After Brexit, Barclays Should Exit
With the likelihood of a favorable Brexit negotiation dimming, Barclays would be wise to leave London ASAP.
Barclays and its predecessors have proudly claimed London as their birthplace and hometown for over 300 years[1]. But unless it acts quickly to leave the UK, London may also become Barclays’ undoing. The risk, of course, is Brexit: banks like Barclays are critically dependent on the free flow of capital and people between their London headquarters and European clients – free flow which Brexit is threatening[2].
The latest on Brexit
First, some context. In March, British PM Theresa May invoked Article 50 of the Lisbon Treaty, setting off a two-year negotiation between the UK and EU[3]. At the end of this period, in March 2019, the UK will formally exit the EU under whatever terms have been thus far agreed. There are essentially two possible outcomes; the first is a ‘soft Brexit’. In this scenario, the UK and EU reach a conciliatory agreement that recognizes the special status of the UK and establishes a graceful transition period. Free flows of capital, people, goods, and services are preserved[4], meaning little change for Barclays. Although this outcome is favored by the traditionally strong London finance lobby, it has thus far been ineffective at swaying UK leaders from their populist stance[5]. Consequently, most observers remain pessimistic, and negotiations for a soft Brexit have already stagnated[6].
In the second scenario – a ‘hard Brexit’ – the UK loses access to the European single market (meaning no free flows of capital and people), and immediately becomes a ‘third country’ — no different than, say, Canada[7]. Unfortunately, this seems the likely outcome. For one, May has promised voters that she will not accept a deal that allows for continued open borders and immigration, while the EU has firmly stated it will not allow for free flow of capital without equivalent free flow of people[8], [9]. With immigration being arguably the central issue that drove Brexit[10], it is hard to see concessions coming from the UK side. Meanwhile, the EU has little incentive to cooperate: first, it (rightly) views Brexit as an unprovoked aggression by the UK[11]; and second, cities like Frankfurt and Paris are already benefiting from partial relocations by firms like Goldman Sachs in response to Brexit[12], [13].
What happens to Barclays under a ‘hard Brexit’?
Truthfully, we don’t know for sure. However, the European Banking Authority (EBA) issued a 69-page framework for Brexit last month which should scare Barclays. The EBA is proposing to treat the UK like a true ‘third country’, meaning UK-based firms will suffer stringent limitations and costly regulations as foreign entities[14], [15]. For example, Barclays would have to effectively double its regulatory staff to ensure ongoing compliance with both UK and EU laws[16].
What is Barclays doing in response?
To its credit, Barclays has grasped that avoiding the massive costs of operating as a foreign firm means creating a second headquarters within EU territory. As such, the bank has begun moving some senior executives to its existing subsidiary in Ireland[17]. In the medium-term, the bank plans to reincorporate its European subsidiaries under this Irish entity, and upgrade the Irish entity’s EU banking license to fully serve European clients. Nonetheless, citing uncertainty about the outcome of Brexit negotiations, Barclays has not developed a real contingency plan, and its CEO has actually downplayed the severity of Brexit to investors[18].
This approach is dangerous. The aforementioned EBA report is sweeping, and contains detailed guidelines that specifically anticipate Barclays’ current maneuvers. Two provisions are particularly problematic: first, the report advises that banks should maintain certain (potentially material) capital reserves within the EU; second, the report notes that firms should not be able to create perfunctory legal fronts in the EU while still effectively running their European operations from the UK[19]. Read: it is not nearly enough for Barclays to file some paperwork and move a few executives to Ireland; to comply with likely post-Brexit regulations, it needs to move the bulk of its business and capital into the EU — immediately.
Can Barclays really move?
There is no question such a large move would be disruptive and costly, but the alternative is continued uncertainty over Brexit. Confusion has already weighed on both the UK economy, whose GDP growth has slowed to 0.4% and is likely to worsen[20], [21], and Barclays, whose stock is down 21% since late March[22]. A decisive plan that acknowledges a worst-case ‘hard Brexit’ may actually help restore investors’ confidence.
