It is not usual for the Governor of the Bank of England to ask permission to make a statement about a completely unrelated issue when giving evidence on inflation to the Treasury Select Committee. So we knew it was serious when Andrew Bailey yesterday told us his concerns about Brussels trying to force banks to relocate their euro clearing from London to the EU.
It is not a surprise that the EU wants to do this – France has been pushing for this for years before Brexit, leading to it losing a case to the UK at the European Court of Justice – but what is concerning is the desperate extremes the EU seems prepared to go. It was, Mr Bailey said, bordering on the illegal.
According to reports of its discussions with the industry, the EU is thinking either of extraterritorial legislation or using other powers granted for different reasons to force banks to clear their euro denominated derivatives within the geographic boundaries of the EU. This raises so many questions. Would it apply to EU headquartered institutions only or all international banks? How would it be enforced?
Ultimately it could end up with the EU effectively imposing sanctions on international banks that do certain aspects of their financial services in London. ‘If you don’t do your euro clearing in the EU, you won’t be able to offer other services to European conglomerates’ being the general gist of it. This is similar to the approach the US takes in its attempts to stop companies from other countries trading with Iran.
I warned when I was CEO of the British Bankers’ Association, and more recently here, that the main threat to London’s financial centre from Brexit wasn’t failing to get a deal with the EU, but the unleashing of the EU’s protectionist instincts.