is essential however, as we have been operating under the same system for 40 years it is quite inconcievable that anyone could think that there is not regulatory equivalence in every sense.  In reality, it may be possible to re enstate passporting under non membership conditions but no one should be banking on it. Pun intended.  Maintaining parity in terms of regulatory framework benefits both sides of the equation.  Many European banks and business leaders have pointed out that losing access to UK capital markets could be catastrophic for European business.

Interestingly, so far only 20 banks have applied for a new European licence, presumably this is because many already have them, whereas 120 banks have applied for a UK banking license.  

Chief economist of Deutche Bank, Mr David Folkerts Landau, stated recently that he does not believe that any of Europe’s financial centres would reap any benefit from a no deal Brexit.  So one would think that there is no incentive to cripple european economies by failing to put some more comprehensive form of solution into place, other than EU ideological intransience.  However, let us not forget that this is the same ideological intransience that has so damaged the EU before and continues to increase anti EU sentiment continent wide.  Recently we learned that as far as the EU is concerned, negotiations are over.  Large in response to the bizarre wish list that UK Prime Minister, Theresa May brought back from Europe and tried to sell as reasonable deal. Despite high level politicians across Europe stating that they thought it was ridiculous and that no state would sign up to such an arrangement.   But even outside of a negotiated solution, the means exist to enable banks to continue to trade effectively exist.   It may not be quite as streamlined as under current passporting rules but Banks will not be left applying for 27 new banking licenses.  Indeed, many banks already have what they need.  A banking license in any of the other member countries. The fear of many media pundits (genuine or otherwise) was that areas such as Frankfurt may benefit from a no deal Brexit as businesses sort to relocate due to this seem quite ridiculous to anyone that has spent time in the financial services industry, however, they might not put it that way in public.   Unlike our Prime Minister, our banks know how to negotiate. 

Indeed,  Deutche Banks, David Folkerts-Landau went so far as to say:  The idea that somehow you can move a large chunk of [the financial services industry] onto the continent seems foolhardy – or, if you do, you’re going to destroy it. 

None of the cities of Europe has the centuries long history of building skills, capacity and regulatory structure to cater for such a scenario.  The idea that you could make say, ‘Frankfurt’ European financial capital is laughable.  The situation is rendered logistically impossible due to legal incompatibility, German legislative complexity, sheer scale, and the simple fact that there are not nearly enough people skilled in the appropriate areas to cater for such a move.  It is something which would take decades at best and would be further hampered by increasingly ideologically led decision making from Brussels’ and the inherent instabilities in the European Monetary Union.  Why would banks of all organisations, rush to increase their presence in an economic area in which political risk is increasing and in which many of the largest global corporations have spent a decade reducing their exposure in every possible way. 

The reality is that this is not a serious suggestion outside of propagandising and were it so it would be very likely to mark the end of the Euro zone, at the very least ,and quite likely the collapse of the European Union as we know it thereafter.  Frankfurt is the most often touted alternative destination and in many ways the city which does to some extent compete with London.  But such a move would be a logistical feat of unparalleled proportions.   German banks were vastly overcapitalised and among the weakest in the western world following the last quake to hit the worlds banking system in 2007.   Hampered by the European Central Banks ineffective and slow attempt to reinject stability and confidence,  some of the largest German banks have taken almost an entire decade to escape a crisis situation.

Banks will lobby, and they will restructure to do what they feel is best for them.  Banks were quick to offshore aspects of their business right up to the point that customers started to notice and make different choices.   It is telling that the company most respected and highest rated companies in the UK, in terms of customer service as voted for by its own customers, is a bank.  First Direct Bank. An autonomous division of HSBC which has benefitted greatly by winning customers on the basis of providing its customer service IN the UK.  Winning the coveted best company for company service award despite public distrust and dislike for banking in general.  Hopefully, other banks will learn from this. Having experienced local support and a customer, rather than cost oriented approach, those customers are never going back to the companies they left.  However, some banks will inevitably keep searching for lowest cost despite the risk to customer service.   Sadly, despite the need for integrity, many a CEO with an eye to their bonus package criteria will still go for a quick fix at the risk of long term growth and sustainability.  So we should not be surprised if we see a company occassionally moving a call centre or an accounts department  Some will leave and some will return. In reality, this will not be affected by Brexit, it will only change when customers stop using companies who outsource them.

The UK happens to be in a perfect geographic position to trade with both, New York and Hong Kong.  That hour difference between GMT and CET makes a huge difference in trading terms and this is not something that any amount of infrastructure, IT or outsourcing can easily solve.

The situation is eminently solvable and indeed, a clear plan should have been executed and in its end stage at this point.  Unfortunately, the UK government have failed dramatically, when it comes to providing any clear direction for Brexit.  Wasting time with unrealistic, fake negotiation on deals which are not any sort of deal at all but an acceptance of a belated EU wish list, the UK government have squandered vital time when it comes to the creation of infrastructure and the mitigation of such genuine risks that may exist.

Indeed, having witnessed my colleagues spending almost 2 years talking to UK investment agencies, only to find that the UK may stay in the customs union, I have some sympathy for any business that simply want clarity and a vision against which to make reliable decisions.  In 2016, it seemed clear that the vote was held and Britain would leave the EU, so businesses began to plan accordingly.  Theresa May at least set out some ‘red lines’ and then later, made a clear statement at mansion house concerning the approach which would be taken.  However, the government have then demonstrated that they have literally no idea what they are doing.  Failing to plan for the most likely outcome, making policy choices that nobody wanted and being utterly discredited when ever red line and every commitment was broken.