Finally, a move of this magnitude requires time. With only 16 months until the negotiation period closes, Barclays must decide between the possibility of a long, slow demise amid the unfolding Brexit saga, or a vigorous new chapter that responds to a changing world order.
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Sources:
[1] “300 Years and Counting.” Barclays Timeline, timeline.barclays/content/1690/The-start-of-Barclays.html.
[2] Schoenmaker, Dirk, The UK Financial Sector and EU Integration after Brexit: The Issue of Passporting (October 8, 2016). Forthcoming Chapter in ‘The Economics of the UK-EU Relationship: From the Treaty of Rome to the Brexit Vote’, edited by N. Campos and F. Coricelli, Palgrave McMillan, London. Available at SSRN: https://ssrn.com/abstract=2844253
[3] “Brexit: Article 50 Has Been Triggered – What Now?” BBC News, BBC, 29 Mar. 2017, www.bbc.com/news/uk-politics-39143978.
[4] Whitman, Richard G. “Soft or Hard Brexit?” European Policy Centre, 15 July 2016, www.epc.eu/pub_details.php?cat_id=4.
[5] James, Scott, and Lucia Quaglia. Brexit and the Limits of Financial Power in the UK. University of Oxford: The Global Economic Governance Programme, 2017, www.bsg.ox.ac.uk/research/working-paper-series/brexit-and-limits-financial-power-uk.
[6] Meredith, Sam. “Banks Shifting Jobs from London Post-Brexit Need to Act Fast, German Central Bank Official Says.” CNBC, 6 Sept. 2017, www.cnbc.com/2017/09/06/brexit-banks-shifting-jobs-from-london-need-to-act-fast-german-central-bank-official-says.html.
[7] Quinn, James. “Four Reasons Why Banks Won’t Leave the City of London after Brexit.” The Telegraph, Telegraph Media Group, 24 Oct. 2016, www.telegraph.co.uk/business/2016/10/24/four-reasons-why-banks-wont-leave-the-city-of-london-after-brexi/
[8] Munchau, Wolfgang. “The Perils of a Hard Line on Post-Brexit Immigration.” Financial Times, 10 Sept. 2017, www.ft.com/content/542a5536-9482-11e7-a9e6-11d2f0ebb7f0.
[9] Rankin, Jennifer. “Free Movement: a Circle That Cannot Be Squared in the Brexit Debate.” The Guardian, Guardian News and Media, 13 Sept. 2017, www.theguardian.com/politics/2017/sep/13/free-movement-circle-that-cannot-be-squared-brexit-debate.
[10] Van Reenen, J. “Brexit’s Long-Run Effects on the U.K. Economy.” Brookings Papers on Economic Activity, vol. 2016 no. 2, 2016, pp. 367-383. Project MUSE, doi:10.1353/eca.2016.0031
[11] Somai, M. (2017). BREXIT: RISKS AND OPPORTUNITIES OF DISINTEGRATION”. Unia Europejska.Pl, 243(2), 9-19. Retrieved from http://search.proquest.com.ezp-prod1.hul.harvard.edu/docview/1938830784?accountid=11311
[12] Demary, Markus; Voigtländer, Michael (2016): Will Brexit dwarf London’s competitiveness as a financial centre?, IW-Kurzberichte, No. 50.2016
[13] Djankov, Simeon. The City of London After Brexit. Peterson Institute for International Economics, Policy Brief 17-9, 2017, piie.com/publications/policy-briefs/city-london-after-brexit.
[14] EBA Opinion on Brexit Issues. European Banking Authority, 12 Oct. 2017, www.eba.europa.eu/documents/10180/1756362/EBA+Opinion+on+Brexit+Issues+%28EBA-Op-2017-12%29.pdf.
[15] Begg, Iain. “Making Sense of the Costs and Benefits of Brexit: Challenges for Economists.” Atlantic Economic Journal, vol. 45, no. 3, July 2017, pp. 299–315., doi:10.1007/s11293-017-9550-x.
