Will Banks Find a Better European Home than London Post-Brexit?

JP Morgan is reportedly scouring the continent, as well as Ireland for a new post-Brexit home base in the euro-area. The bank employs 16,000 people in the U.K. It may be hard to leave behind the financial infrastructure of the U.K. for an untested new country where the bulk of the bank’s employees won’t speak the language. At the top of the list appear to be Frankfurt, Paris, Luxembourg and Dublin.

Some of the pressure to move is driven by obtaining the required banking licenses to do business in the euro-area. Max Colchester writes in The Wall Street Journal

Currently, J.P. Morgan has three European subsidiaries with banking licenses: a bank in Dublin, one in Luxembourg and a Frankfurt-based investment bank which handles some of the lender’s euro clearing operations. It also has branches in several major European cities including Amsterdam, Milan and Brussels.

The bank’s executives are still deciding which operating model to use. Given the uncertainty around Brexit negotiations, the bank is hedging its bets and considering plans to scale up both branches and subsidiaries, according to people familiar with the plan.

Banks will likely wait until after the French election to complete their plans. It would be unhelpful to pack up for Paris, only to find out that Marine Le Pen had won the election and France was now on the path to separation from the EU. That would put the banks right back in the same spot they’re in now. Banks are laser-focused on France right now, with at least one bank strategist already saying Le Pen has a chance to win. According to CNBC:

One strategist at Goldman Sachs says the market is too complacent about the coming election in the eurozone’s second-biggest economy, telling clients in an email that “while the base case is that she won’t, it is at best naive, at worst negligent to assume she can’t.”

Bobby Vedral, global head of Goldman’s MarketStrats group, sent the note to clients this week with an analysis showing how it’s possible for the populist Le Pen to garner more than 50 percent of the vote in the expected second round of the election. (If no one wins more than half the vote in the first round on April 23, then the top two vote-getters face off in a May 7 runoff.)…

To be sure, Vedral agrees that the most likely outcome is the one predicted by the polls, which suggest that Le Pen and Emanuel Macron will face off in the second round. Those polls also show Macron getting more than 60 percent in the second round.

However, the Goldman strategist notes data in the polls that raise doubts. When asked who they would vote for in the second round if their candidate lost, an astonishingly high percentage of people answered “don’t know” — as high as 42 percent, depending on the candidate. (There are 11 people running.)…

Vedral said he suspects that a lot of those people don’t want to admit they will vote for Le Pen, who is a hardliner against immigration, particularly Muslim immigration. “Political correctness leads people to lie in the polls,” Vedral said. “Hence populist candidates benefit from the ‘shy vote.'”

If two-thirds of those undecided voters go to Le Pen, Vedral said, she gets awfully close to winning.

A win by Le Pen doesn’t automatically mean France will leave the EU, but it will surely stir the pot; creating a massive amount of gridlock in EU processes and building in the potential for a further breakdown of the currency bloc. Debbie and I have seen the angst among the French first hand on our recent trips. Their desire for a hard liner like Le Pen may be more than any of the polls are showing today.