July 03, 2019

Four centuries ago, the world’s first multinational company was established in Amsterdam. The Dutch East India Company was created by a government-directed merger of rival trading companies and went on to dominate the Asian spice trade.

The company’s formation was crucial in a series of major innovative steps that saw the capital of The Netherlands blossom into Europe’s financial capital. The Dutch thought their Golden Age would last forever — but it lasted just throughout the 17th century before larger powers, with bigger populations, notably Britain, modernized and came up with market-centered innovations of their own.

Could something similar happen to London, because of Brexit and the political turmoil and unpredictability it has brought? Fears are growing that it could. This week, Britain’s premier business magazine, The Economist, warned about Brexit risks to the city of London, arguing it may spell its end as “the capital of capital.”

Banks based in London are restarting their preparations for a so-called no-deal Brexit, which would involve Britain relinquishing membership of the European Union without any withdrawal agreement or any trading arrangements in place. There had been a lull in the shift of financial services jobs and capital from Britain to the EU in the recent months, according to EY, a consultancy that’s been tracking Brexit-related announcements by 222 of the largest financial services firms.

But now, with the odds mounting on a hard Brexit, the mood has changed.

“In the last few weeks, we have seen some firms restarting their programs and we expect preparation activity for a no-deal to increase markedly,” said Omar Ali, head of financial services for EY in Britain.

With its convenient time zone, light banking regulations and stock market deregulation ushered in by Margaret Thatcher in 1986, in what was dubbed the “Big Bang,” London has thrived. For the past quarter of a century, it has been the global financial powerhouse and highest net exporter of financial services anywhere in the world.

The city’s financial district, nicknamed the Square Mile, generates $152 billion of output a year, allocating capital and distributing risk across the globe. London accounts for a third of the world’s currency dealing and not far short of a quarter of all cross-border lending. From trading in derivatives and bonds, arranging interest swaps and raising funds as well as managing assets, London has been the go to city.

For the British economy, the financial sector has made all the difference to the country's prosperity and growth. More than 2 million jobs in Britain are tied to financial services.

The confidence of the city of London can be seen in its changing skyline, which has altered dramatically with the mushrooming of grandiose, dizzying skyscrapers, including the iconic high rise The Shard. A record 76 skyscrapers are on schedule to be finished in 2019 - more than any other year.

Brexiters point to the skyline, arguing international firms are still building and therefore retain their confidence in London remaining a major financial hub.

But with the mounting possibility that Britain will leave October 31 without a withdrawal agreement, a disorderly exit that would see  financial ties to Europe unraveled, analysts are questioning whether London can remain the pumping heart of the international monetary system.

Bankers are already hedging their bets to be ready to bolt if London fails its toughest test yet. Nearly 300 major financial firms have shifted some staff and trading activity to other EU member states ready for possible major relocations depending on the manner of Britain’s break from the bloc. Around $1.3 trillion in capital has already been shifted.