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Brexit ‒ View ofthe Association of German Banks
26 January 2017
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Summary Timetable
Negotiating phase
Outlook for banks
Outlook for customers
Need for adjustments
Consequences for the EU
Frankfurt as a financial centre
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Basic position of the Association of German Banks on Brexit
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Europe
But the top priority is the cohesion of the EU27 Continued integration of the internal market is needed, with
economic, monetary, banking and capital markets union The internal market needs all four fundamental freedoms
Brexit a mistake We regret the vote to leave We don’t think the decision is reversible We assume the UK will exit the EU
Long-term relations
The UK remains an important part of Europe We remain interested in very close political and economic ties
between the EU and UK This requires a comprehensive economic agreement which
allows extensive mutual market access
Banks
Our members want to see continuity in business relations and activities
The primary concern is the maintenance of financial stability A secure political and regulatory environment is needed so
that a dependable service can be provided to customers
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“Hard” Brexit scenario
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2017 2018 2019 later23.6.Referendum
Starting point Majority of UK policymakers
pushing for a clean break; negative effects have not yet to make themselves felt
Priority for EU is cohesion of EU27
Contentious negotiations about exit agreement likely
23.4./7.5.2017FR elects new PresidentSeptember 2017General election DE
Expected April 2019EP elections
May 2020General election scheduled in UK
Two-year period for Brexit negotiations Economic agreement
Brexit Result of the overall
situation: “hard” Brexit UK loses all privileged
market access and becomes third country on 1 April 2019
Transitional period (following 1 April 2019) Comprehensive transitional
agreement unlikely Partial agreements possible
in final phase of negotiations; impossible to predict at present
Banks now under pressure to be ready for 2019
Economic agreement Only achievable in the long
term, if at all
July 2019Election COM President and appointment of new COM
Phase 1 Phase 2
Expected March 2017UK triggers Art. 50
January 2021New EU budgetary period
17.3.2017General election in NL
Phase 4
Third-country access ?
Phase 3
25.3.201760 years since Treaty of Rome
Spring 2018General election scheduled in IT, may be brought forward to summer 2017
?
Expected June 2017EU negotiating line
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Basic principles of the negotiationsFair negotiations EU must accept the decision to leave UK must be prepared to accept the consequences; there will be differences between
members and non-members Both sides should negotiate constructively
Fair behaviour Avoid creating one-sided competitive advantages (tax or regulatory dumping, state aid) EU27 must be able to manage its affairs
Keep long-term outlook in mind Goal: comprehensive economic agreement with extensive market access; the exit
negotiations will lay the groundwork – also in terms of the political climate Regulatory standards should not develop in different directions
Special aspects for financial services Primary objective is to maintain financial stability and a level playing field Important to keep a regulatory and political environment which enables banks to serve
customers dependably and with legal certainty, but also allows a return to profitability
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Outlook for banksEU27 banks EU27 banks normally operate with branches in London Shifting business back to the EU relatively easy from a regulatory and
organisational perspective, but a challenge in terms of staff and technology
UK banks Some UK banks already have subsidiaries in Germany Others engage in little market activity in Germany Very few adjustments needed
Third-country banks Most have their EU headquarters in London; no passporting rights in future Will relocate to EU27 with branches or subsidiaries; may also withdraw to home
market or relocate to other international finance centres
Basic strategy of all banks Need for basic decision on way ahead in the first half of 2017 Step-by-step approach: postpone decisions for as long as possible; preparation
(e.g. applying for a licence) is not the same as implementation
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Outlook for customers (I)Retail customers Brexit will have no implications for retail customers in Germany Financial services are supplied almost exclusively by domestic banks
Corporate customers The same goes for commercial and corporate clients in Germany since most are
also served by domestic banks The entire existing range of financial services – funding, investment services,
hedging, transactions – will continue to be readily available London based contracts: Documentation and processing will become more costly
and complex, and the number of suppliers may fall
Very high-volume transactions Very high-volume financing and hedging transactions may face some restrictions Clients seeking such services may establish their own market access to the UK
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Outlook for customers (II)International business Brexit will hardly undermine London’s position as the world’s biggest currency
trading venue; there will be continued access to trading
Economic impact Continuing uncertainty, obstacles to international trade and a reluctance to
invest pose long-term risks to the UK economy Funding the budget and current account deficits will be another long-term
challenge As a major trading partner of the UK, Germany is affected by these risks too; but
overall only minor implications for growth and employment in Germany
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Adjustment to future third-country statusStarting point UK will become a third country At the same time, substantial and complex economic ties have grown up over the
years EU and German laws should be adjusted to reflect this in order to mitigate the
impact of upcoming changes on existing contractual relations
Examples of the need for adjustments (I)
At EU level Clarification of data protection framework Clarification of whether securities denominated in euros will in future have to be
cleared in the EU or the eurozone; arrangements for existing business Amendments to banking regulatory requirements (e.g. in the clearing and
settlement regime) to protect existing contracts
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Examples of the need for adjustments (II)Eurozone Cooperation agreement between eurozone and UK financial supervisors
Germany Clarification of tax arrangements Simplified processing of residence permit applications and grandfathering
arrangements for UK citizens already living in Germany UK real estate should remain eligible to serve as cover assets under the German
Pfandbrief Act Cooperation agreement between BaFin and UK financial supervisors
In Germany we need a law enabling German legislation to be adjusted in the light of Brexit!
