The Strategist

Frankfurt is winning the Brexit banking race

07/04/2017 - 12:57

Apparently, Frankfurt-am-Main has won the Brexit race. For decades, the German city sought to gain world-wide importance, and tried to compete with London for the title of financial center of Europe after the euro was introduced. However, Frankfurt-on-Main did not manage the capital of Great Britain, Bloomberg writes.

As Britain is leaving the European Union and banks are seeking to maintain access to a single market, this city with a population of about 700,000 people is getting another chance to "get into the big leagues." In recent weeks, several banks have said they are inclined to move the center of their European operations to "Mainhattan," as local people call a business area in Frankfurt. Sumitomo Mitsui Financial Group Inc., Standard Chartered Plc, Daiwa Securities Group Inc. and Nomura Holdings Inc. have already chosen this city. Morgan Stanley, Citigroup Inc., and Goldman Sachs Group Inc. are considering a similar option.

"Frankfurt-am-Main has become a major candidate for the transfer of banking operations from London," says Hubertus Vath, director of the Frankfurt Main Finance Association, "Frankfurt and the entire region are receiving distinct benefits (from Brexit)."

Nevertheless, even supporters of Frankfurt as a new center of banking operations are admitting that the real impact will be restrained. The after-Brexit transfer will probably not be massive: each bank will re-locate several hundred workers at most. Managing Director at the Association of Foreign Banks in Germany Oliver Wagner notes that these processes will occur not simultaneously, but gradually. This is hardly enough to change the index of the world financial centers. Frankfurt occupies the 23rd place in this ranking, after Shenzhen and being only slightly ahead of Seoul. London leads the list, and the second place is occupied by New York.

"Frankfurt does not have enough scope in a lot of areas, such as reinsurance, insurance, asset management, trade finance, legal services etc.," said Michael Mainelli of Z / Yen Group, an analytical center that calculates the index. "Basically, Frankfurt-am-Main has always been just a financial center for two major investment banks, none of which is particularly healthy."

Deutsche Bank AG, which suffered losses and a row of legal disputes, is headquartered in the city. Commerzbank AG, another major bank in Frankfurt, is cutting down thousands of jobs and is turning to corporate and retail clients.

The city’s main advantage is that it houses themain office of the European Central Bank. In June, the Governing Council of the ECB recommended adding Article 22 to the Eurosystem’s statute. This amendment would transfer the powers to regulate the clearing of trade transactions in euro. This power game could herald re-location of jobs from the London clearing industry to the European Union, and, possibly, Frankfurt.

This week, Sumitomo Mitsui Financial, Japan's second-largest lender at market value, announced a decision to set up securities and banking divisions in Frankfurt to keep business in the EU after the UK leaves the EU. This happened less than a week after the largest brokerage company in Japan, Nomura, announced that it had filed a request for a license to work with a new unit in Frankfurt.

American bank Goldman Sachs is plannig to double the number of employees in Frankfurt. Goldman Sachs CEO Lloyd Blankfein publicly stated that the bank has postponed plans to transfer additional key operations to the UK. Morgan Stanley is also about to choose Frankfurt for its expanded center in the EU, sources familiar with the situation said on June 22.

Many bankers admit that the prospect of moving to a city that is about ten times smaller than London somehow looks like sending to a deserted outpost. According to Bloomberg’s source in management of one of the banks, many jobs that will be transferred to Frankfurt are likely to be full with new employees, and will not necessarily attract people from London.


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