London frets future as money hub with Europe excluding U.K.

First step toward banking union comes Jan. 1

London No. 1

The City remains the world’s most important money center because of such advantages as its time zone, language, talent pool and legal infrastructure, according to Z/Yen Group Ltd., a London-based research firm. New York and Hong Kong are ranked Nos. 2 and 3 by Z/Yen.

“The effect will not be as much as people say,” George Mathewson, who retired as chairman of Edinburgh-based RBS in 2006, said in a phone interview. “My personal view is it won’t be dramatically bad for the U.K. The U.K. has got some in-built advantages that are difficult to dislodge.”

Ismail Erturk, a senior lecturer in banking at Manchester Business School, echoed that view.

“I doubt Frankfurt can replace London in the near future for euro-denominated businesses,” Erturk said. “The euro-zone banks are interconnected with the U.S. and the big emerging- economy banks in wholesale markets, and I doubt Frankfurt or anywhere else in the euro-zone will be able to accommodate interbank, interest-rate-swap and currency-trading markets.”

U.K. Proposals

The EU has struggled to meet its year-end banking-union deadline as members negotiate provisions, including the scope of the ECB’s authority. The system is to be phased in for all 6,000 euro-area banks by 2014. Unlike Britain, Denmark and Sweden are considering whether to join the banking union and on what terms.

The U.K. has called for safeguards to prevent the ECB, or the euro area as a bloc, from dominating the London-based European Banking Authority once the transfer of supervisory powers takes place, according to documents obtained by Bloomberg News. It has also said that if observer status in the ECB’s bank-supervision arm is granted to any of the 10 EU nations that don’t use the euro, it should be granted to all of them, according to the documents.

Ash Saluja, financial-services partner in London at law firm CMS Cameron McKenna LLP, said global banks may opt for full ECB supervision either by moving their headquarters into the euro region or by pressing the U.K. to surrender national regulation in favor of the single supervisory mechanism.

It’s “very worrying for the City and the Bank of England,” he said. “The euro zone holds all the cards.”

Bloomberg News

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