{"id":25117,"date":"2017-11-15T19:14:04","date_gmt":"2017-11-16T00:14:04","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/after-brexit-barclays-should-exit\/"},"modified":"2017-11-15T19:21:52","modified_gmt":"2017-11-16T00:21:52","slug":"after-brexit-barclays-should-exit","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/after-brexit-barclays-should-exit\/","title":{"rendered":"After Brexit, Barclays Should Exit"},"content":{"rendered":"

\"\"<\/a><\/p>\n

Barclays and its predecessors have proudly claimed London as their birthplace and hometown for over 300 years[1]<\/a>. But unless it acts quickly to leave the UK, London may also become Barclays\u2019 undoing. The risk, of course, is Brexit: banks like Barclays are critically dependent on the free flow of capital and people between their London headquarters and European clients \u2013 free flow which Brexit is threatening[2]<\/a>.<\/h4>\n

The latest on Brexit<\/em><\/strong><\/p>\n

First, some context. In March, British PM Theresa May invoked Article 50 of the Lisbon Treaty, setting off a two-year negotiation between the UK and EU[3]<\/a>. At the end of this period, in March 2019, the UK will formally exit the EU under whatever terms have been thus far agreed. There are essentially two possible outcomes; the first is a \u2018soft Brexit\u2019. In this scenario, the UK and EU reach a conciliatory agreement that recognizes the special status of the UK and establishes a graceful transition period. Free flows of capital, people, goods, and services are preserved[4]<\/a>, meaning little change for Barclays. Although this outcome is favored by the traditionally strong London finance lobby, it has thus far been ineffective at swaying UK leaders from their populist stance[5]<\/a>. Consequently, most observers remain pessimistic, and negotiations for a soft Brexit have already stagnated[6]<\/a>.<\/p>\n

In the second scenario \u2013 a \u2018hard Brexit\u2019 \u2013 the UK loses access to the European single market (meaning no free flows of capital and people), and immediately becomes a \u2018third country\u2019 — no different than, say, Canada[7]<\/a>. Unfortunately, this seems the likely outcome. For one, May has promised voters that she will not accept a deal that allows for continued open borders and immigration, while the EU has firmly stated it will not allow for free flow of capital without equivalent free flow of people[8]<\/a>,<\/sup> [9]<\/a>. With immigration being arguably the central issue that drove Brexit[10]<\/a>, it is hard to see concessions coming from the UK side. Meanwhile, the EU has little incentive to cooperate: first, it (rightly) views Brexit as an unprovoked aggression by the UK[11]<\/a>; and second, cities like Frankfurt and Paris are already benefiting from partial relocations by firms like Goldman Sachs in response to Brexit[12]<\/a>, [13]<\/a><\/sup>.<\/p>\n

 <\/p>\n

What happens to Barclays under a \u2018hard Brexit\u2019?<\/em><\/strong><\/p>\n

Truthfully, we don\u2019t know for sure. However, the European Banking Authority (EBA) issued a 69-page framework for Brexit last month which should scare Barclays. The EBA is proposing to treat the UK like a true \u2018third country\u2019, meaning UK-based firms will suffer stringent limitations and costly regulations as foreign entities[14]<\/a>, [15]<\/a><\/sup>. For example, Barclays would have to effectively double its regulatory staff to ensure ongoing compliance with both UK and EU laws[16]<\/a>.<\/p>\n

 <\/p>\n

What is Barclays doing in response?<\/em><\/strong><\/p>\n

To its credit, Barclays has grasped that avoiding the massive costs of operating as a foreign firm means creating a second headquarters within EU territory. As such, the bank has begun moving some senior executives to its existing subsidiary in Ireland[17]<\/a>. In the medium-term, the bank plans to reincorporate its European subsidiaries under this Irish entity, and upgrade the Irish entity\u2019s EU banking license to fully serve European clients. Nonetheless, citing uncertainty about the outcome of Brexit negotiations, Barclays has not developed a real contingency plan, and its CEO has actually downplayed<\/em> the severity of Brexit to investors[18]<\/a>.<\/p>\n

