Predicting Brexit's effect on banking jobs has become a case of shock and awe. Oliver Wyman said nine months ago that a hard Brexit could do away with 31,000 to 35,000 London banking jobs directly and 40,000 banking jobs indirectly. Today, it's cut that number to anything from 31,000 to 35,000, but the figures are being greeted with horror like they've never been seen before. This is a mistake: they have been. It's also a mistake to fixate on the uncertain implications of Brexit upon employment. The more likely effects are on pay.
Buried behind the reiterated employment figures, Oliver Wyman says in today's reportthat Brexit-related changes could add $1bn or between 2% and 4% to banks' annual cost base in Europe as finance, compliance and risk functions are all duplicated. Simultaneously, it says banks in Europe will need to hike capital by 15% to 30% in order to capitalize businesses based both in the UK and the EU.
In both senses, Brexit looks horribly like the regulatory wave that hit after the financial crisis. That wave prompted banks to strengthen control staff. It also forced them to hike capital levels. In both cases, this was to the detriment of pay.
The post-crisis increase in compliance, risk and finance staff spurred banks' enthusiasm for hiring low cost control staff in low cost locations. Before 2008 there were technology staff in India, there were some back office staff in Bournemouth and there were a handful of quants in Hungary. But back in 2008 Goldman Sachs wasn't in Warsaw, UBS wasn't in Wroclaw and was barely in Krakow, Deutsche Bank had hardly anyone in Birmingham, and Bank of America's Chester office was still just a service centre for credit cards. It was the need to hire in thousands of extra control staff after the crisis that prompted banks in Europe to build their presence in cheaper offices outside London. This applied in New York too: Goldman Sachs only decided to pump-up its Salt Lake City office in 2008.
By forcing the duplication of control staff, Brexit will give low cost locations another, and potentially even greater, boost. If banks were tentative about offshoring and near-shoring these control in 2008, they have no need to be now that the concept has been fully tested. Control jobs supporting the new European offices will likely be in Eastern Europe. Control jobs currently located in London will increasingly be shifted there too (or to low cost locations in the UK). Either way, pay for control staff is about to re-rated downwards, again.
At the same time, Brexit's duplication of capital costs will likely encourage banks in Europe to trim pay to maintain already low returns on equity. J.P. Morgan analyst Kian Abouhossein issued various notes in 2010 warning that as regulations reduced banks' returns, a lower proportion of revenues would be committed to compensation as banks sought to bring their RoEs back up again. Abouhossein's intuition proved correct. The same thing is likely to happen across Europe as banks commit new capital to new businesses in the EU.
And then, too, there are the actual costs associated with transferring jobs and business lines. HSBC has only spent $1m so far on Brexit, but it said yesterday that it expects to spend $300m on legal and relocation fees when it moves 1,000 staff to locations within the European Union. That's $300k (£227k) per head.
Overall, it looks remarkably like banking compensation in Europe is about to get hammered again. When Brexit's done you will almost certain earn less than before. Of course, you could always escape - by moving to New York City.
Photo credit:with the hammer by Nina Hale is licensed under CC BY 2.0.