The UK’s Supreme Court is deliberating the government’s ability to invoke Article 50 without parliamentary scrutiny and there remains the question of whether or not such a move automatically triggers the country’s exit from the European single market.
But let us conduct a thought experiment about logistics, one which assumes that banks lose their passporting rights and that the UK loses access to the single market. Right now, despite the legal challenges, that seems like a fair base case. So how should bank operations based in London respond?
The difficulties of relocating whole desks of investment banks have been rehearsed many times, but these often focus on office space or other commercial infrastructure.
The reality, however, is that such moves are not decided in Excel or in the office of a commercial real estate agent. Some of the most crucial decisions will be made around the dining tables of thousands of employees. The factors that matter there are sometimes of an altogether more mundane nature.
But let us start with the capital markets nitty-gritty. The anchor of the capital markets is the debt market, and if most predictions prove correct, that is only going to get more important as bank balance sheets become an even more scarce resource.
As anyone managing a debt fund will tell you, the single most important data point in such a world is loss-given default. What is my expected recovery if the worst happens?
That makes bankruptcy codes a pretty crucial piece of the jigsaw. One banker Euromoney spoke to recently estimated that in 2009 about $3.5 trillion of debt defaulted in the US. Pretty much all of it was renegotiated in the space of 18 months. The bankruptcy courts are very efficient there, and London, in the opinion of the banker, was the only place that came close. How long to calculate the LGD on an Italian bond? Answers on a postcard please.
This will get better over time, of course, and it is no surprise that the European Commission is trying to push through a unified bankruptcy code. But even so, it is going to take a while to catch up.
Then there is the client money. It is in London. The City does not dominate Europe’s capital markets because the banks are here – it is because the money is here. When the likes of Och-Ziff or BlackRock up sticks for the Continent, then that could change. But until then...
And so we come to the domestic front, the families. We heard an instructive example of this the other day. Years ago a big bank was contemplating the effort involved in shifting a chunk of its operations from London to France. Those tasked with researching the feasibility picked one business line as a test case.
Once front office, back office and all other relevant ancillary services were taken into account, the group probably entailed about 1,000 people.
They then looked at the family situation of that group, with those who were in a relationship having an average of 1.3 children. The result was that there were roughly 1,000 mostly English-speaking children to cater for.
So they researched English schools in Paris – at the time, they found a grand total of two. And both had long waiting lists.
We do not know if that was the final clincher in the move not happening, but it is an illustration of the kind of logistical complexity that such firms will have to deal with and which often has little to do with regulatory or even commercial issues.
Of course there are many ways that such things can be finessed. Only those roles where location is absolutely crucial might be moved, but that depends on what functions can be done from outside the EU. Even if that is possible, there would be financial and efficiency costs in separating functions that used to be co-located.
What about commuting? Some bankers talk almost wistfully about the prospect of hopping on the Eurostar to work in Paris and returning to their families at the weekend to London. After all, many already do that. But again, the cost of implementing that, in housing and travel, across entire business lines is going to give pause for thought. And there will be many individuals for whom the thought of it is unacceptable. And all of this is predicated on the ability of non-EU staff even being permitted to work in the region.
Does all of this mean that such relocations are not going to happen at all? Not necessarily, but it will not be something that happens quickly and en masse in response to Brexit. Much more likely is that it will happen over a generation.
After the great rotation, the great migration – but only when the legal and domestic infrastructure has caught up, and only when the money moves.