A 'hard Brexit' could see Britain lose a significant portion of financial activity, Central Bank of Ireland Governor Philip Lane warned on Friday (28 October).
The headquarters of some of the world's largest banks are located in London, but their future in the capital remains uncertain with the UK working on a deal to leave the EU. Britain has yet to trigger Article 50 of the EU constitution, which would effectively rubber-stamp its intention to leave the bloc, but the pressing concern for worldwide lenders is to ensure they retain access to the European banking passport system.
This allows banks and other financial institutions authorisation to operate in an EU country, or a state member of the European Economic Area (EEA), to conduct business across the union.
However, financial firms could consider relocating away from the UK in the event of a so-called 'hard Brexit', which would see Britain lose access to the European single market and place restriction on the freedom of movement of EU nationals.
"If the UK-EU negotiations deliver an agreement that effectively preserves the single passport for UK-resident entities selling into the EU, the net impact on the structure of the European financial system might be quite minor," Lane said.
"However, in scenarios in which UK-resident firms are no longer treated as equivalent to EU firms for regulatory purposes, it is likely that significant migration of financial activity from the UK to the EU will occur."
Lane, who is also a member of the European Central Bank council, added that a number of non-EU banks could set up subsidiaries in Europe, while a larger number of euro-denominated financial transactions would take place within the Eurozone.
The Bank of Ireland governor added that Ireland had seen an increase in inquiries from financial services firms in the three months following the referendum, adding Dublin, Paris, Amsterdam and Frankfurt could all lure businesses away from London.
Data released on Thursday showed the UK economy defied fears of a Brexit-related slowdown and grew more than expected in the third quarter, recording GDP growth of 0.5% over the third quarter of 2016, in the three months after the EU referendum, compared with analysts' forecast expecting a 0.3% growth.
However, Lane warned the Brexit impact could be felt a lot more over the long-term future.
"The transition towards the phase of active UK-EU negotiations that will begin in spring 2017 may trigger a more substantial reassessment of post-Brexit economic prospects," he said.