EU membership, financial services
and stability
The Economics of the UK-EU
Relationship, Brunel Workshop
Angus Armstrong, June 3rd, 2016
National Institute of Economic and Social Research
What is the issue?
“Inconsistency between internationalism /
globalisation and the policy domain of
nation states.”
Rodrik (2000), Schoenmaker (2013), Shin (2015)
National Institute of Economic and Social Research
Heads of State Agreement
“Respecting the powers of the central bank in the
performance of their tasks, including the
provision of central bank liquidity, within their
respective jurisdictions,”
Agreement between EU Heads of State
February, 2016
National Institute of Economic and Social Research
Four features of UK finance
1. Passporting and the presence of overseas firms
o More than half largest global institutions EU HQs
2. Financial sector balance sheet = 680% GDP
o Residency basis & ex derivatives
o Banks account for 380%
3. Multi-currency area
o Less than half bank sector assets in sterling
4. Foreign direct investment (related to passporting)
o 40% is related to financial services
National Institute of Economic and Social Research
Financial infrastructure pre-Brexit
1. UK has a systemically large domestic banking system
o Different to Luxembourg etc.
2. UK taxpayer is backstop so UK must regulate
o ‘he who pays piper, calls the tune’
3. And ELA should be sanctioned by financial regulator
o So UK will use sterling and not join EBU
4. Unusually, Eurozone infrastructure extents to EEA
o Allows UK to be centre of Euro wholesale finance
o But vulnerable to Eurozone caucusing
National Institute of Economic and Social Research
Financial infrastructure post Brexit
1. UK probably treated ‘equivalent’ in regulation terms
o But, a regulatory ‘sword of Damocles’
2. Direct membership of TARGET2 extends to EEA
o Would non-EEA banks require EEA home country?
3. MOU between BoE and ECB for currency swaps
o Would this be in interests or even credible?
4. No ECJ to enforce non-discrimination
o Non-cooperative behaviour in event of failures?
5. Regulatory issues and ECB collateral requirements
National Institute of Economic and Social Research
Capital flight
1. Issue is access to financial infrastructure outside EU
o Domain of central banks and legal jurisdiction
2. Stock of FDI related to financial sector around £250bn
o Flow important to funding current account deficit
3. If firms look to migrate, where would they go?
4. Outcome is likely to be a higher cost of finance
o Would come on top of likely sovereign downgrades
(implied by credit rating agencies)
5. What will happen to City under ’neverendum’
National Institute of Economic and Social Research
EU membership, financial services
and stability
The Economics of the UK-EU
Relationship, Brunel Workshop
Angus Armstrong, June 3rd, 2016
National Institute of Economic and Social Research