[16] Reid, Thomas J. “The Law and Brexit XI.” Forum on Corporate Governance and Financial Regulation, Harvard Law School, 14 Apr. 2017, corpgov.law.harvard.edu/2017/04/14/the-law-and-brexit-xi/.
[17] “Q3 2017 Earnings Call.” Barclays Plc. 26 Oct. 2017. Capital IQ. Transcript.
[18] “Q2 2017 Earnings Call.” Barclays Plc. 28 Jul. 2017. Capital IQ. Transcript.
[19] European Banking Authority, op. cit.
[20] Wearden, Graeme, and Nick Fletcher. “UK GDP: Britain’s Economy Grew by 0.4% as Brexit Slowdown Continues – as It Happened.” The Guardian, Guardian News and Media, 25 Oct. 2017, www.theguardian.com/business/live/2017/oct/25/uk-gdp-britain-growth-slowdown-brexit-pound-ftse-business-live?page=with%3Ablock-59f052f16509f30750e8a0ba.
[21] Cazan, Sabina Andreea. “BREXIT IMPLICATIONS OVER THE ENGLAND BANKING SYSTEM–AN EVENT STUDY APPROACH.” Journal of Public Administration, Finance and Law: 81.
[22] “Barclays PLC.” Google Finance, Google, 14 Nov. 2017, finance.google.com/finance?q=LON%3ABARC.
Interesting post! There is no doubt that Barclays will need to move their EU operations into the EU. With the European Banking Authority now moving to Paris (with Dublin very narrowly missing out), I wonder if Barclays should be building their presence there, too [1]. It should also be noted that the EU and the UK will have a land border between Ireland and Northern Ireland. The UK government has not laid out a plan for border control, although they have given verbal assurances that there will not be a physical land border [2]. Recently, an explosive leaked document suggested that Northern Ireland will need to remain in the customs union in order to prevent a physical land border [3]. However, Northern Ireland needs to remain part of the UK, not least due to the Good Friday Agreement which has kept Northern Ireland at peace since 1998. It is clear that there will need to be a hard border between the UK and the EU, it is a matter of where. Hence, there could potentially be consequences for the Ireland-EU border. Barclays and other banks should consider this as they choose where to locate in the EU.
[1] https://www.theguardian.com/politics/2017/nov/20/london-loses-european-medicines-agency-amsterdam-brexit-relocation
[2] https://www.theguardian.com/politics/2017/nov/17/irish-pm-brexit-backing-politicians-did-not-think-things-through
[3] https://www.rte.ie/news/analysis-and-comment/2017/1117/920981-long-read-brexit/
Interesting post! There is no doubt that Barclays will need to move their EU operations into the EU. With the European Banking Authority now moving to Paris (with Dublin very narrowly missing out), I wonder if Barclays should be building their presence there, too [1]. It should also be noted that the EU and the UK will have a land border between Ireland and Northern Ireland. The UK government has not laid out a plan for border control, although they have given verbal assurances that there will not be a physical land border [2]. Recently, an explosive leaked document suggested that Northern Ireland will need to remain in the customs union in order to prevent a physical land border [3]. However, Northern Ireland needs to remain part of the UK, not least due to the Good Friday Agreement which has kept Northern Ireland at peace since 1998. It is clear that there will need to be a hard border between the UK and the EU, it is a matter of where. If the borders between Northern Ireland and Ireland or the UK cannot be hard borders, there could potentially be consequences for the Ireland-EU border. Barclays and other banks should consider this as they choose where to locate in the EU.
