photo: Leon Yaakov
Yesterday, in the wake of BoE Governor Mark Carney’s warning of a potential Brexit threat to British financial stability, we followed up on our analysis of BlackRock’s Brexit research report. The central premise of yesterday’s post was that the financial industry in Britain is enormous — in terms of its size relative to GDP and also in relation to the amount of tax revenue generated by the sector.
In addition to the risks posed to the UK due to the scale and weight of the British financial industry, regulatory uncertainty, in the event of a Brexit could be, as we wrote yesterday, “especially pernicious” — due to “passporting” risk. As we quoted from BlackRock’s report yesterday:
“The sector’s influence goes beyond fiscal policy and the balance of payments. Financial and related services made up 11.8% of GDP in 2013, according to a March 2015 TheCityUK report. Much of the industry’s surplus with the EU is dependent on unfettered access to the single market. This is known as ‘passporting,’ the right of a company registered in the European Economic Area (EEA) to do business in another EEA state. Leaving the EU would curtail the industry’s market access – and reduce the surplus on the UK’s capital account.”
Now, take a look at this chart from the BlackRock report — which appears quite literally on the last page:
The chart shows the relative share of different lines of business within the British financial services industry, compared against the other 27 nations in the European Union.
While British bank lending represents 18% of the EU’s total bank lending, the UK is responsible for 85% of hedge fund assets, 64% of private equity funds raised, and exactly half of total fund management.
So how exposed is Britain’s massively overweighted asset management business?
As BlackRock puts it:
“The UK is the behemoth of fund management in Europe, yet this dominance is contingent on the ability to do business across the continent. Regulation matters – a lot.”
“The EC could try to discourage other member states from going it alone by raiding the UK’s honey pot, the financial industry. One way to do this would be to refuse to issue the industry a Markets in Financial Instruments Directive (MiFID) passport, in our view. This regulatory framework is crucial for UK capital markets and investment firms selling or advising funds in the EU.”
All of which may make you wonder: In the event of a Brexit, what impact might a refusal to passport Britain’s financial industry have — not just on the UK itself but also on the other 27 nations of the European Union?
Especially when Britain’s financial industry appears to be both overweight and unbalanced.