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Financial system 16 Jan 2017

Which city will replace London as Europe's new financial center?

When the U.K. voted to leave the EU vote on June 24th, a series of unknowns started to emerge that have Europe in suspense to this day. Among the many questions to be resolved, the referendum has called into question London’s status as the financial center of Europe.

The U.K. leaving the EU could mean the loss of the financial passport that allows companies to do business in other European countries, without having to acquire licenses in each one. One of the dangers facing London is that these passports could be withdrawn, forcing banks to relocate to continental Europe to continue their business. A total of 336,421 financial passports have been issued in the U.K., as some companies have several.

The top 15 investment firms have more than 70,000 employees in London

Many financial institutions have spoken out regarding brexit, as it is inevitably on the agenda of all foreign banks with operations in the U.K. In fact, between 70% and 90% of all employees of U.S. investment bank in Europe work in London. The top 15 investment firms have more than 70,000 employees in London, but that number jumps to 300,000 if all the funds, brokers and consulting firms are included.

People walking - London City

Top U.S. and British banks warned that they may relocate a significant portion of their investment banking staff to other cities or even move their operations center outside of London if brexit becomes a reality. Other European banks have been less clear about the options they are considering.

Japanese banks were the latest to express their opinion, calling for greater clarity about the U.K.’s future relationship with the EU. Without this clarity, they are considering leaving London and transferring their business to other locations within six months. The four biggest Japanese banks in London employ 5,000 people.

Experts say that the location of the new financial center will greatly depend on where the U.S. banks go. If they decide to move to a certain city as a group, this will set a trend that other banks are likely to follow.

European institutions based in London, like the European Banking Authority (EBA) will also have to move, as the EBA President indicated prior to the brexit vote. They are currently considering which European city to choose for their relocation. The European Council will have the final call.

The search for a new financial center

Command of English as the universal language of business is essential for a city to become a financial center. It also needs to capable of attracting, retaining and developing the best talent and have a favorable regulatory environment – especially in terms of employment. Excellent transportation and communications infrastructure are also fundamental, as are the availability of office space, luxury homes, good schools and restaurants and a wide range of cultural activities.

Several cities meet this description and are candidates to become the new European financial center. Dublin was initially one of the favorites as a temporary move that would serve to maintain the community passport during the transition stage, which began in June after the referendum. However, as the months go by, cities like Madrid, Paris and Frankfurt seem to be stronger candidates.

European financial cities

European financial cities: Madrid, Frankfurt and Paris.

Madrid – one of the favorites

The capital of Spain is one of the favorites to replace London as Europe’s financial center, according to a JP Morgan study from last July.

One of its main attractions is the percentage of vacant offices – 16% compared to Paris’ 7% and Frankfurt’s 12%, according the real estate consulting firm CBRE. Along these lines, there has been a lot of talk about the Distrito Castellana Norte project, which would allocate 32% of its space to offices. In fact, vacant offices in Madrid could increase another 4.8% in 2017 due to the rise of online work and new ways of working. Madrid also stands out for its rental prices, and its wide range of leisure and entertainment activities.

Plaza de Cibeles, Madrid

Plaza Cibeles, Madrid.

The support of the central and regional government did not take long. Last October, the Community of Madrid launched its campaign #ThinkMadrid. This initiative seeks to lure British companies to the region with low taxes and streamlined paperwork – a so-called “administrative highway” to make it easier for companies and investors that decide to leave the U.K. after Brexit.

The Spanish central government has also gotten directly involved, creating a committee comprised of the Bank of Spain and the National Securities Market Commission (CNMV) to promote an attractive environment for the financial companies that leave London after Brexit, as confirmed by Minister of Economy Luis de Guindos on December 20th.

In December, the CNMV also announced several key steps to make Madrid the most attractive option for financial firms looking to relocate. These measures include creating a welcome program for investment and management companies based in the U.K.; a direct authorization procedure for these companies; the use of internal models to calculate minimum capital requirements; and flexibility to outsource activites, among others.

Chamartin Towers, Madrid.

Cuatro Torres Business Area.

Other cities under consideration

Paris was probably one of the first capitals with the greatest potential to openly offer itself as an option. The City Council of Paris launched a campaign directed at bankers featuring the slogan “Welcome to Europe”. The French capital has its infrastructure in its favor but its high taxes work against it.

Germany also has significant potential, especially Frankfurt because of its strategic location and because it hosts the European Central Bank. According to the Financial Times, 80% of European banks and 60% of insurance companies have offices or subsidiaries in Frankfurt, Munich or other German cities. In the banking sector, the closest rival is Luxembourg with 50%, followed by Dublin and Paris with 40% each. The distribution is more balanced for insurance companies: 8 out of 10 of the top insurance companies have offices in Dublin, followed by Germany and Spain, with 6 each, and Milan and Luxembourg, with 5 each.

Another place experts say meets all the requirements is Amsterdam. It is a city that should not be overlooked as it has historically has attracted foreign companies with financial incentives.

Without a doubt, it will be a difficult choice that will be influenced by the incentives these cities offer and by the negotiations between the U.K. and EU – an arduous process that could last up to two years.

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