The City thrived as the EU’s finance hub. But now new opportunities look more promising, says Matthew Lynn.
Deutsche Bank has been staggering from crisis to crisis for years now. Its shares have fallen almost 90% from their pre-crash peak, and what was once Europe’s mightiest financial institution is now a shadow of its former self. With 8,000 staff in London, it was one of the largest employers in the City, and it was a mark of the British capital’s dominance of European markets that the German giant chose to run its trading operations from here rather than Frankfurt. Many of those jobs were eliminated in a restructuring this week, and unless there is a dramatic turnaround it is likely that many more will be lost in the next few months.
By itself that might not matter so much. Investment banking is a cyclical, turbulent industry. But there is also a deeper theme here. It is not just Deutsche that is in trouble. Most of the major European finance houses are in retreat. BNP Paribas, its only real equal inside the eurozone, has been struggling this year because of losses in its trading division. Credit Suisse has been hit by trading losses, and has spent years reducing its reliance on investment banking. UBS has been cutting jobs in investment banking, and so has France’s Société Générale; Germany’s Commerzbank has too many problems of its own to do anything other than retrench. There is not a single European bank that is expanding.
There are reasons for that. The eurozone has been stagnant for years, and that is being reflected in the strength of its banks. They are not so important any more because their domestic economies are not very strong. The imbalances that are endemic within the single currency zone mean that huge sums have to be recycled through the banking system and that has created vast potential losses. And the negative interest rates the European Central Bank has imposed have wiped out bank profits by making it virtually impossible to earn any sort of margin on deposits or loans. Europe has crippled its banking sector and it is unlikely to recover anytime soon.
That matters for the City. Over the last 30 years London has turned itself into Europe’s main financial hub. A deep talent pool, access to global markets, a stable legal system and membership of the EU’s single market meant it was the easiest place for European companies to raise capital and for investors to trade shares, bonds and debt. London accounted for the vast bulk of Europe’s equity trading, its derivatives market, its foreign-exchange business, its hedge funds and its bond issues. That was great while it lasted, and it was one of the key reasons the City flourished. Europe could use it to access the world, and the world could use it to access Europe. True, it meant complying with the EU’s often meddlesome rules on finance. But that was a price worth paying.
A changing equation
The trouble is, most of Europe’s financial sector is now in full-scale retreat. That changes the equation. It was worth complying with the EU’s rules if it meant Deutsche employed 8,000 highly paid staff in London and generated lots of tax revenues. For 1,000 staff, or even 500? Not so much. The City has been fretting for the last three years about losing access to the European market if we see a no-deal Brexit. But the EU’s banks have already been leaving Britain – because it doesn’t have a sustainable business any more.
The City has already started to refocus on its links with China and the Middle East and North America. It has created a system that makes it possible to trade Chinese equities in London. It has carved out a niche as the place to list Russian or Middle Eastern companies. It has started to pivot towards raising debt for businesses and governments across the developing world, and it is becoming an alternative technology hub to the west coast of the US. The City will need to double down on that, and focus a lot less on what kind of relationship survives with the EU. Its links with Europe have been great for the last three decades, but as the likes of Deutsche wind themselves down there is very little mileage left in them – it is time to move on to the next opportunity.