The Financial Services Sector in the Post-Brexit Environment

Helle Marie Nymann Leth & Nikoline Søndergaard Wagner

Student thesis: Master thesis

Abstract

This research paper seeks to go into depth with the uncertainty the financial institutions in the City of London are experiencing as a result of Brexit. This will be done by identifying how London is being affected by the exit, how the financial institutions are reacting to the situation, and finally, how the different cities, Frankfurt, Dublin, Paris and Luxembourg, can exploit from a potential migration. The financial institutions are currently either speculating or have decided on a potential migration from the British capital, whilst awaiting the results of the negotiations. If the businesses are to relocate, there will be different factors and determinants influencing the final choice of destination. Brexit, and hereto the use of sources, is being critically examined throughout the thesis, accompanied by a positivist approach. The thesis is founded on the quantitative method to provide a broader perspective for the reader. The interviews conducted are semi-structured, seeking the interviewees own interpretation of the subject, in accordance with a hermeneutic approach. The findings in this paper show that there is a negative effect associated with the departure, regarding trading, levels of FDI and economic growth. The findings show that the UK awaits a longer period of financial instability and lower levels of economic activity. Similarly, the City will likely experience a drop in the level of FDI, in case no special agreement on financial services is arranged. The UK has been a very strong contributor to the EU, which will create a large economic gap, and presumably will increase the overall EU-related costs for the EU27. This paper also finds that the EU is moving towards a federalist direction, in an economically sense, e.g. with the banking union and capital markets union, and that the UK is looking towards a somewhat backwards integration in order to regain sovereignty, and this is creating this ‘clash’ between the them. London and financial institutions depends highly on their passporting rights, and the risk of losing this could have serious consequences for the City, enhancing the incentive for the financial corporations to consider a migration. The paper finds an indication of the financial institutions employing locally, when establishing a new branch within the European borders and not relocating employees from 5 the City of London. It hints that the institutions are preparing for a worst-case scenario, but seek to keep their presence in London. This paper establishes that, while the four cities are working effectively on improving their competitiveness within financial services sector based on FDI determinants, there are opportunities for enhancing the attractiveness of the cities. It is found that the UK is facing a period of both political and economic instability postBrexit, and therefore, the exit may not be causing as much turbulence to the financial market within the EU as first anticipated, but based on the Commission’s proposal to the EU budget, the costs associated could increase for the EU27. Preliminary forecasts of the British economy show signs of a stagnation or a decrease. It is likely that the UK will be experiencing lower levels of productivity and financial activities, and a higher level of unemployment and access to skilled foreign labour. In contrast, the EU will presumably experience a period of uncertainty post-Brexit, generated by the state of the UK economy

EducationsMSc in International Business, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2018
Number of pages124