This approach is dangerous. The aforementioned EBA report is sweeping, and contains detailed guidelines that specifically anticipate Barclays\u2019 current maneuvers. Two provisions are particularly problematic: first, the report advises that banks should maintain certain (potentially material) capital reserves within the EU; second, the report notes that firms should not be able to create perfunctory legal fronts in the EU while still effectively running their European operations from the UK[19]<\/a>. Read: it is not nearly enough for Barclays to file some paperwork and move a few executives to Ireland; to comply with likely post-Brexit regulations, it needs to move the bulk of its business and capital into the EU — immediately.<\/p>\n

 <\/p>\n

Can Barclays really move?<\/em><\/strong><\/p>\n

There is no question such a large move would be disruptive and costly, but the alternative is continued uncertainty over Brexit. Confusion has already weighed on both the UK economy, whose GDP growth has slowed to 0.4% and is likely to worsen[20]<\/a>, [21]<\/a><\/sup>, and Barclays, whose stock is down 21% since late March[22]<\/a>. A decisive plan that acknowledges a worst-case \u2018hard Brexit\u2019 may actually help restore investors\u2019 confidence.<\/p>\n

Finally, a move of this magnitude requires time. With only 16 months until the negotiation period closes, Barclays must decide between the possibility of a long, slow demise amid the unfolding Brexit saga, or a vigorous new chapter that responds to a changing world order.<\/p>\n

 <\/p>\n

(789 words)<\/p>\n

\n

Sources:<\/em><\/p>\n

[1]<\/a> \u201c300 Years and Counting.\u201d\u00a0Barclays Timeline<\/em>, timeline.barclays\/content\/1690\/The-start-of-Barclays.html.<\/p>\n

[2]<\/a> Schoenmaker, Dirk, The UK Financial Sector and EU Integration after Brexit: The Issue of Passporting (October 8, 2016). Forthcoming Chapter in ‘The Economics of the UK-EU Relationship: From the Treaty of Rome to the Brexit Vote’, edited by N. Campos and F. Coricelli, Palgrave McMillan, London. Available at SSRN:\u00a0https:\/\/ssrn.com\/abstract=2844253<\/a><\/p>\n

[3]<\/a> \u201cBrexit: Article 50 Has Been Triggered – What Now?\u201d\u00a0BBC News<\/em>, BBC, 29 Mar. 2017, www.bbc.com\/news\/uk-politics-39143978.<\/p>\n

[4]<\/a> Whitman, Richard G. \u201cSoft or Hard Brexit?\u201d\u00a0European Policy Centre<\/em>, 15 July 2016, www.epc.eu\/pub_details.php?cat_id=4.<\/p>\n

[5]<\/a> James, Scott, and Lucia Quaglia.\u00a0Brexit and the Limits of Financial Power in the UK<\/em>. University of Oxford: The Global Economic Governance Programme, 2017,\u00a0 www.bsg.ox.ac.uk\/research\/working-paper-series\/brexit-and-limits-financial-power-uk.<\/p>\n

[6]<\/a> Meredith, Sam. \u201cBanks Shifting Jobs from London Post-Brexit Need to Act Fast, German Central Bank Official Says.\u201d\u00a0CNBC<\/em>, 6 Sept. 2017, www.cnbc.com\/2017\/09\/06\/brexit-banks-shifting-jobs-from-london-need-to-act-fast-german-central-bank-official-says.html.<\/p>\n

[7]<\/a> Quinn, James. \u201cFour Reasons Why Banks Won’t Leave the City of London after Brexit.\u201d\u00a0The Telegraph<\/em>, Telegraph Media Group, 24 Oct. 2016, www.telegraph.co.uk\/business\/2016\/10\/24\/four-reasons-why-banks-wont-leave-the-city-of-london-after-brexi\/<\/p>\n

[8]<\/a> Munchau, Wolfgang. \u201cThe Perils of a Hard Line on Post-Brexit Immigration.\u201d\u00a0Financial Times<\/em>, 10 Sept. 2017, www.ft.com\/content\/542a5536-9482-11e7-a9e6-11d2f0ebb7f0.<\/p>\n

[9]<\/a> Rankin, Jennifer. \u201cFree Movement: a Circle That Cannot Be Squared in the Brexit Debate.\u201d\u00a0The Guardian<\/em>, Guardian News and Media, 13 Sept. 2017, www.theguardian.com\/politics\/2017\/sep\/13\/free-movement-circle-that-cannot-be-squared-brexit-debate.<\/p>\n

