Can London's finance hub survive – and even thrive – after Brexit?

Bank of England governor Mark Carney predicts banking sector could double in size

City of London gherkin

It seems that for everything "Brexit" related no two forecasts are the same.

In the banking sector we have "Brexodus", which refers to the general belief, bolstered by almost daily announcements, that jobs will move from London to the Continent.

According to the consulting firm Oliver Wyman, as many as 40,000 investment banking jobs could be lost in a worst-case scenario, says the Financial Times.

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Another view, expressed by Mark Carney, governor of the Bank of England, is a surprising one.

He told The Guardian yesterday that the banking sector could double in size over the next 25 years and that London will remain the "investment banker for Europe".

Pessimism reigns

It's fair to say that of these widely different views, the Brexodus scenario is the one that most people believe in.

It all comes down to "passporting" – the right as part of EU single market membership for firms to operate freely across Europe without having to hold banking licences or big capital reserves in any other country.

If Britain leaves the single market and loses passporting, banks would probably have to deal with EU clients from an entity within the bloc under EU rules. As a result, the European Commission might clamp down on London-based banks processing euro-denominated deals.

Banks are therefore working on contingency plans to move jobs to the Continent.

At first the numbers seem reasonably small. Of 80,000 investment banking jobs (and in excess of 160,000 financial services jobs in the City in total) Oliver Wyman predicts that 12,000 to 17,000 will be lost.

But writing in The Guardian former private equity investor Nesrine Malik warns: "As talent and infrastructure move and become embedded elsewhere, so a sense that the centre is shifting develops."

Doing a deal

Critical to whether this happens is when the government starts to secure some clarity on Brexit and what the deal looks like.

First that means securing the oft-cited "transitional deal" to ensure that banks – and other firms – don't have to face a cliff-edge of new rules they won't have time to prepare for in March 2019.

It's widely believed that to ensure banks don't set plans in motion this needs to happen by the end of the year.

Then there's the final deal, which will be closely scrutinised in relation to passporting.

Britain doesn't have to stay in the single market to keep this right as EU rules allow for financial firms to trade freely if they are in a country with an "equivalent" regulatory regime. The government has also said that remaining in the single market is not on the table.

So if the UK is prepared to adopt or match EU banking rules, there's a good chance it will be able to preserve passporting.

Beyond this some commentators say the future prospects for London hinge in part on whether UK-based firms are still able to hire talent from the EU for specialist roles – that's why the Treasury is pushing for specialist financial services visas to be agreed.

London still attracts top talent

London has a long history of international banking and investment. Its success is not just related to EU passporting.

Open Europe, a think-tank that adopted a neutral stance on the EU referendum, says the reliance on the EU is exaggerated. It says that around 20 per cent of Britain's banking sector business is under threat and only seven per cent of assets in funds managed in Britain will be affected directly, according to Reuters.

London has longstanding liquid capital markets, a world-renowned legal system, a well-regarded and "nationality-blind" regulatory system and a deep talent pool, says Howard Davies in The Guardian.

"Three decades of post-Big Bang concentration in the UK cannot be reversed overnight," adds Nils Pratley in the same paper.

Could we be focusing too much on wholesale investment banking? According to the FT, Europe's largest banks are massively expanding their private banking arms that service wealthy individuals as "the attractiveness of London" has been going up despite Brexit.

A compromise deal for the City?

Damaging the City is not necessarily in the EU's interest.

Carney points out that as much as half of the equity and debt raised for both European governments and businesses is raised in the UK, as is more than three-quarters of "foreign exchange and derivatives activity in the EU".

Even if the EU did want to bring more business to the Continent, there is no agreed consensus as to where it should go.

Ranked by the Global Financial Centres Index according to the attributes foreign firms look for, London remains the top choice for global financial centres. The only European centre in the top 20 is Luxembourg, while Frankfurt comes in at 23 and Paris 29.

Banks are spreading their proposed post-Brexit hubs to places that include Frankfurt, Paris, Amsterdam, Dublin, Brussels and Berlin.

Banks like the cost effectiveness of a single operation in a vibrant centre so many experts reckon that if London loses business it could choose to go outside the EU, "meaning Europe as a whole could end up worse off," says Reuters.

This might be enough of an incentive for the EU negotiators to strike a compromise deal for the City.

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