LONDON (Reuters) - Large chunks of London’s financial sector are unlikely to move to the European Union for the foreseeable future, though some activity could shift to New York after Brexit, Bank of England Deputy Governor Jon Cunliffe said on Wednesday.
Frankfurt, Paris, Luxembourg and Dublin hope banks and other financial firms in London will relocate business to them if Britain fails to secure adequate access to the single market after it leaves the bloc.
Cunliffe, however, said the City of London financial district was a complex “ecosystem” that had taken years to create.
“What we call London ... I can’t see that being replicated in the foreseeable future in one place in the European Union,” Cunliffe told a committee of Britain’s upper house of parliament.
New York, however, already has its own ecosystem to rival London‘s.
“Some of it, yes, could certainly go (to New York),” Cunliffe said.
Banks may even decide it would not be economic to transfer some activities to the continent, meaning they could simply cease, reducing choice for everyone, Cunliffe said.
French President Francois Hollande has said he wants to see clearing of euro-denominated contracts like derivatives shifted to the single currency area. London currently dominates this activity.
Cunliffe said political moves to shift clearing could backfire and undermine financial stability by fragmenting Europe’s capital market plumbing.
“I think if you do that, then the cost of clearing - and clearing to me from a financial stability point of view through central counterparties is a really important reform since the crisis - you make the cost of that much, much higher,” Cunliffe said.
He said there was “great uncertainty” about the possible loss of banking activity in Britain.
“To the extent that activities cease to happen in London, cease to happen at all or move to other jurisdictions in Europe or elsewhere, to the extent that that happens and the structure of financial firms has to change, there’s great uncertainty about how much that will have to happen,” he told lawmakers.
Senior bankers said on Tuesday they could start moving staff out of Britain as early as next year if there is no clarity on the country’s access to the European single market once it leaves the EU.
Britain is due to begin formal divorce talks with the EU by the end of March, and Cunliffe said the BoE’s contingency plans for dealing with Brexit-related market shocks would remain in place as that milestone passed.
He warned banking chiefs that as they prepared to move any operations from London to the continent, they should not lose sight of risks from day-to-day activities.
The “overall thrust” of mainly EU-sourced banking rules currently in place would remain after Brexit, Cunliffe said.
Reporting by David Milliken, Huw Jones and Helen Reid; writing by William Schomberg; Editing by Andrew Roche