Brexit forced international banks (i.e. non-EU and non-UK headquartered) to create separate client-facing subsidiaries in the EU and the UK, effectively partitioning their corporate and investment banking (CIB) business in separate headquarters.
The build out of the EU subsidiaries has been gradual and at present their assets range from 7% and 30% of UK subsidiaries’ assets, in line with the more measured pre-Brexit forecasts.
In conjunction with the post-Brexit buildout of EU subsidiaries, the financial returns of the CIB business in Europe have improved substantially and reversed a multi-year trend of high cost-income ratio and low return on capital.
These improved business returns have masked the impact of running a second regional headquarter, which introduces financial and operational inefficiencies: trapped capital and liquidity, loss of diversification benefits across positions, duplications in the operating model of supporting functions etc.
While some banks have introduced Brexit inefficiencies, some of competitors have managed to maintain more efficient structures. For example, EU banks generally centralise the European business in their EU headquarters and some international banks have managed to consolidate most of their European business in one entity (i.e. with a EU/UK asset ratio of less than 3% or more than 97%).
As a result, for some international banks the dual headquarter may prove unsustainable in the long run and lead them to re-define how they operate in Europe.
This has not been possible so far because the re-definition of client-facing subsidiaries is a is a large undertaking that requires certainty on both the business and the regulatory context. This uncertainty has greatly reduced since Brexit:
- The UK/EU regulatory frameworks don’t seem to be diverging fast, with residual uncertainty limited to specific areas such as EUR Clearing;
- CIB clients have adapted to operating cross-border;
- EU talent hubs are developing fast in cities like Amsterdam, Frankfurt, Paris and Dublin;
- Regulatory demands on the level of substance for client-facing subsidiaries are now known.
Against this backdrop of decreasing uncertainty, International banks should seek to regain structural efficiency in Europe vs their better placed competitors and assess options available consolidate businesses in a single regional subsidiary, reduce the number of regional subsidiaries or consolidate the support functions in regional centres of excellence.