Frankfurt has attracted the majority of the large international banks looking for a post-Brexit hub in continental Europe and is expected to see a further influx of banking jobs over the next few years, Hubertus Väth, managing director of lobby group Frankfurt Main Finance, said in an interview.
Britain may have left the European Union but "this is not the end of the story" as the future of financial services is still to be determined and there is more scope for banks to transfer operations from London to the continent in the longer run, according to Väth, whose organization represents the interests of Frankfurt as a European financial center.
Fish for banks
The U.K. left the European Union on Jan. 31 and entered an 11-month transition period by 2020-end, during which the two sides will have to hammer out an agreement on their future trade relations. The negotiations are shaping up to be tough with financial services being in the center of an expected row over fishing rights.
The EU has linked any agreement on future access of U.K. financial services to continental Europe to a mutual agreement on fishing rights whereby both sides can access each other's waters and quota shares. The EU has also said it is prepared to break up the trade talks if no deal on fishing rights is reached.
Fishing is a sensitive issue and if it is used by the U.K. as a bargaining chip, the talks could turn into "some sort of horse trading" with a subpar outcome for both sides, Väth said. This is an additional risk for financial services given the tight deadline to reach a deal, he said.
It is "very unlikely" the transition period will be extended because it is clear the U.K. government needs clarity and wants to move on from Brexit, Väth said. Therefore, a deal should be expected at the end of 2020 but with some trade-offs, he said. The new EU trade commissioner, Phil Hogan, also recently said he expects trade-offs on fishery and financial services access towards the end of the U.K.-EU talks. The two sides want to have a deal on fishing rights by July 1 and complete a review of financial services equivalence by the end of June.
Väth does not see a no-deal scenario. Prime Minister Boris Johnson's Conservative Party has a stable majority in the British Parliament, there is a new European Commission and stable governments in the two leading EU economies — Germany and France. This is fertile ground for reaching political compromises, according to Väth.
EU financial ambitions
A new push within the EU for the completion of the banking union and capital markets union projects suggests the financial sector is unlikely to be sidelined in the talks. These projects are intended to harmonize banking rules and supervision across the bloc, deepen and further integrate EU capital markets.
"As a matter of principle, the European Commission understands that they need to create a known capital and financial services market independently of London," Väth said. "That will be a major political project."
Germany, which will hold the EU presidency in the second half of 2020, plans to bring both projects forward during that time, Väth said. The presidency of the Council of the European Union, the upper house of the EU legislature, is rotated among the EU member states every six months.
The banking union and capital markets union projects are essential for the proper functioning and stability of EU financial services after London is no longer part of the bloc's system because it is already clear different services will be split between several financial centers rather than concentrated in one. Frankfurt, Paris, Dublin, Amsterdam and Luxembourg will all be responsible for different parts of the market and ties between them will have to be strengthened, Väth said.
Frankfurt wins banking
Frankfurt will not become "the sun of the planetary system of European financial services", but it is a clear winner in banking, Väth said. "We have a total of almost 60 applications from more than 50 financial institutions that applied to either extend or set up new entities in Frankfurt," he said. Of these, 31 have selected Frankfurt as the EU-wide headquarters for the operations, including the majority of large international banks, he added.
U.S. groups Goldman Sachs Group Inc. , JPMorgan Chase & Co., Morgan Stanley, Citigroup Inc., Japan's Mizuho Financial Group Inc. , Daiwa Securities Group Inc., Sumitomo Mitsui Financial Group Inc. and Nomura Holdings Inc., Switzerland's two largest banks UBS Group AG and Credit Suisse Group AG as well as U.K.'s third- and sixth-largest banks by total assets, Lloyds Banking Group PLC and Standard Chartered PLC, respectively, have decided to steer their EU banking business from Frankfurt, according to research of S&P Global Market Intelligence. Many other leading international banks have offices in the city despite having chosen a different EU hub.
Between 2016 when the U.K. decided to leave the EU and the end of 2019, Frankfurt added 1,500 banking jobs, according to Frankfurt Main Finance's estimates. Frankfurt should see further 2,000 jobs added in 2020 and more are expected in the coming years, Väth said.
Over the long run, the Brexit fallout should result in the addition of some 8,000 jobs to the Frankfurt financial services ecosystem which currently employs 65,000 people, German state-owned bank Landesbank Hessen-Thüringen Girozentrale said in a study published Jan. 29.
By the end of 2020, the Brexit-induced growth in banking jobs should reach around 4,000, half of which will come from international institutions, Helaba said.