Here we are in January of 2019 less than 3 months away from exiting the EU with almost no credible leadership from a government totally lacking in vision.  Instead of planning and preparing for the opportunities afforded by Brexit and mitigating real risks the government has been tying itself in knots.  Indeed, half of the government seem to have spent more time trying to undermine democracy entirely than they have done in terms of the job in hand.

Mathew Westerman, HSBC Head of Global bank echoed the sentiments of almost everyone when he said that ‘having a period to deal with whatever is ultimately decided is going to be critical’.  Surely  this is a sentiment every business in the land with any sort of European exposure must surely echo. We had 2 years to plan.  To build infrastructure and to understand what genuine risks there are to the financial system and which are simply banks not wishing to take on the burden of regulatory compliance in another separate jurisdiction or simply lobbying for advantageous legislation and put solutions in place.

Mark Blyth is a British Political scientist specialising in political economy at the University of Dundee. and occasionally Guardian Newspaper commentator he was forced to admit that Britain should leave the EU rather than become part of the monetary union as it stands today.  The European Union is built on a fundamentally unsustainable globalist ideology. Because it will fundamentally increase instability and polarization of societies.   Banks are fully aware of this.  Political risk only continues to grow within the EU as more and more ideological regulations are passed without the democratic consent of citizens, often to their detriment.  Mark Blyth wrote one of ‘THE’ books on the subject of Austerity having been close to EU decision makers and policy throughout much of the Eurozone crisis and particularly the leaders of Greece during that nations debt crisis.  ‘The history of a dangerous idea’  (Oxford Press 2013).  Which hi lights how the European system must lead to social injustice and instability and demonstrates the real cause of situations such as that has overcome Greece in recent years. 

Highly recommend his books as well as the many talks found on YouTube etc.   As Mark himself put it, just before the UK Brexit referendum; ‘My side is very pro European, but I am against the Euro so if I still lived in the United Kingdom, I would have an interesting choice. If you look at Larry Elliot  (Economics Editor) in the Guardian, he has said that he should he should vote for an exit from the EU on purely social justice grounds‘.  In terms of why, Mr Blyth put it thus:

‘Because this is the existential crisis that blows up the euro. Now why would you want to blow up the Euro because that would be terrible etc etc. Because the long run effect of the Euro is going to be to drive western European wages down to eastern European levels and global competition for export share with the Chinese’.

This is a socialist professor and well respected economist feeling bound to vote leave for very different reasons to what one reads in the mainstream media.  But he is far from the only leading economist that greatly fears for the economic future of the Eurozone.  Many of them are at the heart of the banking industry and these people are extraordinarily unlikely to want to add vast additional risk to their business for very opaque gain, if any.

Another eminent economist, ‘Joseph Stiglitz’ wrote award winning books on the inherent instability within the European Union and the poor decision making that has led to a systemic weakness.  Winner of the Nobel Memorial Prize in Economic Sciences and the ‘John Bates Clark Medal’ he has been many things around the world.  Perhaps best known for his role as chief economist at the World Bank.  He was also Chairman of the UN committee on Reform of the International Monetary and Financial System.  He has been advisor in some form to many world leaders.  He wrote one of the most accessible and clearly written books on the European system and the unsustainable ideologically led decision making that led to it, ‘The Euro’ (highly recommended). 

Hedge fund operators such as the infamous George Soros know how to benefit from destructive and predatory economics often making huge fortunes over night.  However, banks, in general are the targets of these practices, not the perpatrators and so do not.  Therefore, increasing exposure to a systemic and fundamentally flawed region with increasing political risk seems to be an unlikely decision to make.  Particularly if that means losing particular privileges and advantages in the process which are unique to Britain.

It is looking increasingly likely that the world will see another major failure in the international banking system in 2019 as a result of the failure to address global issues in the past.   Against this background of global issues within capital markets the only bank that would want to increase that is a bank that didn’t want to be here in time to come.  What learning and provisions did European banks make to increase their resilience to such a threat?  I suspect almost anyone can guess.  Hint, regulators in Europe did largely nothing and the European Central Bank has been widely criticised for being utterly ineffective throughout the crisis.  The European Monetary Union still functions under the same rules which exacerbate global problems when they arrive in Europe.  This is simply because EU politicians want more power to control nations and see monetary control as essential leverage.  This failure to regulate and unwillingness to reduce their stranglehold on national economies is even now playing out in Italy.  If a crisis comes, it may be the existential threat which those with the hope evinced by Mark Blyth and those like him have been hoping for. 

It seems that a bank wanting to move the majority of their operations into the Euro zone is probably not one to keep your money in.

UPDATE:   As the EU now begins its slide into recession with Italy officially there already and German on a knife edge with 0% growth last quarter.  This seems incredibly prophetic.  Indeed, with the most under capitalised financial system in Europe and trapped inside the constraints of monetary union and just a small nudge will send Germany into full blown recession.  With all the timing of ‘that law’ (colloquial), here comes Brexit… 

Perhaps it is time a bit less fanaticism in Europe and time to take a long hard look at what a mess the current generation of fanatical European federalists have made of things at home.  

supremeleader.eu would love to hear from you if you are in the financial services industry.  Particularly if you manage Hedge Fund or specialise in ‘short selling’ underperforming shares or currency.