The great British banking exit

U.K. citizens are starting to see some serious real-world effects from their notorious vote earlier this year to have the U.K. leave the European Union. As the pound sterling currency continues to fall against the dollar and the euro, the head of the British Bankers’ Association has laid out in stark detail just how uneasy the banks are feeling about the situation and how it could end up costing the U.K. economy tens of billions in taxes each year.

The banks are “quivering”

Banks and bankers aren’t known to be afraid of much, but according to the head of the BBA, its members are now “quivering” at the implications of the Brexit and have begun to move operations out of the U.K.

“Most international banks now have project teams working out what operations they need to move to ensure they can continue serving customers, the date by which this must happen, and how best to do it,” Anthony Browne, head of the BAA, said in a column in the Observer newspaper on Sunday.

Browne added: “As an industry, we have asked for some form of that passporting to continue once we leave, enabling customers on both sides of the Channel to continue getting the services,” Browne said.

Leaving the EU means that companies based in the U.K. may no longer have those rights automatically.

What’s the problem?

In short, Brexit.

Banks and financial services are considering departing the U.K. because an eventual Brexit will mean they no longer have automatic access to the single market and the many benefits it affords them. Along with lower tariffs, banks worry that if they remain based in the U.K., they may not be able to legally sell their products across Europe.

Specifically, because the U.K. has decided to leave the EU, it will no longer have automatic access to the European Economic Area, which consists of the 28 EU member states plus Iceland, Liechtenstein, and Norway. The EU is a market of 500 million people with a combined economy of $19 trillion.

A company authorized to sell products and services in one country in the EEA can legally do so in all other countries too without having headquarters in those offices. This is known as “passporting.”

But if Norway can do it, why not the U.K.?

To be included in the passporting mechanism, countries need to abide by other conditions. These include contributing to the EU budget and allowing free movement of goods, services and, crucially, workers — something U.K. Prime Minister Theresa May has said categorically the country is not willing to do.

“For banks, Brexit does not simply mean additional tariffs being imposed on trade — as is likely to be the case with other sectors,” Browne said. “It is about whether banks have the legal right to provide services.”

Who is leaving?

Executives at Morgan Stanley, Citigroup, Deutsche Bank and JPMorgan Chase are among those who have said that being cut off from the single market will lead to an exit from the U.K. in order to better serve their EU clients.

Goldman Sachs is also said to be considering a move, potentially relocating the 2,000 people who work for the company in London. Insurance giant Lloyd’s of London is also considering a move, and it is currently investigating whether it needs to set up locations in other European countries as a result of Brexit.

Are banks a big deal for the U.K. economy?

In short, yes.

According to Liberal Democrat foreign affairs spokesperson Tom Brake, a “hard Brexit” would cost the country £65bn every year in lost taxes from the financial services industry. Research by consulting firm Oliver Wyman quoted by Bloomberg last week suggests that a loss of access to the single market will cost financial services companies in the U.K. almost $50 billion in lost revenue and put 70,000 jobs at risk.

“The Conservative government must explain how it will make up this funding shortfall if the U.K. leaves the single market,” Brake told the BBC.

According to research published last year by think tank Z/Yen, London is the world’s leading financial services hub. However, that position is now being undermined by the impending Brexit.

Where will the banks go?

The banks already have plenty of suitors, evidently. “It is understandable that other European cities want to attract jobs from London,” Browne wrote in his op-ed. “Delegations from Frankfurt, Paris, Dublin, and Madrid are all coming to the U.K. to pitch to bankers.”

The problem with all those locations, though, is that they simply cannot match London’s expertise in this area. Bloomberg reports that “privately, bank executives are concerned about regulators in other locales — they may struggle to cope with an influx of financial-services companies looking to set up shop.”

One likely result is that no one location will replace London, with companies choosing a number of different countries and cities.