A vote to leave the European Union could push banks away from London, as financiers choose to locate in Dublin or Paris instead, a leading ratings agency has warned.
In a new report, Standard & Poor’s said that a departure from the EU would imperil the City’s status, and could see Europe’s banking center of gravity shift away from the UK’s capital.
“London is the principal global hub for banking and financial markets, and non-EU banks typically make it their springboard for conducting operations in the EU,” the report said, noting that a fifth of global banking activity is booked in the country.
While London would “maintain its status as a global financial center” if Britain voted ‘no’ to continued EU membership, S&P warned that international banks “could ultimately consider other locations as bases for their European operations”.
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The ratings agency said: “Post-Brexit, the center of gravity in European financial markets could well move further toward Frankfurt, Paris, Dublin, or beyond.”
But Frank Gill, a credit analyst at S&P, added: “The extent of this impact will crucially depend on what alternative free trade arrangements the UK government could agree with its European partners in the event of an exit.”
The UK will retain so-called “passporting rights” if it remains a part of the European Economic Area (EEA), which could mean that banks and trading services based in London could continue to operate across Europe.
“Without these rights, we see a risk that enough major global banks could choose to route their business through other financial centers in the EEA that retain those rights,” S&P said.
S&P downgraded the UK’s sovereign rating from AAA with a “stable” outlook to “negative” in June, based on the Government’s decision to hold a referendum on EU membership.
The move came after Moody’s, another top ratings agency, said that Brexit could threaten the UK’s growth prospects and damage its high sovereign debt rating.
Any threat to the financial services sector could also exacerbate the UK’s current account position, characterised by large and persistent deficits.
Mr Gill said: “Given that the UK operates the second-largest current account deficit in the world, to put at risk one of the few net exporting sectors via a highly politically charged referendum would in our view pose substantial risks to the balance of payments, the currency, and the economy.”
At present, finance attracts 30pc of the inward foreign direct investment that comes into the country, S&P said, and is an industry on which the UK is particularly reliant.
Mr Gill said that an exit from the EU could “significantly dent the UK’s current net trade surplus in insurance and financial services of more than 3pc of GDP”.
Economists have warned that the UK’s large current account deficits make it vulnerable to shocks, and that foreign investors could become less willing to finance these if the country left the EU.
For insurers, an exit from the EU could be “costly but not game-changing”, S&P said.
“We see the UK’s highly successful insurance sector as less exposed to any risk of a UK exit from the EU,” the report said.
It continued: “While the EU represents about one-third of the UK’s very substantial financial services net export surplus, the insurance sector in the UK is far more reliant on trade with non-EU countries, especially the US, and is a very limited recipient of inward investment.”
[“source – elegraph.co.uk”]