Banking across borders: Goldman Sachs in London – or Frankfurt?
In a nationwide referendum held in June 2016, British citizens voted for the United Kingdom to leave the European Union. In the wake of the controversial Brexit vote, financial markets nosedived and Prime Minister David Cameron, who led the campaign to stay in the EU, resigned.
Following the referendum, concern intensified around the impact of Brexit on business – especially the financial services industry, which contributed 7.2% of total UK GVA (Gross Value Added) in 2016. Banks have historically set up their businesses in Britain and then used its right to “passport” into the rest of the 28-member bloc – the ability to access all EU markets if approved to enter any one of them. Their lawyers, however, have since warned that they would likely need a new legal home after Brexit.
Consequently, Goldman Sachs is one of many banks wary of losing access to the single market. Uncertainty around the Brexit negotiations and costs associated with conducting business across regulated borders have caused the bank to prepare to shift a portion of its work to mainland Europe, as seen in Figure 1.
Figure 1 – Brexit impact on financial services jobs in London.
Given the uncertainty around how the negotiations will conclude, the bank has now initiated its near-term contingency plan in the event it will lose its passporting rights into the single market. According to Richard Gnodde, Goldman Sachs’ Europe CEO, “Goldman Sachs will begin moving hundreds of people out of London before any Brexit deal is struck as part of its contingency plans for Britain leaving the European Union” .
Its medium-term plans, however, remain uncertain; Knodde has conceded that “What our eventual footprint will look like will depend on the outcome of those [Brexit] negotiations, and what we are obliged to do because of them”.
In the longer term, several options are available to the bank. Goldman Sachs could legally shift operations to the EU but keep its actual workforce in London. Alternatively, the bank could move the majority of its front-office roles to EU cities such as Frankfurt, given the nature of its current contingency plan. This will likely result in the bank incurring significant costs, as it will have to pay for moving highly paid professionals across borders in addition to having to bear costs associated with new office leasing contracts, licensing, back-office and infrastructure development.
The former option is undeniably more attractive due to its lower cost and risk profile, but its feasibility will depend on the negotiation outcome and, more specifically, decisions made by EU regulators. Many have not only vocally opposed Brexit, but specifically warned financial services firms against “any attempts to game the system” following the UK exit.
Given the costs associated with an unfavorable negotiation outcome, or “hard” Brexit, Goldman Sachs management should minimize uncertainty and risk associated with any potential move, and maximize its chances of UK and EU negotiators reaching a deal that is beneficial to the bank.
As such, Goldman Sachs could join forces with its competitors and invest in lobbyists to represent the banks’ interests during the Brexit process. Lobbyists could not only argue in favor of “soft” Brexit solutions, such as a UK exit from the EU but not the European Economic Area, but also scrutinize major developments to allow the bank to adjust its contingency plans as negotiations progress.
In addition, it could pre-emptively secure banking licenses in EU as it prepares to move operations to an EU member country; according to Damian Carolan of Allen & Overy, “it would typically take banks 2-3 months to put a license application together. They would then have to wait for about six months for approval for an investment bank”. The bank stands to lose much in terms of opportunity costs and losing first-mover advantages if it leaves the licenses until negotiations conclude.
The discussion above, however, gives rise to questions concerning the ability of banks to influence the post-Brexit regulatory process. How can Goldman Sachs best approach its lobbying efforts?
 Pruitt, Sarah. 2017. History. March 29. http://www.history.com/news/the-history-behind-brexit.
 Tyler, Gloria. 2017. “Financial services: contribution to the UK economy.” Parliament.uk. March 31. http://researchbriefings.files.parliament.uk/documents/SN06193/SN06193.pdf.
 Noonan, Martin Arnold and Laura. 2016. Banks begin moving some operations out of Britain. June 26. https://www.ft.com/content/a3a92744-3a52-11e6-9a05-82a9b15a8ee7.
 Worstall, Tim. 2017. Goldman Sachs Does The Obvious – Moves Staff From London To EU Over Brexit. March 21. https://www.forbes.com/sites/timworstall/2017/03/21/goldman-sachs-does-the-obvious-moves-staff-from-london-to-eu-over-brexit/#784e92b57fb3.
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 Cohn, Huw Jones and Carolyn. 2017. EU Regulator Warns UK Insurers to Avoid ‘Fronting’ in Post-Brexit EU HQs. September 28. https://www.insurancejournal.com/news/international/2017/09/28/465870.htm.