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Luxembourg’s Brexit sweet spot

  • Thu, 12 Oct 2017 20:32

Citi is the latest bank to be attracted to Luxembourg and its wealth management industry

As London’s investment bankers, corporate lenders and traders flock to Frankfurt, Paris and Dublin, the tiny state of Luxembourg has found a sweet spot — private banking.

On Wednesday, it emerged that Citigroup is setting up a new base to administer the accounts of its EU private banking clients in Luxembourg, the second smallest nation in the EU by population size and area (after Malta). 

Citi, America’s fourth biggest bank by assets, is not the only international bank to recognise Luxembourg’s wealth management allure as the UK’s EU departure draws nearer. JPMorgan Chase is also expanding its private bank there, according to people familiar with the bank’s plans. And Bank of Singapore last month picked Luxembourg, over London, as the location for its European expansion.

Barclays is expected to put its EU private bank in Dublin, while the only other big US bank with a European private bank, Goldman Sachs, continues to weigh its options. 

Still, Luxembourg can safely claim victory in the race to become the EU’s private banking hub. Nicolas Mackel, head of Luxembourg for Finance, the agency charged with developing Luxembourg’s financial centre, believes heritage has been a big help in attracting private banks. 

He points out that his city already “acts as the international private banking hub for many banking groups, both from the EU (for instance large French, German and Scandinavian banks) and from outside the EU”. In July, it got another boost when Switzerland’s Julius Baer announced plans to centralise its EU operations there. 

Banks say that Luxembourg’s highly developed funds industry is a major draw; they see benefits in proximity to the funds that their clients want to use for their investments. 

There are other considerations. International banks were so wrongfooted by Brexit that many vow to never again put all their eggs in one basket by basing all their businesses in the same city. In the post-Brexit world, they want to scatter operations across the EU, so that no one country can ever upset their entire EU business again. 

Luxembourg tried to win some other bank activities, but it was never seen as a serious contender for trading, since banks doubted its capacity to deal with the trillions of dollars of assets and thousands of people that could ultimately be needed. 

By contrast, the number of people required for EU private banks will be small, and Luxembourg, with a population of less than 600,000, can easily accommodate them. 

The city continues to eye other banking spoils, including hosting the European Banking Authority, the EU’s banking standard setter. It will have to leave its Canary Wharf home once the UK leaves the EU. Luxembourg is on the shortlist of eight final contenders to host the agency.

Beyond banking, Luxembourg is attracting other financial services business in areas of traditional strength. Mr Mackel says “many financial institutions” in other sectors, such as insurance and wealth management, are relocating. UK insurer RSA has picked Luxembourg as its post-Brexit EU hub, as have AIG and Hiscox. Other insurers already have a big presence there.

“For all these activities, it is Luxembourg’s specialisation in cross-border business that is particularly attractive,” Mr Mackel adds. 

There is plenty still to play for. Even though most institutions have decided where to base their regulated entities after Brexit, many are still deciding how many jobs will go to each location. Luxembourg could find another niche before the battle is done.

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Further reading

Over the cliff edge

Why the so-called “brains behind Brexit” Dominic Cummings says the process is a total disaster. He blames the government. (Prospect)

Repeal bill compromise

Anders Jay on why the EU withdrawal bill must pass — and why it is in both party’s interests to compromise. (Open Europe)

Banks fill vacancies

Global banks are still filling job vacancies in London despite concerns that Brexit could threaten the city’s status as a major financial centre, according to Hays, the recruiter. The company said London banks had contingency plans in place for Brexit but were still replacing departing staff in most roles, including in IT and compliance. (Reuters) 

Hard numbers

Pound takes a knock on declaration of ‘deadlock’ in Brexit talks

FastFT’s Katie Martin wrote on Thursday at midday: Sterling has stumbled after the EU’s chief Brexit negotiator Michel Barnier said talks over the UK’s exit bill had reached “deadlock”.

The pound now stands 0.5 per cent lower on the day against the dollar, at $ 1.3150. The high for the day was just over $ 1.32.

As Oliver Harvey, a currencies analyst at Deutsche Bank put it earlier today (with our highlights):

“We think it is still too early to give up on May’s chances of a transitional deal before year-end, and remain long sterling versus the euro. But, with the pound (and BoE) narrative, becoming increasingly binary into year-end, investors will have to be agile to incoming political news.”



Harvard Business Review

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