Rome [ENA] The United Kingdom’s exit from the European Union generates an opportunity for the remaining EU27 to speed up a better development of its financial markets increasing its resilience against shocks. It’s important to remember that: England voted for Brexit, by 53.4% to 46.6%, as did Wales, with Leave getting 52.5% of the vote and Remain 47.5%. Scotland and Northern Ireland both backed staying in the EU.
Scotland backed Remain by 62% to 38%, while 55.8% in Northern Ireland voted Remain and 44.2% Leave. In the same way, Brexit entails risks for market integrity and stability, because the EU including the UK has been definitively dependent on the Bank of England and the UK Financial Conduct Authority for oversight of its wholesale markets. Deprived of the United Kingdom, the EU27 must quickly elevate its capacity to safeguard market integrity and financial stability. Moreover, losing even partial access to the efficient London financial centre could cause a loss of efficiency for the EU27 economy, mainly if financial developments inside the EU27 remain limited and unequal.
London is the financial hub of Europe, providing corporate and investment banking services to the European Union’s member states and well beyond. In a scenario without the United Kingdom by the spring of 2019, UK-based financial firms would lose their passports to do direct business with EU27 clients. Disentangling 43 years of treaties and agreements covering thousands of different subjects was never going to be an undemanding task. It is a thorny question also because it has never been done before and negotiators will be arranging it as they go along.
The post-Brexit trade deal is perhaps the most complex part of the negotiation because it needs the unanimous approval of more than 30 national and regional parliaments across Europe, some of whom may want to hold referendums. Anyway, Brexit would thus lead to a partial relocation of financial services activities from London to the EU27 (EU minus UK) so that financial firms can go on to work with their customers there. The EU27 should ameliorate its financial surveillance architecture to reduce the financial market fragmentation subsequent to Brexit and the corresponding increase in borrowing costs for firms.
Some decrease in cross-Channel integration is inevitable and the EU27 should move quickly towards a fully integrated single market for financial services, with coordinated rules and stable supervision and enforcement. Policy initiatives need to comprise governance reform and greater empowerment of the European Securities and Markets Authority, further steps towards banking union and third-country regimes for the supervision of market infrastructure firms, similar to those in the United States. With policy integration, there will be less necessity for financial firms to move to one location, reducing the pressure for all facilities (infrastructure, offices with trading floors, residential housing) to be in one city.
Brexit is also an opportunity to build more integrated and vibrant capital markets in the EU27 that would better serve all its member economies, increase risk sharing to resist local shocks and make the EU27 an smart place for global financial business. This would accelerate the rebalancing from a mostly bank-based to a relatively more market-based financial system, which is a central objective of the EU’s Capital Markets Union (CMU) policy. That is to say, that a reliable supervision of wholesale markets and enforcement of relevant regulation is critical to achieve cross-border integration.
In this case integration of the institutional architecture is required, for which the tried-and-tested model in the EU is a hub-and-spoke design, long used for competition policy and, in recent times, for banking supervision. An organized way of implementing this, without the need for changes to the EU treaties, is through the reinforcement of ESMA, the European Securities and Markets Authority that was created in 2011 and that already has a direct EU wide supervisory role, though only for limited market segments. An expansion of the scope of ESMA’s authority requires reform of its governance and funding, which at present limit its independence and capacity.
ESMA should be the central authority for enforcement of International Financial Reporting Standards. With Brexit, some components of the EU27’s financial system infrastructure will find themselves outside of its territorial scope. This challenge should force a broad rethink of the way the EU27 manages its regulatory relationships with third countries, which for now are largely organised around the principle of recognition of equivalence. http://bruegel.org/reader/making-the-best-of-brexit-for-the-eu27-financial-system#