[1] https://www.theguardian.com/politics/2017/nov/20/london-loses-european-medicines-agency-amsterdam-brexit-relocation
[2] https://www.theguardian.com/politics/2017/nov/17/irish-pm-brexit-backing-politicians-did-not-think-things-through
[3] https://www.rte.ie/news/analysis-and-comment/2017/1117/920981-long-read-brexit/
This is an excellent and frightening summary of the potential impact of Brexit on the U.K. economy. Relocating to the EU is a critical decision facing all British companies with global operations and, as Professor Emeritus notes, relocating is the prudent choice. Unfortunately, the decision to relocate will further disrupt the British economy. As companies relocate and capital flees Great Britain, economic growth will stagnate, unemployment will rise, the pound will depreciate, and real estate values will plummet.
My 89-year old Grandmother resides in England and voted for Brexit. She was a single-issue voter (immigration) and did not appreciate Brexit’s far-reaching consequences. My Grandmother did not understand that her vote would directly effect her bank account. I wonder if she would have voted differently if she had that clarity?
Thanks for this fascinating post! I think you particularly highlight the risks to limiting both free flows of capital and also free flows of people. I think Barclays should be particularly concerned on the point of limiting free flows of people. Barclays chief executive Jes Staley highlighted the same concern, saying that access to talent is “tremendously important” for the financial sector [1]. He went even further to say access to talent is “perhaps the most important thing for the financial industry, perhaps even more important than passporting.” [2] There are estimates that London’s financial sector could lose between thirty and seventy thousand jobs as a result of Brexit, and migration statistics since May 2017 indicate E.U. citizens are already leaving the country, which could threaten Barclays ability to hire and retain talent in the interim until the Brexit terms are finalized [3]. As said by Alex Barker, the Brussels chief of the Financial Times, “We are a hub leaving a network.” [4] I think talent acquisition and retention pose a real challenge for Barclays to consider as it debates its next move.
[1] “Barclays Boss Sounds Brexit Talent Warning,” BBC, April 26, 2017, http://www.bbc.com/news/business-39716732, accessed November 2017.
[2] “Barclays Boss Sounds Brexit Talent Warning,” BBC, April 26, 2017, http://www.bbc.com/news/business-39716732, accessed November 2017. Passporting refers to banks’ ability to serve clients across the EU without individual country licenses.
[3] Sam Knight, “Sadiq Khan Takes on Brexit and Terror,” The New Yorker, July 31, 2017, https://www.newyorker.com/magazine/2017/07/31/sadiq-khan-takes-on-brexit-and-terror, accessed November 2017.
[4] Sam Knight, “Sadiq Khan Takes on Brexit and Terror,” The New Yorker, July 31, 2017, https://www.newyorker.com/magazine/2017/07/31/sadiq-khan-takes-on-brexit-and-terror, accessed November 2017.
I totally agree with RSI. This post is providing an excellent example of the complacency of some companies facing the Brexit. It is frightening to read that Barclays has not developed a strong contingency plan and that the CEO has downplayed the severity of Brexit to investors. Indeed, it seems quite obvious that the banking sector is going to shrink in the UK: the European Banking Authority has recently decided to shift its headquarters from London to Paris after Brexit [1] and several hundred of banks (including Morgan Stanley, Goldman Sachs and Standard Chartered) are expanding their operations in Frankfurt, as the city vies to become the EU’s principal financial center after Brexit [2]. Facing this urgent situation, I would advise Barclays to: 1. Follow its competitors and move its business and capital in European financial centers, 2. Expand its presence globally, mainly in countries where Barclays has already a solid reputation and network. The first move would enable Barclays to not only operate under EU regulatory compliance, but also to remain competitive against other industry players. The second move would enable Barclays to mitigate the risk of a declining UK economy and political isolationism by leveraging Barclays’ brand and worldwide network. Barclays should aim to be the leading financial services group in English speaking countries where the bank has already a strong presence. The bank could indeed leverage its Barclays Africa Group arm in countries such as South Africa, Kenya, Nigeria or Ghana. To further strengthen its presence and notoriety in these countries, Barclays should invest in local communities and partner with cities. The famous Barclays’ bike that used to be so beloved by Londoners should now be cherished by Johannesburg and Laos inhabitants!
