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Frankfurt and Paris favorites to host EBA, but smaller city may win

Frankfurt may be the obvious choice to house the European Banking Authority, with Paris a close second, when the institution moves from London following the U.K.'s exit from the European Union. However, with several other EU cities putting their hand up to be the EBA's new host, the race appears far from settled.

The EBA has been based in London since its foundation in 2011 and is charged with ensuring prudential regulation and supervision across the European banking sector. Its founding regulation requires it to be headquartered within an EU member state, which suggests that it will have to move once Britain formally leaves the EU, which under the current timeline would be sometime in 2019.

"Everyone assumes that the EBA would have to leave London," said Vincenzo Scarpetta, senior policy analyst at Open Europe. "It would be awkward to have it outside of the EU."

The eurozone's two largest cities already house key EU financial institutions: The ECB, European Systemic Risk Board and European Insurance and Occupational Pensions Authority are all based in Frankfurt, while Paris is home to the European Securities and Markets Authority. An EU official told Reuters in late June that one of the two would be the EBA's post-Brexit home, although close to a dozen locales are in the mix to varying degrees.

Putting the EBA alongside the ECB, which now supervises the eurozone's largest banks on an individual basis, would be logical, said Grigory Vilkov, a professor of finance at Frankfurt School of Finance and Management. But other contenders are likely to make a case for spreading the wealth, he added in an interview.

"Being close to the ECB makes sense, but you hear a lot of voices saying we are all in the EU," he said.

Paris is also an attractive choice because of its size as a banking center and its central location, Vilkov observed. The city is home to 11 of the eurozone's 100 largest banking groups, whose combined assets total €7.4 trillion, according to research by Brussels-based think tank Bruegel. Frankfurt, by contrast, houses six top-100 groups with assets worth €2.9 trillion, followed by Madrid (€2.6 trillion held by eight groups), the Dutch Randstad of Amsterdam, Rotterdam, The Hague and Utrecht (€2.2 trillion, six groups) and Milan (€1.8 trillion, five groups).

Smaller cities

Yet although Frankfurt and Paris appear to be favorites in the race to become the new host of the EBA, other cities could argue that housing a regulator would amplify the voice of less influential EU countries within the bloc. Those to have thrown their hats in the ring include Dublin, Madrid, Milan, Vienna and Stockholm, while Luxembourg and Warsaw have also been linked with possible bids.

Stockholm has pitched its case in part around its non-eurozone status, something that would also apply to Warsaw, while Madrid argued just days after the Brexit vote in June that it is relatively underrepresented in terms of housing EU institutions. Brian Hayes, Dublin's representative in the European parliament, backed the city to host the EBA in late June, although he said in early November that Warsaw and Milan looked the likeliest candidates.

"Every medium-sized town in the EU at this point is a candidate," said Nicolas Véron, senior fellow at think tank Bruegel. "There will be a lot of horse trading, but it will not be a case of who has the most banking assets."

"It's a matter of prestige," Scarpetta said. "The race is very much open and quite a few cities have made a case."

Brexit also means that the EU stands to lose its largest non-eurozone member, perhaps raising the question of whether the EBA is somewhat redundant given the ECB's expanded supervisory role. The EBA carries out EU-wide stress tests, but earlier in 2016, ESMA conducted its first stress tests of central counterparty clearing houses, institutions that are designed to reduce risk in derivatives and equities trading.

"The EBA will still have a role to play," Scarpetta said. "We shouldn't take it for granted that all the other non-eurozone countries would make a big push to join the euro."

But an EBA move might be the right time to think about restructuring or downsizing the institution because of overlap between some EU institutions, Vilkov noted.

An EBA spokeswoman said the founding articles mean that the decision on headquarters is ultimately political and so up to the European Commission. The Commission's favored city is then put to the European Parliament and Council for approval.

That means "politicians will decide," Vilkov said, "and politicians don't always go along with the most economical decision."