The City of London should prepare to be cut off from European financial markets following Brexit, a top German central banker has warned.
Andreas Dombret, executive board member at the Bundesbank, also urged Square Mile banks to apply for permission to operate in the EU or risk being left “high and dry”.
“A ‘no deal’ on financial services is – like it or not – a realistic outcome,” Mr Dombret said in a speech delivered in London on Thursday.
He also cast doubt over the prospect of a transition period or a so-called “mutual recognition” deal, whereby Britain and the EU would accept each other’s financial rules.
“I am sceptical as to whether such a mutual recognition framework is actually possible.
“Moreover, a future agreement may very well be quite limited – for example, to the exchange of goods. Labour migration is likely to be excluded; at least, this has been mentioned as a red line for the UK government. And free trade in services also seems less and less likely.”
Mutual recognition would award substantial powers to technical committees of supervisors, thereby undermining national sovereignty and democratic legitimacy, crossing the UK’s “red lines”, he argued.
UK-based banks and insurers are widely expected to start pulling the trigger on Brexit contingency plans by the end of the first quarter, when the UK will be about 12 months away from leaving the EU.
Germany is set to be one of the main beneficiaries of any exodus, though businesses are also expected to flee the UK for rival financial hubs including Dublin, Paris, Luxembourg and Milan.
He went to “strongly advise” banks not to slow down their efforts to apply for licences to operate in the EU, in the “vague” hope of a transition period.
“I strongly advise banks not to slow down in their preparatory efforts because of a vague possibility of a transitional period,” Mr Dombret added.
“The first quarter of this year has been named by many in the financial industry as a point of no return for pushing the button on their Brexit contingency plans. In my view, this is still a fair estimate.
“Those who do not complete their plans and start implementing them by March this year risk being left high and dry by Brexit one year later.”
US banking giant Goldman Sachs – which employs around 6,500 UK staff – is set to at least double its Frankfurt office to 400 employees through a mix of relocation and local hiring, and has also signed a lease on a yet-to-be-built skyscraper that can house up to 800 workers, with options to take up additional space.
Paris – where Goldman employs around 150 staff – will serve as a dual hub alongside Frankfurt, with additional moves to offices including Milan, Madrid, Stockholm and Dublin.
American peer Morgan Stanley is understood to have plans to move 200 of its 6,000 UK staff to Frankfurt, but is taking a similar approach by bulking up offices in Milan, Madrid and Paris – while Citigroup notified its bankers in July that it may need to create 150 new roles at its Frankfurt offices as well as those in Amsterdam, Dublin, Luxembourg, Madrid and Paris.
JP Morgan, which has 16,000 staff in the UK, will ramp up operations at a number of its EU sites with plans to move up to 1,000 London front and back office roles.
A raft of Asian banks including Nomura, Daiwa, Sumitomo Mitsui Financial Group (SMFG) and Mizuho Securities are also on track to expand their operations in Frankfurt.