[1] “Paris wins battle to host European banking regulator”, Financial Times, November 20, 2017, https://www.ft.com/content/f9f954b4-ce19-11e7-b781-794ce08b24dc, accessed November 2017.
[2] “Banks and companies plan expansion in Frankfurt after Brexit”, The Guardian, July 21, 2017, https://www.theguardian.com/business/2017/jul/21/banks-and-companies-plan-expansion-in-frankfurt-after-brexit, accessed November 2017.
I am slightly less pessimistic as the article and the previous comments. I do not believe the the current British government would allow the financial industry to suffer in the extent outlined above. Barclays alone has ca. 40,000 employees in the UK (https://www.statista.com/statistics/295529/barclays-group-employees/) and there is a total of 1 million people in financial services, with half of the world’s banks having their headquarters in London (http://www.europarl.europa.eu/RegData/etudes/BRIE/2016/587384/IPOL_BRI(2016)587384_EN.pdf). This demonstrates both the interest the government should have in the sector, as well as the combined power of all these financial institutions and the impact of their possible struggles on the world economy. Due to these factors I believe that a compromise with the European Union will be found, that will not leave the banks as well off as before, but does not warrant a scenario as drastic as described either.
This is definitely very alarming for Brexit. That being said, I do think some of the risks might not be as severe as have been portrayed in the media as Bettina eludes to. While I think the issues you bring up are important, I think the more critical challenge Barclays faces is the fact that the local UK market accounts for more than half of its total revenue [1]. Moving deposits abroad is a risky move and might not gain acceptance from the local market. Instead, I believe Barclays should focus on developing a strategy to smoothen the expected GDP decline in the UK due to Brexit, which will naturally result in a decrease in banking revenue pools. In order to do this, Barclays should consider the following in addition to the ideas you suggested:
– Invest in areas of growth outside the UK: With an expected declining banking industry in the UK, Barclays will have to consider investments in other countries. Barclays already has presence in several countries around the world and should invest heavily to ensure that the decline of UK revenues are compensated by growth elsewhere. This does not mean that it should neglect its large UK business, but that another source of revenue is critical.
– Engage local regulators: Barclays should work with local regulators to get favorable terms for itself and the rest of the banking industry. While the populist opinion is important, the government cannot suffer the decline of the UK banking industry [2].
I think Barclays is shortsighted if they have not developed a strategic roadmap as you suggested. Failure to appease shareholders will only lead to a further decline in share price. The company needs to engage its clients and customers to comprehensively assess the implications on Brexit and develop an action plan to share with its investors and clients.
[1] “Barclays Group Turnover Worldwide,” https://www.statista.com/statistics/441845/barclays-group-turnover-worldwide/.
[2] Monger, Tim, “What Brexit Means for Financial Institutions,” https://www.bcgperspectives.com/content/articles/financial-institutions-strategy-what-brexit-means-financial-institutions/?chapter=4#chapter4.
I have a few friends working in the finance industry in London, and as you mentioned, both Goldman Sachs and Merrill Lynch have leased office space in Frankfurt and Paris respectively in anticipation of a post-Brexit world[1]. Given Barclays’ strong ties to Britain, I wonder if there will be any intervention by the British government if Barclays pursues an exit – as NAK notes, the implications to Britain will be long dated and far reaching. For example, a recent PwC report commissioned by the City of London noted that the financial services contributed £72.1bn in tax (the bulk of which was income tax), representing the highest amount paid over the 10 years the data has been collected[2]. That said, I definitely think Barclays should set up an EU hub. The diversified nature of a typical bank’s workforce and client base demands this, and there is a risk that Barclay’s loses market share if they do not a) set up a plan which allows them to credibly compete with the other banks, and b) clearly and convincingly communicate this plan to shareholders.
