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LONDON – US investment bank Citi is preparing for a “hard Brexit” and is in the final stages of deciding where to move operations to maintain links to clients, EMEA corporate and investment banking chief, Manolo Falco, said.
“We’re preparing for a hard Brexit, which means we will set up a second broker dealer in the EU,” Falco said in an interview before the June 8 general election.
“The major cities in Europe have a lot to offer,” he said. “We’re doing our homework, like everyone else. We’re looking at the regulatory side, the size of the country, political risk, we’re looking at real estate, infrastructure, education system and so on.”
In January, Jim Cowles, Citi’s European operations chief, said the bank would make a decision on the location of its EU-based broker-dealer in the first half of the year.
A broker-dealer accesses capital markets on behalf of clients, and there are concerns that, in hard Brexit in which the UK crashes out of the EU single market, London will lose its financial passport to access markets in the EU.
“On Brexit, we’re still in the decision making phase,” Falco said. “There will not be a disruption to the service we provide to our clients.”
“My business is a lot less affected than others. M&A is a non-regulated activity so it’s more about the capital markets side of the business, and some cash management. I also already have 60% of my bankers outside of London,” said Falco.
With the clock ticking down to March 2019, banks are not waiting to see how the UK’s talks with the European Union pan out. The UK has been thrown into political chaos after this month’s general election returned a hung parliament, weakening rather than strengthening Prime Minister Theresa May’s credibility in the negotiations.
Banks and European regulators need at least a year, if not longer, to set up fully functioning branches and subsidiaries in Europe to maintain activities. This means that if talks stumble, or the likelihood of the UK leaving the EU without a transition deal increases, banks may be forced to move quickly on plans to boost EU offices.
Last month, Sabine Lautenschlager, vice-chair of the Frankfurt-based SSM, a unit of the European Central Bank, said applications for European licences will be scrutinised closely.
“It is the ECB that grants licences in the euro area. And to be clear: we will only grant licences to well-capitalised and well-managed banks,” she said.
“We will not accept empty shell companies. Any new entity must have adequate local risk management, sufficient local staff and operational independence.”
The direction of talks, and the SSM’s regulatory stance prompted Deutsche Bank’s chief regulatory officer last month to warn that the bank may be forced to move up to 4,000 staff from the UK to Europe as a result of Brexit.
Cowles has said “Germany is one of our favourites” as a location for the bank’s European base in an interview with German newspaper Frankfurter Allgemeine Zeitung earlier this year.
Citigroup has 370 people in Frankfurt and could shift 200 more to Germany’s financial centre from London to maintain access to the European single market after the UK leaves the European Union, he said.