€
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Consequences for the EUInstitutional consequences UK is a net contributor the EU budget; EU must have the capacity to act on the
2019 and 2020 budgets and on the medium-term financial framework for the 2021 to 2027 period
The maximum number of MEPs should be decreased; no reallocation of seats vacated by UK MEPs
The EU will lose a member state committed to the market economy; the German government will need to position itself more clearly
European integration The goals should be to consolidate what has been achieved and move forward in
small steps Subsidiarity principle needs to be strictly observed and the internal market
integrated further in terms of economic, monetary, banking and capital markets union with firmly binding rules and effective sanctions for non-compliance
A set of common economic policy principles needs to be developed
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Political commitment
RegulationAdministration
Clear commitment by the federal and regional governments, the city of Frankfurt and the financial industry to promote Frankfurt as the financial centre of the European Union
Call for the European Banking Authority (EBA) to be moved to Frankfurt
Removal of “home-grown” regulatory obstacles
Location factors (schools, transport, administration)
Frankfurt – Berlin fintech hub
Prerequisites for Frankfurt’s positioning
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Five proposals for removing home-grown regulatory obstacles
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Legislation governing terms and conditions
of business
Further enhance personal autonomy by lifting the applicability of general business terms and conditions to commercial transactions
Bank levy Remove the ban on the tax deductibility of the bank levy
(in place since 2010 in Germany and since 2016 for contributions to the Single Resolution Fund)
Venture capital Ensure transparent taxation of private equity investors
Accounting Allow companies to prepare individual financial statements in
accordance with IFRS only, without needing to prepare German GAAP accounts as well
Labour law
Make it easier to fire very high-earning staff Adjust German Working Time Act to reflect digitalisation Refrain from creating further competitive disadvantages
(e.g. German Pay Transparency Act)
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Background Strengths of Frankfurt as a financial centre
Comparison of financial centres
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Frankfurt highly suitable as an EU gateway
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Financial centre of the eurozone
Frankfurt is the banking and financial centre of the eurozone Efficient stock market, which will become even more
important after merging with the LSE Centre of fintech innovation; bridge to startup capital Berlin
Banking supervision
Frankfurt is the seat of the European Central Bank, the SSM and EIOPA and thus the most important centre of monetary and financial policy in the European Union
Location factors
Major centre of financial research and training Good transport and digitalisation infrastructure Cost of living comparatively low by European standards; office
space also comparatively inexpensive and readily available
Sound legal environment
Stable political system Governed by the rule of law with functioning legal remedies Legal certainty and smoothly functioning administration
Dispute resolution in labour law
Dispute resolution is swift, inexpensive and predictable No significant “suing culture” Codetermination does not hamper managerial decision-making
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Comparison of London, Frankfurt and ParisA brief overview
London Frankfurt ParisPopulation(2014; in million) 8.5 0.7 2.2
Foreign banks as a percentage of all banks(%; ECB definition, as at end of 2015)
51.1 37.9 28.4
Financial centre ranking(GFCI1, 2016) 1 19 29
Ease of Doing Business Index2(country-specific, 2015) 6 15 27
Tax burden ranking(country-specific, 2015) 15 72 87
Market value of stock exchanges(market capitalisation in €bn, 2015) 133 15.7 3.34
Share turnover(EOB trades in €bn, 2015) 2,4033 1,410 1,8824
ETF turnover(in €bn, 2015) 388.33 198.1 162.44
Sources: Helaba, World Bank, WFE, Z/Yen
1 The Global Financial Centres Index (GFCI) of the Z/Yen think tank ranks the competitiveness of financial centres based on indices analysing the business environment, development of the financial sector, infrastructure, human capital and reputation and also on responses to a survey of financial experts.2 The World Bank’s Ease of Doing Business Index ranks economies from 1 to 189 on their ease of doing business. A high ranking means the regulatory environment is more conducive to starting and operating a local firm. 3 LSE with Borsa Italiana 4 Euronext, which operates in Amsterdam, Brussels, Lisbon and Paris