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From London to Frankfurt?

The City of Banks sets its sights on becoming the leading Euro clearing centre

This edition of RBC Investor & Treasury Services' Flight from London series examines the potential for Frankfurt to attract UK-based financial services firms following Brexit.

Known in Germany as the 'City of Banks', Frankfurt is looking to Brexit as an opportunity to bolster its status as a European financial centre. Within two hours of the UK's referendum result, Frankfurt Main Finance, a trade group, launched a Twitter campaign and a website to attract asset managers from London.

Frankfurt is home to the European Central Bank (ECB), making it a prime candidate for London-based firms looking to retain access to European securities trading. The city was once known as a robust market for foreign exchange, but that trade largely shifted to London after Germany retired the Deutsche mark in favour of the Euro.

Key insights

  • With its close proximity to key financial institutions, including the European Central Bank, Frankfurt is a strong contender to become a premier Euro clearing destination
  • Germany's strong labour laws are affecting financial services firms' interest in Frankfurt as an EU base, despite the city's efforts to bill itself as a hub of fintech and foreign investment

Today, Frankfurt's finance sector employs around 60,000 people and is home to 200 banks.1 Frankfurt Main Finance anticipates that a further 10,000 workers will arrive from London within the two-year Brexit negotiation period.2 The high level of financial expertise in the city is supported by two influential universities, the Frankfurt School of Finance and Management, and the Goethe Business School.

The City of Banks

In addition to being the headquarters of the ECB, Frankfurt houses several agencies that regulate insurance and banking, including the Deutsche Bundesbank, Germany's central bank. The European Commission (EC) has confirmed that the European Banking Authority (EBA) will be relocated from London.3 Both Dublin and Luxembourg have staked claims on being the authority's future location4, but with so many European banks and regulatory authorities already based in Frankfurt, the EC may decide to position the banking authority close to the ECB.

The clearing house

The biggest shift from London to Frankfurt could come in clearing

The biggest shift from London to Frankfurt could come in clearing. Lawmakers in the European Parliament's Committee on Economic and Monetary Affairs (ECON) have stated that these trades will be required to take place within the EU, following Britain's departure from the Union.5

Currently, London's clearing houses manage about 70 percent of Euro-denominated derivatives trading, valued daily at more than GBP 500 billion.6 In the wake of the ECON's comments, European cities, particularly Paris, have eagerly sought to attract this activity. However, EU regulators may seek to bring Euro-denominated derivatives trading within close proximity to the Eurozone's central bank in Frankfurt.

Courting foreign investment

Foreign investment from both Asia and the US is also a highly sought-after prize for cities across the continent, and Frankfurt is no exception.

In an attempt to garner interest from foreign investors, Tariq Al-Wazir, economics minister in Frankfurt's state of Hesse, has visited both South Korea and Japan to champion the city's merits to Asian financial institutions.7 Similarly, the state's premier, Volker Bouffier, made a trip to the US to discuss relocation and incentives with American banks.8

The extent to which these missions will convince investors of Frankfurt's edge over other competing cities remains to be seen, but they have been able to attract one major European bank. In January, Swiss bank UBS confirmed its plans to move its wealth management operations from London to Frankfurt, relocating approximately 1,500 employees in the process.9

A digital factory

As the trading of assets becomes increasingly automated and managed by digital technologies, the presence of a vibrant fintech scene is growing in importance. Germany is the second largest fintech hub after the UK10, positioning it as a key innovator, and Frankfurt as an attractive prospect for firms looking to develop new, innovative technologies.

The presence of a vibrant fintech scene is growing in importance

In a bid to bolster this emerging industry, Deutsche Bank has opened a 'Digital Factory' in Frankfurt.11 Working in collaboration with the Massachusetts Institute of Technology, this accelerator program hopes to attract some of the sharpest coders and financial technologies from across Europe and further afield.

Restrictive labour laws

Despite these advantages, many asset managers, banks, and private investment firms have expressed reservations about Frankfurt as a potential post-Brexit financial hub. Often referred to as the smallest metropolis in the world, Frankfurt is seen as being small and provincial compared with London — its population is less than a tenth of London's — which may deter finance professionals from relocating.

Large financial firms are also wary of Frankfurt's restrictive labour laws. Germany has some of the strongest employee protections in the world, including lengthy minimum statutory redundancy terms and special protection for older workers, as well as those with families.12 However, state of Hesse's finance minister, Thomas Schaefer, has indicated that these restrictions could be revised in an attempt to make Frankfurt more attractive to companies considering relocating from London.13

As the UK enters into negotiations to withdraw from the EU, financial firms across London are weighing their options. Frankfurt is a key contender, boasting proximity to the ECB and a long history of financial competence. With Euro-denominated trading already well-established, and a booming fintech scene emerging, Germany's City of Banks may bolster its status as a world-leading financial hub.

Flight from London to Dublin Infographic

 

Next in RBC Investor & Treasury Services' Flight from London series: Paris


Sources

  1. Bloomberg (October 14, 2016) Flight of the Brexit Bankers
  2. Bloomberg (February 2, 2017) Frankfurt Lobby Group Sees 10,000 U.K. Bankers Moving on Brexit
  3. BBC (April 19, 2017) EU agencies to leave London after Brexit, says Commission
  4. Irish Times (March 31, 2017) Ireland to contest Luxembourg's right to host banking authority
  5. Bloomberg (March 9, 2017) Bloomberg (March 9, 2017) EU Has to Control Euro Clearing After Brexit, Lawmakers Say
  6. Ibid. Flight of the Brexit Bankers
  7. Reuters (November 7, 2016) Ahead of Brexit, some banks quietly shift M&A bankers to Frankfurt
  8. Bloomberg (November 14, 2016) Europe's Financial Hubs on Frankfurt 'Catwalk' for Brexit Spoils
  9. City A.M. (January 18, 2017) Brexit bye byes: UBS becomes the latest bank to confirm it's considering moving bankers from London
  10. EY (November 17, 2016) German FinTech landscape: opportunity for Rhein-Main- Neckar
  11. Deutsche Bank (September 29, 2016) Deutsche Bank opens Digital Factory in Frankfurt
  12. Financial Times (October 9, 2016) Frankfurt vies for UK banking jobs post-Brexit
  13. Bloomberg (September 12, 2016) Frankfurt's Brexit Pitch: We'll Make It Easy to Fire Bankers

Other articles in the series

May 31, 2017

From London to Dublin?

May 26, 2017

Flight from London?