If Britain votes to leave the European Union in June, some US banks could give up parts of their business in the bloc altogether.
The option is an extreme scenario under consideration by some Wall Street firms if the terms of an exit, currently a matter of speculation, leave financial services companies in Britain unable under their current set-ups to do business inside the EU, according to discussions Reuters had with several US banks and their lawyers.
The scenarios being studied by task forces at US banks underscore the extent to which the London operations of non-European banks are linked to business on the continent.
In particular focus are the banks’ market operations, as trading of most European securities is regulated at the EU level but conducted by many investment banks mainly out of London.
The five largest US banks employ 40,000 people in London, more than in the rest of Europe combined, taking advantage of the EU “passporting” regime that allows them to offer services across the bloc out of their British hubs.
Having to reorganise business in order to set up new continental European outposts – which US banks say is a worst-case scenario that they are being forced to consider – would be so costly that it would make some rethink their commitment to the bloc altogether.
“The costs may lead some banking groups to reassess how important Europe is in the context of their global business and what sort of presence they wish to maintain post-Brexit,” said Edward Chan, a partner at the law firm Linklaters, which has been advising banks on contingency arrangements.
If Britain were to remain a member of the European Economic Area (EEA), which gives Norway, Iceland and Liechtenstein access to the EU’s single market, its financial companies would retain passporting rights for EU countries, although Britain would have no say in the formulation of EU rules.
But if Britain quit the EEA, UK-based firms wanting to operate in the EU would face an “equivalence” test to prove to Brussels that their home rules are as strict as those in the EU.
Leading Brexit campaigner Boris Johnson has said Britain could create a “Britzerland”, based on Switzerland’s bilateral treaties with Brussels.
However, Swiss financial institutions do not enjoy passporting rights within the EU, and Swiss investment banks, like their American peers, base most of their EU operations in London.