Japanese banks to move their European HQ from London to Frankfurt after Brexit

Skyline of Frankfurt am Main’s financial district. Copyright European Union, 2017 / Source: EC – Audiovisual Service / Photo: Daniel Roland

One year after the UK has decided to quit the EU, the first effects of the “leave” vote on the financial sector are becoming visible. Japanese brokerage giants Nomura and Daiwa Securities Group have decided to pick Frankfurt as their new base for European operations, and will soon begin relocating staff from London to Germany. The move puts Nomura and Daiwa among the first world-class finance players to exit the City of London after Britain leaves the bloc, and it’s shaping up to be not an isolated case in the coming weeks and months.

Background

Since the Brexit vote, one year ago, the future of the City of London, Europe’s biggest financial hub, has been dominated by uncertainty. Some of the world’s biggest banking groups such as JPMorgan Chase, Goldman Sachs, Citigroup and Morgan Stanley had immediately warned of the chance of them planning on a relocation outside the United Kingdom as a first consequence of the vote, while Remain campaigners were warning of a sort of getaway since months before the June 2016 vote.

The issue is a related to the fact that US, Japanese and – in general – non European banking groups have been historically setting up their businesses in London, as the City used to be their main point of access to the European Market for decades, thanks to the EU member-state status the UK enjoyed. The “leave” vote clearly changes the European status of Great Britain, and those groups need now to shift their business outside Britain in order to still be able to keep a foothold in the European Union.

Nomura

So last week some of the main media-outlets announced that Nomura, Japan’s largest brokerage and investment bank, is set to relocate its European headquarters to Frankfurt. The Financial Times and Bloomberg reported last week that, according to people with knowledge of the matter, will from July begin “setting up the operation” in Germany and expects to move “several dozens” of bankers and back-office staff from London to run it. Nomura has declined to comment so far.

The company, which employs more than 3,000 people in Europe (2,300 in London alone), is expected to transfer fewer than 100 people to Frankfurt from London, but the move looks already alarming for whole economic system of the City, which currently is the largest financial hub on Earth for number of transactions. Especially because Nomura is not an isolated case.

Daiwa’s decision

Indeed last week another Japanese group has announced it has already decided it will leave Great Britain in favour of Frankfurt as a consequence of Brexit. Daiwa Securities Group, Japan’s No. 2 brokerage firm, has said last week it will set up its European subsidiary in Frankfurt, in order to “ensure that Daiwa can continue to service its clients in EU after the United Kingdom leaves”. The Japanese giant is among the first groups to publicly choose another European country to keep serving its clients in the Old Continent after Brexit, and has issued an official press release to formalise the move.

A translation of the group’s press release seen by the Press Association said: “Daiwa Securities Group, Inc. announced today that it has decided to establish a new subsidiary in Frankfurt am Main (Germany) and will make a license application to the German regulator accordingly”. “This arrangement will ensure that Daiwa can continue to service its clients in EU (Europe Union) after the United Kingdom leaves the EU”, the statement by Daiwa also said.

More to come?

The decisions by Nomura and Daiwa come just days after Goldman Sachs’ European boss Richard Gnodde said his firm would “very probably” double numbers in Frankfurt when the UK quits the EU, as reported by the Financial Times last Thursday. And this is not all. Morgan Stanley also would reportedly be close to picking Frankfurt for its new European Union hub in preparation for Britain’s departure from the bloc, according to Bloomberg. The New York, US-based news agency, reported that both Goldman Sachs Group Inc. and Morgan Stanley would be currently scouting for office space in Frankfurt, as for both the German hub would be the favoured option.

Frankfurt’s momentum

Frankfurt is indeed emerging as the No. 1 option for large banking groups to relocate their European activities out of London, after Paris and Dublin where thought to be the best sites in the first place. There’s multiple reasons behind the momentum the German financial hub is enjoying. Firstly, it is the home of European Central Bank, which supervises all EU banks and sets monetary policy for countries that use the euro. Secondly, it is located in EU’s most populous country, the continent’s biggest economy and by all means the most stable market in the Region. Many big international banks already have a significant presence there, and its central position in the Old Continent also helps.

Both Nomura and Daiwa have been considering Dublin for its EU hub, but, according to the Financial Times, they found that Irish regulators were wary about taking on complex investment bank businesses. German lobby group Frankfurt Main Finance, which is leading the campaign to attract business to Frankfurt, is convinced that Frankfurt could win up to 10,000 jobs, and that as many as 20 international banks to either expand or create operations in Frankfurt as a consequence of Brexit. “Now we expect at least a dozen; if all goes well we could very well have 20”, Hubertus Väth, head of Frankfurt Main Finance, told the Financial Times.

Soft Brexit?

Despite what seems to be a big getaway from the City, London will probably never lose its status of premium financial centre. Most of the groups that are planning to relocate their European activities outside the UK, including the above mentioned ones, would only move a small portion of their employees out of the City, and would never shut their London offices. Other than what is true for Nomura, which will move less than the 4% of its London manpower, Daiwa has only spoken of a “new subsidiary” to be opened in Frankfurt, and said it would still keep staff in London even after Brexit.

Morgan Stanley, which currently employs more than 5,000 people in London, is expected to only move a part of its jobs out of the UK, and to set only the broker-dealer business in Frankfurt. However, what remains true is that, if London-based firms from the US, Japan and other non-EU countries will be willing to keep their “passport” and do business with the EU-27, will be forced to move at least part of their business somewhere else inside the bloc.

The UK’s Chancellor of the Exchequer Philip Hammond and Bank of England Governor Mark Carney made a pledge last week to defend the financial-services industry and to shift Brexit focus away from controlling migration to safeguarding jobs. In the meantime the City will be waiting to see if other big banking groups will follow the “Japanese way” and move staff to Frankfurt. JPMorgan Chase & Co., Standard Chartered Plc. and Citigroup Inc. are on the list.