[1] http://www.businessinsider.com/r-bofa-signs-lease-for-office-space-in-paris-bloomberg-2017-10
[2] http://www.independent.co.uk/news/business/news/barclays-brexit-banking-exodus-eu-frankfurt-tax-loss-revenue-chairman-john-mcfarlane-a8082716.html
Totally agree. It’s incredible to me how the UK and large UK-oriented companies like Barclays seem to have retreated into denial as Brexit negotiations have stalled. The UK has absolutely no leverage with the EU, and for a whole host of geopolitical reasons, not least of which is to discourage other countries from defecting, the EU needs to make an example of the UK. It’s not surprising, but also similarly incredible, how dishonest many British politicians have been with the public about the likely outcome of negotiations. No one is adequately preparing for March 2019.
Beyond Europe, I wonder if there are opportunities for Barclays to expand in Asia. Not entirely sure what the firm’s presence there is now, but it seems that the financial services market has been expanding in places like Singapore and Hong Kong as the regulatory environment has become less flexible in the US/Europe post-crisis. I also think FS in New York could be an additional beneficiary of Brexit, as there is currently no European city with the same level of FS sophistication as London. Certainly firms will need to move staff and resources into the EU, but I imagine that some will also be moved to NYC as some functions are just not as developed in other European countries.
Agreed with Ice Cream on thoughts of the risk to the UK being not as severe as some might think, but from a different lens. The UK has all the incentives to ensure that banks do stay in London (as Rasha noted), especially given that as Oliver Wyman estimated, the UK stands to lose early 75,000 jobs in the instance of a hard Brexit [1]. Given the EU’s hard line on the free flow of capital, I would imagine that it would be the UK that backs down on regulation to allow banks to conduct basically as they have in London, except with being base in the EU. With the constantly changing state of the regulatory environment, I would not be surprised to see regulations changed on how they treat branches of EU-based entities, which is what rsi you are suggesting Barclays pursue. I would recommend that Barclays take the initiative in these regulatory conversations and push them with the government. In fact, these “branch-back” initiatives where banks are moving their headquarters to a branch in the EU and turning their UK office into a branch is where I would assume there to be the most success in a smooth transition.
[1] https://www.ft.com/content/1b99624a-c545-11e7-b2bb-322b2cb39656
Thank you rsi – I thought the context setting paragraph up front was brilliant and described what is really quite a simple situation which many politicians are trying to obfuscate. It is absolutely clear from the EU’s stance and the UK’s current government double bind that the final terms will be particularly punishing for the UK economy, and anyone qualified should be able to see that.
One course of action you haven’t mentioned, which seems to me as one of the few realistic ones, is Barclays withdrawing from the EU and focusing on the UK market. As a traditional English bank with some shaky moments in its recent past [1], it will not be as globally competitive without the advantage of its ties to the London financial centre (much like Lloyds and Natwest in the retail banking space). With the technocrats at the ECB and EBA unwavering in their demands, Barclays is likely to face drawn out regulatory battles, penalties and fines, all while its customer base in the EU is shrinking and its home market economy is inevitably suffering. Downsizing and rationalizing operations exclusively within the UK may well be the prudent thing to do at this point; unfortunately, this is not a very appetizing proposition to investors, and the current CEO is, as you pointed out, burying his head in the sand. Having worked in the UK financial services industry during the Brexit vote drama, I observed there was not only much talk of (and consulting spending on) global banks leaving London, but also British banks retreating from the bigger stage.
[1] Barclays bank reaches $100m US settlement over Libor rigging scandal, https://www.theguardian.com/business/2016/aug/08/barclays-libor-100m-us-settlement
Brexit and the other nationalist/isolationist movements that have taken hold of both Europe and the U.S. in recent years don’t bode well for companies that require the free flow of funds and trade across jurisdictions. As we move to a world where some jurisdictions are isolated from advantageous trade situations while some jurisdictions remain linked (tenuously at times), it seems inevitable that companies residing in isolated jurisdictions will suffer in relative terms to their global peers in the same industry. The unfortunate implication will be that companies with historic ties to a particular place will either be uprooted and will move to different jurisdictions or they will fail. The competitive disadvantages of unfree trade are too great for firms to survive in a globalized world.