Brexit: Impact on City of London

This article was first published by me on Talkmarkets:

Brexit has received royal assent, and is now the law of the land in the UK. How will this law impact the center of finance in the British Empire, the Square Mile, otherwise known as the City of London?

The Square Mile is the backbone of world finance. Its trading platforms and protection of private property are strong. This gives rise to activity that shields wealth from taxation in home nations. From Reuters writer Peter Apps we see this good and bad assessment of London:

As long as the tide of foreign money sweeping into London is one of the factors pushing up property prices, there is relatively little appetite to change anything. At the end of the day, a very large number of people in the capital stand to benefit from London's growing reputation as the centre of the world for the global elite. As long as it remains one of the world's pre-eminent cities, will probably also remain one of its biggest cesspools, too.
So, the City of London, the original Roman Londinium, where the mythical, but meaningful, Roman garbed statues of Gog and Magog "protect" the Square Mile to this day, is the center of world finance for the global elite.

City of London (Square Mile) Skyline © User:Colin / Wikimedia Commons / CC BY-SA-4.0

With Brexit now being the law of the land, how will this center of world finance do as it could lose some access to the Eurozone. My first thought is that it is a big world out there. Not much will stop the Square Mile. Brexit was good for the pound in the long run, because eventually there would have been only one currency allowed in the Eurozone.

But how will Brexit affect the square Mile itself? The Peterson Institute tries to put some numbers out on just how it will be affected. Simeon Djankov from the institute writes:

The City of London may lose up to £18 billion in revenue and up to 30,000 jobs by leaving the single market (Oliver Wyman 2016). The analysis in this Policy Brief suggests that these estimates account for about 15 percent of financial sector revenue and 3 percent of employment in the City. Other estimates show similar magnitudes: £14 billion to £20 billion in revenue and 70,000 jobs lost (PwC 2016) or 83,000 jobs lost (EY 2017). According to these estimates, the direct negative effect of Brexit on the financial sector in the City of London will be a 12 to 18 percent loss of revenue and a 7 to 8 percent drop in employment, clearly significant effects.
The report goes on to say that for the entire UK, the losses will be modest:

UK GDP may shrink by 0.5 percent and employment by 0.2 percent. These estimates are smaller than those predicted by the government prior to the referendum.3 In April 2016 the UK Treasury predicted declines of £38 billion in revenue and up to 230,000 jobs in the financial sector as a consequence of Brexit.
The City began its financial power through currency exchange. It then grew as the Empire grew, to cover financial management on a vast scale. The City was weakened as was all of London at the end of World War 2. I remember going to London in 1972 and seeing ruins that were not yet cleaned up, from the devastation that was inflicted on the city in World War 2.

Not too long after I left, in the 1980's, the City became center for the Big Bang. The Big Bang changed trading from face to face to electronic. It created, as many writers have said, a churn in stock buying and selling. There was no Glass-Steagall present in the UK, so deregulation was unnecessary in the absence of regulation to start with. That is my take, and we can see from author Djankov a complementary assessment:

There were three key elements to the reforms: abolishing minimum fixed commissions on trades, ending the separation between those who traded stocks and shares and those who advised investors, and allowing foreign firms to own UK brokerages. Removing fixed commissions allowed more competition; ending the separation of dealers and advisors allowed mergers and takeovers; and allowing foreign owners opened the City of London to international banks (Martin 2017).
The result of these reforms are further assessed by the author:

These reasons—the historical development of the City as global financial center; the beneficial language, educational, and legal environment for the development of financial services; and the regulatory improvements in the 1980s enhanced by the introduction of the euro and the expansion of the single market program—explain why London ranked first among global financial centers in 2017, ahead of New York and Singapore. The next highest ranked European city is Z├╝rich, in 9th place; Luxembourg is 12th, Frankfurt 19th, Munich 27th, and Paris 29th.8
 The City of London has grown beyond the Square Mile itself:

The City is defined in this Policy Brief as the financial sector within the greater London area, comprising the square mile, Canary Wharf, and the West End. 
A fifth of total banking activity in the entire world is booked in the UK. Derivatives and clearing Houses and OVC trading is centered in London and the numbers are not even close:

The City of London is the global base for clearing foreign exchange transactions. Clearing is a post-trade activity that aims to reduce operational, counterparty, settlement, market, and legal risks between transaction parties. It is executed through a central counterparty (CCP), typically a clearinghouse. Four clearinghouses operating in the City are regulated as CCPs. Currently, about three-quarters of all foreign exchange trading takes place in London, followed by 11 percent in Paris and 7 percent in Frankfurt.15 London is also home to the world’s largest “over the counter” (OTC) foreign exchange derivatives and OTC interest rate derivatives markets. In the former, around €1 trillion are exchanged daily, compared with €395 billion in the United States.
For this reason, banks are unlikely to abandon the City of London. They will likely open subsidiaries in the Eurozone to comply with outsider regulations.

And an issue with the Peterson article is simply this: there are likely more transactions taking place than are reported by the City of London corporation, the real Crown of the UK. Many transactions are funneled through current and former Crown Colonies:

The term "tax haven" is a bit of a misnomer, because such places aren't just about tax. What they sell is escape: from the laws, rules and taxes of jurisdictions elsewhere, usually with secrecy as their prime offering. The notion of elsewhere (hence the term "offshore") is central. The Cayman Islands' tax and secrecy laws are not designed for the benefit of the 50,000-odd Caymanians, but help wealthy people and corporations, mostly in the US and Europe, get around the rules of their own democratic societies. The outcome is one set of rules for a rich elite and another for the rest of us.
Freedom of the individual has turned into freedom for money. That is likely hurtful to world prosperity in the long run, as real economies are hollowed out partly due to this inability of nations to tax their wealthiest citizens.

So, for me, barring some world conflict, the City of London will roll on, until the end of time, most likely. There is nothing to stop its enormous legitimate and illegitimate success, until this Neo-Roman Empire will also meet its end.


Popular posts from this blog

Learn Economics

The Unholy Alliance of Big Banking, Neocons, Big Media and Israel

John Mauldin Discusses What Could Go Wrong