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As it happens, the easing of restrictions is at the margin, applying only to banks with small retail operations in the UK, such as Santander or Virgin Money.
While major banks such as HSBC, Barclays, Lloyds and NatWest will still be structurally different, it can be argued that the global capital adequacy and liquidity regimes that were adopted in response to the 2008 crisis have since become more cost-effective and capital-efficient. A method to achieve the same end result as ring-fencing.
UK banks were hit hard by the financial crisis. Deposit:Bloomberg
However, the cautious approach to the issue generally reflects a timid approach to financial services in an environment where Brexit has threatened London’s position as a global financial centre.
More European shares are now traded in Amsterdam than in London, and the market capitalization of France’s stock market topped that of the UK’s stock market this year.
Perhaps more threatening to London’s position is a European Union plan to require derivatives traders to use a European clearing house for some of their transactions, threatening London’s grip on a market estimated at more than $US26 trillion ($39 trillion).
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London dominates the world’s trading of interest rate swaps and currency derivatives, including euro-denominated derivatives.
After Brexit, some of that activity has shifted to New York and is now seeking to force the return of at least some euro-denominated transactions by demanding a progressive increase in volumes cleared on EU platforms. The EU wants more European regulatory oversight of euro-denominated derivatives activity.
In the post-Brexit environment, Europeans are seeking to remove the UK’s dominance of financial market and financial services activity and bring euro-denominated or based activity back to Europe.
Financial markets and services are a significant part of the UK economy, accounting for around 10 per cent of tax revenue and around 20 per cent of all services exports, and employing around 2.3 million people. It is also the most internationally important and competitive sector of the UK economy.
The British have been able to offset some of the effects of the end of “passporting” (which allowed UK-based financial services firms to operate in the EU through branches rather than subsidiaries while retaining their regional headquarters, infrastructure and majority of their people in the UK) in Asia. Expanding their relationships, with minimal job losses thus far.
However, with an estimated £1 trillion of capital moving from the UK to Europe since Brexit, and in response to EU demands that companies set up and capitalize subsidiaries in Europe, there has been significant leakage of capital and EU rather than UK regulations.
Six years after the Brexit vote the UK is still struggling to redefine its position in the global economy and financial system, even as the implications of a divorce from the EU begin to loom.
While Thatcher’s Big Bang may have played a role in exacerbating the impact of the 2008 crisis on the UK financial system and economy – the UK’s banking system was one of the hardest hit by the crisis, with huge costs to taxpayers – the most obvious opportunity was to reduce the erosion of UK financial markets that The EU is following through and reducing the generally damaging effects of Brexit to the position that UK markets are regulated differently to those in the EU.
The European Commission is a heavy-handed regulator and eurozone markets are fragmented. There is still no banking union and the state of the region’s economies varies widely. It is not an easy or efficient region in which to conduct financial services activity.
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Sensible deregulation and market-friendly policies could help London retain its position as the world’s number two financial centre.
The deep recession of its own economy, the recent near implosion of its bond market and pension fund sector, after the short-lived Truss government toyed with more radical fiscal policies and backlash against more controversial foreign capital from Russia and the Middle East. However, London’s flooding in recent decades means the Sunak government will tread carefully on fiscal reforms.
Six years after the Brexit vote the UK is still struggling to redefine its position in the global economy and financial system, even as the implications of a divorce from the EU begin to loom.
The temporary steps the UK is now taking to liberalize its banking sector will not stop the flow of financial activity to mainland Europe – it is very limited – but at least shows that the UK is starting to respond.
The Market Recap newsletter is a wrap-up of the day’s trading. We all get itEkday afternoon.
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