European regulators have the means to shut down key parts of London’s financial centre at a stroke if Britain left the European Union and would not hesitate to do so, leading central bank experts have warned.
Membership of the EU single market is the UK’s only legal defence against an onslaught of regulations aimed at forcing banks and fund managers to decamp to the eurozone, they say.
“It would be catastrophic and suicidal for Britain to leave. The UK would lose the protection it currently enjoys as the eurozone’s major financial centre,” said Athanasios Orphanides, a former member of the European Central Bank’s governing council.
Mr Orphanides said the ECB is already clamping down on payments, clearing and settlement systems conducted in euros outside its jurisdiction, a move deemed necessary to head off future crises. “The only thing stopping regulation that would shift all such activities from London to the eurozone is the legal protection the City enjoys in the EU,” he told The Daily Telegraph.
While Britain is in a “very strong” position now as an EU member outside the eurozone, this would evaporate the moment the UK tears up its membership card. “The UK would be the big loser. I don’t believe it will happen because Britain has the best technocrats in the world, and the British people are rational,” he said.
Legal guerrilla warfare is already under way and EU officials say privately that the struggle for control over the financial industry is reaching a critical point, with Britain rapidly key losing allies. The UK Treasury filed a case at the European Court in late 2011 to block ECB plans that would limit euro transactions by clearing houses if they take place outside EMU territory. It said large-scale euro contracts should come under the sway of the ECB, since no other central bank can issue the currency as a lender of last resort in an emergency.
Britain said the plans breach single market laws allowing firms to set up a business anywhere in the EU. The ECB has held fire for now but the case is still pending. “This is a very real threat,” said Mats Persson from Open Europe.
Dino Kos, a former head of markets at the New York Fed, said the City is more vulnerable to a regulatory squeeze than people realise. “Governments have the power to control where clearing happens, and therefore where trading happens. Central banks can say businesses must have an onshore presence,” he told a Bloomberg forum.
The prize is big. Some 75pc of Europe’s over-the-counter derivatives trades take place in London, and 40pc of global trades. The worldwide market is around $640 trillion in notional contracts, churned constantly.
The ECB’s proposed rules would force LCH Clearnet, and other clearers such as ICE and CME, to hive off part of their business to eurozone hubs. Leaked documents from the Banque de France in 2009 revealed that Paris was pushing behind the scenes for a French clearing house, explicitly to break London’s stronghold. France has since tried to push through a directive requiring clearers to have access to ECB liquidity for euro trades.
Graham Bishop, an expert on EU regulation, said there is a string of parallel disputes, covering such arcane areas as “UCITS” depositories for EU unit trusts or rules on fund management. “The big danger is that foreign banks and funds quietly locate their new business in Frankfurt and Paris, and after five years we will discover that the centre of gravity has moved,” he said.
Deutsche Bank bases its global business and trading in London with 8,500 staff in the UK, much to the irritation of German lawmakers. France’s top lender BNP Paribas has a big trading centre and 8,000 staff in Britain. Both banks are under political pressure to repatriate operations.
The regulatory assault on the City has been an escalating drama since the Lehman crash in 2008. Three EU agencies have been created covering banking, insurance and markets with binding powers that can overrule a British veto on key matters in extremis, effectively stripping Westminster of final control over regulation of the City for the first time in 300 years.
The key measures were signed into law by the Coalition shortly after taking power, before it understood the full significance. The ECB and the Bank of England will share oversight as the EU’s new banking union takes shape, but it is a compromise fraught with trouble.
Giles Merritt, the head of Friends of Europe in Brussels, warned that EU leaders could become vindictive if Britain’s in/out referendum degenerates into a slanging match. “If British eurosceptics turn it into a sneering campaign against Europe, then the Europeans will play hardball,” he said.