[10]<\/a> Van Reenen, J. “Brexit\u2019s Long-Run Effects on the U.K. Economy.”\u00a0Brookings Papers on Economic Activity, vol. 2016 no. 2, 2016, pp. 367-383.\u00a0Project MUSE,\u00a0doi:10.1353\/eca.2016.0031<\/a><\/p>\n

[11]<\/a> Somai, M. (2017). BREXIT: RISKS AND OPPORTUNITIES OF DISINTEGRATION\u201d. Unia Europejska.Pl,\u00a0243(2), 9-19. Retrieved from http:\/\/search.proquest.com.ezp-prod1.hul.harvard.edu\/docview\/1938830784?accountid=11311<\/p>\n

[12]<\/a> Demary, Markus; Voigtl\u00e4nder, Michael (2016): Will Brexit dwarf London’s competitiveness as a financial centre?, IW-Kurzberichte, No. 50.2016<\/p>\n

[13]<\/a> Djankov, Simeon.\u00a0The City of London After Brexit<\/em>. Peterson Institute for International Economics, Policy Brief 17-9, 2017, piie.com\/publications\/policy-briefs\/city-london-after-brexit.<\/p>\n

[14]<\/a> EBA Opinion on Brexit Issues<\/em>. European Banking Authority, 12 Oct. 2017, www.eba.europa.eu\/documents\/10180\/1756362\/EBA+Opinion+on+Brexit+Issues+%28EBA-Op-2017-12%29.pdf.<\/p>\n

[15]<\/a> Begg, Iain. \u201cMaking Sense of the Costs and Benefits of Brexit: Challenges for Economists.\u201d\u00a0Atlantic Economic Journal<\/em>, vol. 45, no. 3, July 2017, pp. 299\u2013315., doi:10.1007\/s11293-017-9550-x.<\/p>\n

[16]<\/a> Reid, Thomas J. \u201cThe Law and Brexit XI.\u201d\u00a0Forum on Corporate Governance and Financial Regulation<\/em>, 性视界 Law School, 14 Apr. 2017, corpgov.law.harvard.edu\/2017\/04\/14\/the-law-and-brexit-xi\/.<\/p>\n

[17]<\/a> \u201cQ3 2017 Earnings Call.\u201d Barclays Plc. 26 Oct. 2017. Capital IQ. Transcript.<\/p>\n

[18]<\/a> \u201cQ2 2017 Earnings Call.\u201d Barclays Plc. 28 Jul. 2017. Capital IQ. Transcript.<\/p>\n

[19]<\/a> European Banking Authority, op. cit.<\/p>\n

[20]<\/a> Wearden, Graeme, and Nick Fletcher. \u201cUK GDP: Britain’s Economy Grew by 0.4% as Brexit Slowdown Continues – as It Happened.\u201d\u00a0The Guardian<\/em>, Guardian News and Media, 25 Oct. 2017, www.theguardian.com\/business\/live\/2017\/oct\/25\/uk-gdp-britain-growth-slowdown-brexit-pound-ftse-business-live?page=with%3Ablock-59f052f16509f30750e8a0ba.<\/p>\n

[21]<\/a> Cazan, Sabina Andreea. “BREXIT IMPLICATIONS OVER THE ENGLAND BANKING SYSTEM\u2013AN EVENT STUDY APPROACH.”\u00a0Journal of Public Administration, Finance and Law<\/em>: 81.<\/p>\n

[22]<\/a> \u201cBarclays PLC.\u201d\u00a0Google Finance<\/em>, Google, 14 Nov. 2017, finance.google.com\/finance?q=LON%3ABARC.<\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

With the likelihood of a favorable Brexit negotiation dimming, Barclays would be wise to leave London ASAP.<\/p>\n","protected":false},"author":9817,"featured_media":25181,"comment_status":"open","ping_status":"closed","template":"","categories":[385,2322,3230,1350,3239,1699],"class_list":["post-25117","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-banking","category-barclays","category-brexit","category-financial-services","category-isolationism","category-london","hck-taxonomy-organization-barclays-plc","hck-taxonomy-industry-banking","hck-taxonomy-country-united-kingdom"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/rc-tom-challenge-2017\/","yoast_head":"\nAfter Brexit, Barclays Should Exit - Technology and Operations Management<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/after-brexit-barclays-should-exit\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"After Brexit, Barclays Should Exit - 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