The fate of euro clearing in London will hang in the balance until the final outcome of the Brexit negotiations is known, the governor of the Central Bank of Ireland has said.
In an interview with The Times in Dublin, Philip Lane noted that as things stand Britain and the EU operate under the same regulatory regime.
“The question is once Brexit has occurred what type of understandings can be developed between the UK and the EU,” Mr Lane said. “The European Commission’s position [on euro clearing] turns on this point and that is the importance of location. It is not going to be important if the regulatory systems are going to be similar.
“On the other hand, if there is a significant distance between the UK regime and the EU regime, then location becomes a live issue because euro clearing is an important part of the European financial system.”
London is the global hub for the £880 million a day euro clearing market. The commission published a paper in June calling for more powers to oversee euro clearing after Brexit, although it reserved its position on the future location of the service.
London will remain a significant global financial centre, although the extent of its role in the financial services industry of the remaining 27 EU member states again hinges on the outcome of negotiations, Mr Lane said.
“If Brexit delivers two systems that are similar in regulatory philosophy, then the amount of cross-border trade between the UK and the EU 27 can be substantial. If Britain adopts a different approach to regulation, then that may well lead to a greater need for the European financial system to be more inside the EU border and the UK taking a less significant role.”
Dublin was expected to be one of the main beneficiaries of London’s financial institutions looking to retain a presence in the single market. So far the results have been mixed. On Friday, Bank of America announced that its new EU banking hub would be in Dublin, but the city is trailing well behind Frankfurt. The Irish Central Bank has been criticised by politicians and lobby groups for not doing enough to secure Brexit-related investment.
Mr Lane rejects this criticism. “The idea that we are not open for business just cannot be true because we already regulate so many firms. We already have a large financial services centre. And in terms of new business, we are already seeing enough new inquiries that we think it is quite consequential in terms of the level of activity here. We are making our resource plans in terms of a substantial increase in activity.”
He added that all member states were subject to the same EU regulation and the Central Bank was “neither more forgiving or less forgiving” in the application of these rules.
Mr Lane is also on the governing council of the European Central Bank. The eurozone has been the big surprise this year. Growth in the currency union has outstripped the US and Britain.
“The signals are that the recovery is fairly solid,” Mr Lane said. “For the ECB it is still the case that inflation is too low compared [with the] target.”
Monetary policy was the wrong place to look for the answer to the long-term underpinning of the eurozone, though, he added. “One of the biggest, most robust lessons in economics is that monetary arrangements do not have a first-order role in long-term economic growth, so low growth issues have little to do with the euro.
“It cannot be the case that the affluence of a country fundamentally turns on monetary arrangements. It has much more to do with fundamentals such as geography, people, institutions and policies. It remains a live issue about what needs to be done to make the euro area more robust and that is still an open question.”
