Will Frankfurt become Europe’s leading financial centre after Brexit?

Scott Lavery - SPERI Research Fellow

Davide Schmid - doctoral researcher at the University of Sheffield and SPERI research assistant

Frankfurt has consistently been identified as one of the potential beneficiaries of this process, alongside Dublin, Paris and Luxembourg. However, no comprehensive analysis of the strategic positioning of actors within Frankfurt since the Brexit vote has been conducted.

In a new SPERI policy briefing, available here, we outline some central findings from fieldwork we conducted in Frankfurt in November 2017. For the research, we conducted semi-structured interviews with a broad range of elite stakeholders based within Frankfurt’s financial sector. Respondents included Frankfurt-based trade associations, international banks, regional banks, national regulators, marketing agencies, international financial institutions and representatives of the Hesse region.

A number of key observations emerge from the research.

First, respondents consistently identify a number of core advantages which Frankfurt enjoys over other EU financial centres. These include: the economic and political stability of Germany; the location of the European Central Bank (ECB) and other regulatory institutions such as the European Insurance and Occupational Pensions Authority (EIOPA) and the Bundesbank within Frankfurt; the reputation of German supervisors – the Bundesbank and the Federal Financial Supervisory Authority (BaFin) – for competence in regulating financial institutions; and the locational advantage of Frankfurt at the ‘heart’ of continental Europe.

The theme of Germany’s economic and political stability was regularly highlighted by respondents. One senior representative of an organisation which promotes the Hesse region as a whole told us that, “Germany is an anchor of stability in a world that is becoming very ‘interesting’ in political and economic terms. Within Germany – in that anchor of stability – you have Frankfurt as a financial centre”.

Respondents also stressed that the reputation of the German regulators – the Bundesbank and BaFin – for ‘competence’ and ‘reliability’ are a key asset for Frankfurt.

Similarly, numerous respondents stated that the ECB’s location within Frankfurt is a further advantage for the city. One interviewee – a senior researcher at a large regional bank – stated that, “foreign banks want to be where the cluster is […] in Frankfurt there are lots of foreign banks and Frankfurt is a supervisory hub. We have the ECB, the Bundesbank, EIOPA… a lot of supervisors are already here”.

The ECB and the German regulators insist that they are neutral in relation to where financial activity is located inside the Eurozone, emphasising their mandate to secure price and financial stability. However, the majority of our interviewees noted that an unintended consequence of the ECB and Bundesbank’s location is that this deepens the financial ‘ecosystem’ of Frankfurt, making the city more attractive as a location for business activities after Brexit.

Another finding of the research was that there is a distinct complex of public and private sector interests within Frankfurt – notably local political authorities, lobby groups and regionally-focussed banks – which have taken the lead on ‘promoting’ Frankfurt as a financial centre.

On the political side, the authorities of the state of Hesse and the Frankfurt city government have a clear interest in expanding the size of Frankfurt’s financial sector in order to boost employment and tax revenues. Marketing agencies – Frankfurt Main Finance, Frankfurt-Rhein-Main GmbH and Hesse Trade and Invest [the state development company] – have adopted a coordinated approach in order to promote the city as a financial centre. Other private sector institutions – notably regional banks (‘Landesbanken’) – are also keen to promote Frankfurt as a financial centre, not least because their business models are deeply integrated into the local economy.

In contrast, global banks and internationally-oriented financial institutions with a presence in Frankfurt are more concerned with minimising post-Brexit disruption than with ‘promoting’ one financial centre over another. A senior researcher from a global bank, reflecting on the possible impact of Brexit, stated, “if you are asking a local policymaker in some of the cities that now may benefit from an influx of investment bankers and so on, of course they will probably say that Brexit is a good deal for us. For the financial industry [however], it is definitely a ‘lose-lose’ situation”. The principal concern of global banks based in Frankfurt is not to ‘promote’ one city over another but rather to minimise disruption and inefficiencies caused by Brexit.

Many of our interviewees noted that Frankfurt has ‘played to its strengths’, running a well-structured and unified campaign which emphasises the themes of stability and competence.

A senior executive from the Frankfurt office of a US firm stated, “the entire German marketplace – the associations, the regulators and the German government itself – have exerted a lot of effort in demonstrating that the market is open for banking. They have played very well to their strengths. They haven’t tried to make crazy promises in relation to tax structures […] they’ve played the themes of stability, clarity, reliability and consistency in what they’re doing”. The respondent continued, “When you’re going through a process of political instability – which is what Brexit injects into the equation – there’s a natural tendency to not look for the next ‘cool deal’. You’re looking for stability and clarity – a paradigm with which [one] can work, understand and feel comfortable.”

Many respondents contrasted Frankfurt’s ‘stability’ approach with the more ‘aggressive’ orientation of other financial centres in the EU, most notably Paris. One respondent representing business from the Hesse region stated that, “we didn’t want to be loud and aggressive…and I think it was a good strategy. Paris had another strategy. They were very pushy and populistic in their attempts to attract firms. Frankfurt was a little bit less loud, less aggressive”.

Respondents consistently note that they expect between 5,000 – 10,000 jobs to be relocated to Frankfurt over the next five years. However, there was also a marked tendency for respondents to not overstate the ‘gains’ which might be possible. Interviewees uniformly expect the City of London to remain Europe’s leading hub of global finance. Respondents also noted that some financial activities will be re-located on the basis of pre-existing ‘specialisations’ of alternative financial centres. One stated that, “the truth of it is there is not going to be one winner…different financial centres are equipped to take on different business lines better than others. Asset managers are obviously going to Dublin and Luxembourg…Dublin will also take on back-office jobs…trading platforms should gather in Amsterdam. Insurance will scatter across Europe. Paris and Frankfurt overlap a little bit as far as trading and front-office goes. But banks are deciding where to go based on where they already have operations built up and where there is a good talent pool.” Pre-existing linkages between financial institutions and specific centres – for example HSBC in Paris and US investment banks in Dublin – were also identified as an important determinant of post-Brexit investment decisions.

With the creation of the euro in the early 2000s, there was an expectation that Frankfurt – the new home of the ECB and Germany’s leading financial centre – would emerge as a continental rival to the City of London. In the event, this didn’t happen. After Brexit, the ability for Frankfurt to effectively ‘challenge’ the City of London remains remote. However, Brexit does create an opportunity for Frankfurt to consolidate its position as a European banking centre and to deepen its financial ecosystem in significant ways. Rather than seeking to offer tax incentives or promise lax supervision, advocates of Frankfurt have played the ‘stability’ card, seeking to offer a reliable safe haven for international banks in an uncertain world. In a volatile European and global financial order, Frankfurt is banking on its stability. Whether this strategy has worked will become clearer by March 2019.

Download Scott and Davide’s new SPERI research brief ‘Frankfurt as a financial centre after Brexit’. 

The research was partially funded by the White Rose Collaboration Fund under ‘The Political Economy of Brexit’ project. The White Rose University Consortium is a joint collaboration between the Universities of Leeds, Sheffield and York.