Written By: Mike Ross – Corporate Finance
The City of London’s status as the financial capital of Europe is under threat as global banks located in the City may need to relocate to the continent as a result of the Brexit vote. The French government is doing its best to ensure that Paris becomes the most attractive alternative for those financial institutions looking for a base in Europe.
When Britain’s decision to leave the European Union (EU) takes effect, the country’s financial firms would lose their “passport” to access European markets. According to a report in This Is Money, the UK’s share of the EU’s financial markets includes about 50 percent of Europe’s interest-rate derivatives trading, 40 percent of its foreign-exchange turnover, 30 percent of its marine insurance and a little less than 20 percent of both international bank-lending and hedge-fund assets.
In a bid to grab this market, Prime Minister Manuel Valls of France says that the country wants to “… build the financial capital of the future”.
What is the French government offering?
A report in The Guardian explains that expatriates and French nationals returning from stints abroad would be eligible for tax breaks for a period of eight years, up from the existing five. The benefits include deductions for perks such as employers paying the school fees of their employees’ children and for earnings on capital held abroad. The French government has also promised to establish a one-stop administrative point for banks and financial institutions that want to set up offices in Paris. This facility would offer services in languages other than French. The governor of the Bank of France, François Villeroy de Galhau, has also committed that French regulators would give priority to those banks and financial institutions that are licensed to operate in the UK but want to shift operations to France.
Paris is already an important financial centre with four of the ten largest European banks located there. The city has an estimated 800,000 financial workers.
France wants clearinghouses to move out of London.
French President François Hollande recently announced at an EU summit in Brussels that clearing operations would have to move out of London. Clearinghouses act as safeguards for buyers and sellers of derivatives trades in a market that does $493 trillion in business. They play a critical role in the financial system, and their importance has increased since the great financial crisis of 2008. London has been handling clearing operations in euros as it was part of the EU. But François Hollande has called for an end to this privilege with Britain’s exit from the European Union.
Is France a good alternative for Britain’s bankers?
Back in 2012, François Hollande had said that finance was the “enemy”. At that time he had proposed a tax rate of 75 percent for the rich. Although the government’s stand has changed since then, French bankers remain sceptical about their government’s intentions. Frédéric Oudéa, the chief executive officer of French bank Société Générale, says, “Taxes on employment are much too punishing”. The French government has been actively pursuing global banks with large operations in London to select Paris over other European cities. Frankfurt, another contender for British banking jobs, is not as attractive as the French capital. Only one European bank in the top 10 is based there, and it is not as important a financial centre as Paris.
But Paris could prove to be an expensive alternative to London. Data issued by the French Banking Federation reveals that a €300,000 salary paid in the UK costs a bank €352,740 after taking into account all the applicable charges. A similar salary paid in France would cost the bank an estimated €471,799.
London is home to a large number of global investment banks.
No one country will take London’s banking business lock stock. What will happen is a combined leakage of different specialties moving to different parts of Europe. Individually it will not mean that much to the recipient country but the cumulative drainage effect will be great to London.