Friday 23 August 2019

Influx of funds from London after UK's exit 'could threaten economy's stability'

IFSC: Its growth “may be changing State’s risk profile”
IFSC: Its growth “may be changing State’s risk profile”

David Chance

Dublin's financial services industry could see a huge influx of funds from London thanks to Britain's exit from the EU.

However, this could potentially bring new stability risks to what is already one of Europe's fastest growing financial centres.

A study by two economists from the Central Bank has warned the fragmentation of Europe's financial services industry in a post-Brexit era would see London's influence shrink while other cities - including Dublin, Paris, Frankfurt, Amsterdam and Luxembourg - would reap the benefits.

Silvia Calo and Valerie Herzberg calculate Dublin's banking sector could see an influx of funds equivalent to 12.33pc of its current size that would propel its assets to €610bn, a figure equivalent to twice Ireland's gross domestic product.

The non-bank sector, which comprises investment funds and other so-called shadow banking assets, could grow in size to as much as €4.33tn from €4.15tn, the Central Bank researchers said in their report.

"The growth of the IFSC [International Financial Services Centre] - similar to non-financial multinational firms - may be changing Ireland's risk profile," said the economists.

Their calculations are based on data from the end of 2017 and the adverse scenario assumes each activity now present in London will leave the city proportionally to the share of revenue generated by EU clients for that particular activity.

At present the City of London has a prominent role in foreign exchange and over-the-counter derivatives deals, while banks located in the UK top €10.7tn in assets.

That compares with €7.5tn for France or Germany and €543m in Ireland, the report said.

The Central Bank has flagged the growing risk that international finance poses to the economy thanks to its growing involvement in the domestic real estate sector and the fact that it increases potential links to financial market risks, which could be transmitted to the economy here.

"The evolution of financial centres at home and abroad still has the potential to affect risks to financial stability in the future and continued work on these structural developments will be important," the report said.

There are also growing concerns that a larger financial services industry relative to the size of an economy may bring more risks than benefits and that finance itself is inherently an unstable industry.

Critics argue excessive risk taken in the boom years before the financial crisis was encouraged by implicit government guarantees and light-touch regulation.

Irish Independent

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