Post-Brexit market fragmentation in Europe would be ‘costly,’ IMF No. 2 says

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Reuters/Yuri Gripas

  • IMF Deputy Managing Director warns against the dangers of fragmentation in markets.
  • Speaking at UBS’ annual European Conference, David Lipton said that Brexit will serve to focus “our minds on the future of the financial system architecture.”
  • Emphasised IMF’s belief in eurozone moving towards fiscal, banking, and capital markets unions.

LONDON – David Lipton, the deputy managing director of the International Monetary Fund, has warned of the potentially “costly” consequences of the fragmentation of banking and capital markets in Europe in the aftermath of Brexit.

In a speech at Swiss bank UBS’ annual European Conference, Lipton – who previously worked in both the Clinton and Obama administrations, and is now effectively Christine Lagarde’s number two – said that Brexit will serve to focus “our minds on the future of the financial system architecture,” on the continent, but made clear that fragmenting functions is in no one’s best interests.

“While it remains difficult to predict all the consequences, the prospect of Brexit surely concentrates our minds on the future of the financial system architecture,” he told the conference.

“And on the question of how to avoid fragmentation of banking and capital markets, which would prove costly.

“With the untangling of the markets and institutions whose Euro-based lifeblood flows through London, it will be essential to address the where’s and how’s of the financial integration and oversight capacity that the EU-27 will require.”

During his speech, Lipton was keen to stress the IMF’s belief that Eurozone nations should continue to look towards the creation of “banking, capital market, and fiscal unions,” although he acknowledged that it “appears to be a distant horizon.”

“So, is it just ‘pie in the sky’ to talk about banking, capital market, and fiscal unions? Today it appears to be a distant horizon – but an important one for Europe to reach,” he said.

Since the vote for Brexit, concerns have been raised about London’s future as a financial centre, particularly when it comes to the potential end of the City’s role at the heart of euro-denominated derivative clearing.

Eurozone officials have long sought to bring the clearing activities currently housed in the UK onto continental Europe, failing in a legal battle in 2015. However, the Brexit vote last summer has brought renewed impetus to these claims, with the argument that euro-based derivatives should be cleared in the European Union, not outside, as would be the case if the business remains in London post-Brexit.

“Fragmentation of such global markets by jurisdiction or currency would reduce the benefits of central clearing. EU27 firms account for only a quarter of global activity in cleared euro interest rate swaps, and about 14% of total interest rate swaps in all currencies cleared by LCH,” Bank of England Governor Mark Carney warned in a speech at London’s Mansion House in June.

Brexit will likely speed the process of the European Union’s plan for a capital markets union – a scheme designed to allow businesses easier access to cross-border funding.

“Progress on the EU action plan for capital market union is slower than desired. But Brexit likely will change that,” he said.

“As you know, about one-third of the EU’s market-based financing involves London-based banks, including US institutions.”