Banks braced for pain after Brexit bombshell

By Steve Slater

LONDON, June 24 (IFR) - Thousands of bankers in Britain arefretting about their job security as the industry faces upheavalin trading operations and regulations in the wake of Britain'sdecision to quit the European Union.

Britain employs 2.2m bankers and other financial andprofessional services staff, and banks including HSBC and JPMorgan had warned they could move thousands of jobs to Europe inthe event of a Brexit.

Bankers privately fear London could bear the brunt ofinvestment banks cutting staff given the pressure to slashcosts, especially if a slump in capital markets activitycontinues or Britain's economy slows.

While the Brexit news rocked European financial markets,cities including Dublin, Paris, Frankfurt and Amsterdam arehoping to take advantage of a power shift, or at least anerosion of London's status as Europe's dominant financial hub.

"Inevitably there will be a shift. I think London will getan element of dilution in the coming months and years and nodoubt there will be another financial centre that will benefitfrom it," said Etay Katz, financial regulatory partner at lawfirm Allen & Overy.

More than three-quarters of capital markets business acrossthe EU is conducted out of Britain.

"In the months ahead  we may need to make changes to ourEuropean legal entity structure and the location of some roles,"JP Morgan boss Jamie Dimon said in a memo to staff shortly afterthe Brexit vote was confirmed.

JP Morgan employs 16,000 staff in Britain, and Dimon hadalready warned that leaving the EU would be a "terrible deal"for the UK economy and up to 4,000 jobs could move. In additionto its European headquarters in Canary Wharf, it employsthousands more around the country, including in Bournemouth.

HSBC CEO Stuart Gulliver has said it would probably moveabout 1,000 investment bankers to Paris if Britain quit the EU.That would affect a fifth of its 5,000 investment bankers inLondon - mainly those involved in operations linked to Mifid II,the EU market rules covering a range of products fromderivatives trading to bond pricing.

Morgan Stanley could move around 1,000 of its roughly 6,000employees in Britain elsewhere in Europe, a source at the bankpreviously said.

PASSPORTING

The crucial issue for financial firms relates to"passporting", the rules that enable banks in one EU country toprovide cross-border services to clients elsewhere in the singlemarket. Those arrangements could now be scrapped outright, or bethe subject of renegotiations over several years.

Analysts at Keefe Bruyette & Woods said that such issuesleave the big US banks heavily exposed to Brexit risk. Based onJP Morgan's guidance that a quarter of its UK staff could be atrisk, they said that called into question 2,000 jobs atCitigroup and 4,200 across Goldman Sachs, Bank of AmericaMerrill Lynch and Morgan Stanley.

Analysts warned that Brexit would also make London lessattractive for overseas banks if it restricts the free movementof labour for EU workers.

WORRY

The regulatory framework governing the banking industry isanother major worry. While Britain has often been at odds withthe EU over regulations (for example, over bankers' bonuses),bankers said the framework of EU financial rules provided abroadly supportive environment for the industry, even if itcould be frustrating.

Those issues will be hammered out over the next two years,although banks are unlikely to wait until such rules are decidedbefore acting.

"Banks can't just wait for clarity on what the governmentwants to do, on the negotiations - they need to ensure they cancontinue to serve clients," said a senior banker at a US bankinvolved in contingency planning.

"The only sure way of doing that right now is moving largeparts of your business to another EU country. They can't risknegotiations turning out badly."

That may involve shifts in structure rather than people, andalso less dramatic transfers of where trades may be booked. Evenso, being outside the EU is likely to add more costs andcomplexity for banks, bankers said - not to mention potentiallyreducing the tax banks pay in the UK.

"People are not going to wait two years until they put thefire into the engine," A&O's Katz said.

"The boards of the large banks in Europe will need to takedecisions based on certain assumptions. They will not be able towait for crystal clarity on how the scene is going to play outin practice."

COMPLEX

Major banks have said contingency plans have been in placefor months, and Britain's financial regulators have been infrequent contact. In the last two weeks, the US Federal Reserveand ECB also stepped up their scrutiny of how banks werepreparing. But bankers said most of the focus had been onliquidity and it was only about two weeks ago that many thoughtthere was a realistic chance the back-up structural plans mightbe needed.

Banks sent emails to rattled staff saying there would be aperiod of "complex" and "time-consuming" issues to resolve, andadvised them to think about clients first.

The British Bankers' Association said a significant amountof contingency planning had been done and the industry was wellprepared.

The BBA, which represents 200 UK and foreign banks in thecountry, remained neutral during the debate, saying most of itsmembers did not take a formal position.

But a BBA survey in March showed 57% of banks thoughtleaving the EU would have a negative impact on Britain, comparedwith just 4% who said it would be positive.

Banks employ about 417,000 people in Britain. Adding ininsurance, fund and asset management, legal and accountingservices, management consultancy and other financial servicesswells the number of employees to 2.2m, or 7% of UK employment. (Additional reporting by Gareth Gore)