Leading U.S. banks including JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Goldman Sachs Group Inc. have sharply increased their exposure to Germany since the U.K. voted to leave the EU and have either cut or barely increased their exposure to the U.K.
Ahead of the end of the Brexit transition period, which finishes on Dec. 31, big banks are still maneuvering, with Goldman seeking to move up to $60 billion in assets to Frankfurt before January, Financial News reported. In general, industry experts consider that the U.S. banks are well positioned to weather the fallout.
According to S&P Global Market Intelligence information based on figures from the U.S. Federal Reserve, U.S. banks have steadily reduced their exposure to the U.K. since the referendum on Brexit in June 2016. At that point, the U.K. accounted for more than 36% of U.S. banks' aggregate exposure to Europe, and that fell to just under 32% in the second quarter of this year. The data includes details of banks' direct cross-border claims, foreign office claims — local claims of the bank's offices abroad — and gross derivative claims.
The banks have also increased their exposure to Germany over the same period, from less than 16% of total European exposures to nearly 20% in the second quarter of 2020.
JPMorgan boosted its exposure by nearly 150% in the four years since the Brexit poll, to $95.8 billion — just a fraction less than its exposure to the U.K., which has fallen by more than 5% in the same period.
Bank of America increased its exposure by more than 88% to nearly $50 billion, while only marginally increasing its exposure to the U.K. Goldman Sachs sharply reduced its exposure to the U.K., by more than 20% to under $85 billion, while boosting its, albeit considerably lower, exposure to Germany by nearly 60%.
A source at a leading bank said the main U.S. lenders were well-prepared for the end of the Brexit transition period, whether there is a deal between Britain and the EU or not, and had set up offices in the bloc and moved assets there months ago.
"We are fully prepared for all eventualities, Brexit-ready, and have been for a long time now. So our position is very clear. These figures speak for themselves," the source said.
Dick Bove, an analyst at Odeon Capital, said the move to broaden out to Europe was made necessary by Brexit, adding that there are multiple financial and political reasons for doing this.
"Britain made a terrible mistake here," he said.
London not easily replaced
But he noted that there is a superstructure in London built over centuries that will not be easily or rapidly replicated.
And not all big American banks have cut their U.K. exposure. Bank of New York Mellon Corp., for instance, increased its exposure by more than 72% since the Brexit vote, while also increasing its exposure to Germany by nearly 15%.
Overall, U.S. banks' exposure to the U.K. stood at $553 billion in the second quarter of 2020, and the first two quarters of this year saw a bounce, with the total up nearly 15% year over year, according to the Federal Reserve figures. Their exposure to the U.K. was more than half as much again as banks' exposure to Germany, which was up 9.5% in the same period to $341 billion.
An analysis published on the Federal Reserve website in November 2019 showed that big U.S. banks' U.K. private sector exposures — as opposed to claims on public entities — dropped significantly to $295 billion from $466 billion between the Brexit referendum and the first quarter of last year. In contrast, their exposure to U.K. public debt over the same period rose to $133 billion from $87 billion.
This probably represented a dramatic decline in the banks' vulnerability to Brexit-related risks, according to the analysis, which suggested that public exposure presented less credit risk than private exposure to a disruptive or disorderly Brexit.
Shift to Germany
Germany's central bank, the Deutsche Bundesbank, said Nov. 2 that non-German lenders are moving an additional €397 billion of holdings to the country in light of Brexit, taking their combined balance sheet there to €675 billion at the end of the year, Bloomberg news reported. The ECB, meanwhile, has said banks have agreed to move a total of €1.3 trillion of assets to the euro area.
About 22 global financial institutions have opened post-Brexit EU bases in Germany, or shifted business there, according to an analysis by S&P Global Market Intelligence. Germany is the second most popular destination after Ireland.
John Heagerty, an analyst at Atlantic Equities, said fears of barriers between the U.K. and the EU in relation to financial services when the Brexit transition period ends meant banks had long prepared offices within the EU.
"A lot of trading in German bunds, for instance, has shifted to Frankfurt and banks have set up offices there to make sure that can continue," he said. "But I think a lot of this will plateau after the transition period is over."
Talks between the U.K. and the EU are continuing, with both sides expressing optimism that a free trade agreement can be reached. The U.K. left the EU at the beginning of this year but agreed to follow its rules during a transition period which will finish on Dec. 31.
Though the EU is assessing whether the U.K. financial regulatory system is equivalent to its own, and whether it therefore could allow U.K.-based banks to sell services across the bloc without further restriction, this assessment does not include investment banking.