London as a Financial Center Since Brexit: Evidence from the 2022 BIS Triennial Survey

When the euro arrived in 1999, London’s established dollar business conferred an advantage in intermediating the new number two global currency. The dollar business dominates London’s international financial business, as it has since the 1960s, but London’s share in the global euro business tended to exceed its global dollar share.

The Brexit vote in 2016 put into play London’s role in intermediating the euro and thus its role as an international financial center (IFC). Britain’s exit from the European Union (EU) in early 2021 left firms in London without a passport to offer financial services throughout the EU. It also gave fresh impetus to European authorities’ long-running efforts to shift euro-denominated financial activity to the euro area.

Enough time has elapsed since the 2016 vote to assess the effect of these initiatives, recognizing that forces other than Brexit are at work, such as the phasing out of Libor.

In a new article for the BIS Bulletin, Robert N. McCauley, Jakub Demski and Patrick McGuire examine London’s role as an IFC across four business lines: the trading of interest rate derivatives (IRD) and foreign exchange (FX), international banking and bond underwriting. London’s loss of euro business in any of these lines could have implications for its dollar business lines, since synergies across lines derive strength from one another and in turn reinforce London’s position in the dollar.

Since Brexit, they find London’s position has been marginally eroded in only some of the business lines examined. The recently published 2022 BIS Triennial Survey, the first since the United Kingdom’s formal departure from the EU, shows that London has remained the dominant centre for over-the-counter (OTC) trading of FX and euro IRD, but it has lost share in euro and dollar IRD, in the latter case owing to Libor’s end rather than Brexit. In international banking, London has retained its top position, but its role as a banking hub for the euro area has waned. In the underwriting of euro international bonds, London firms have until recently stood their ground, but recent data raise questions. At the same time, the authors say ongoing responses to European authorities’ initiatives mean this assessment is a preliminary one.