Brexit ‒ View ofthe Association of German Banks

26 January 2017

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Summary Timetable

Negotiating phase

Outlook for banks

Outlook for customers

Need for adjustments

Consequences for the EU

Frankfurt as a financial centre

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Basic position of the Association of German Banks on Brexit

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Europe

But the top priority is the cohesion of the EU27 Continued integration of the internal market is needed, with

economic, monetary, banking and capital markets union The internal market needs all four fundamental freedoms

Brexit a mistake We regret the vote to leave We don’t think the decision is reversible We assume the UK will exit the EU

Long-term relations

The UK remains an important part of Europe We remain interested in very close political and economic ties

between the EU and UK This requires a comprehensive economic agreement which

allows extensive mutual market access

Banks

Our members want to see continuity in business relations and activities

The primary concern is the maintenance of financial stability A secure political and regulatory environment is needed so

that a dependable service can be provided to customers

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“Hard” Brexit scenario

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2017 2018 2019 later23.6.Referendum

Starting point Majority of UK policymakers

pushing for a clean break; negative effects have not yet to make themselves felt

Priority for EU is cohesion of EU27

Contentious negotiations about exit agreement likely

23.4./7.5.2017FR elects new PresidentSeptember 2017General election DE

Expected April 2019EP elections

May 2020General election scheduled in UK

Two-year period for Brexit negotiations Economic agreement

Brexit Result of the overall

situation: “hard” Brexit UK loses all privileged

market access and becomes third country on 1 April 2019

Transitional period (following 1 April 2019) Comprehensive transitional

agreement unlikely Partial agreements possible

in final phase of negotiations; impossible to predict at present

Banks now under pressure to be ready for 2019

Economic agreement Only achievable in the long

term, if at all

July 2019Election COM President and appointment of new COM

Phase 1 Phase 2

Expected March 2017UK triggers Art. 50

January 2021New EU budgetary period

17.3.2017General election in NL

Phase 4

Third-country access ?

Phase 3

25.3.201760 years since Treaty of Rome

Spring 2018General election scheduled in IT, may be brought forward to summer 2017

?

Expected June 2017EU negotiating line

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Basic principles of the negotiationsFair negotiations EU must accept the decision to leave UK must be prepared to accept the consequences; there will be differences between

members and non-members Both sides should negotiate constructively

Fair behaviour Avoid creating one-sided competitive advantages (tax or regulatory dumping, state aid) EU27 must be able to manage its affairs

Keep long-term outlook in mind Goal: comprehensive economic agreement with extensive market access; the exit

negotiations will lay the groundwork – also in terms of the political climate Regulatory standards should not develop in different directions

Special aspects for financial services Primary objective is to maintain financial stability and a level playing field Important to keep a regulatory and political environment which enables banks to serve

customers dependably and with legal certainty, but also allows a return to profitability

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Outlook for banksEU27 banks EU27 banks normally operate with branches in London Shifting business back to the EU relatively easy from a regulatory and

organisational perspective, but a challenge in terms of staff and technology

UK banks Some UK banks already have subsidiaries in Germany Others engage in little market activity in Germany Very few adjustments needed

Third-country banks Most have their EU headquarters in London; no passporting rights in future Will relocate to EU27 with branches or subsidiaries; may also withdraw to home

market or relocate to other international finance centres

Basic strategy of all banks Need for basic decision on way ahead in the first half of 2017 Step-by-step approach: postpone decisions for as long as possible; preparation

(e.g. applying for a licence) is not the same as implementation

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Outlook for customers (I)Retail customers Brexit will have no implications for retail customers in Germany Financial services are supplied almost exclusively by domestic banks

Corporate customers The same goes for commercial and corporate clients in Germany since most are

also served by domestic banks The entire existing range of financial services – funding, investment services,

hedging, transactions – will continue to be readily available London based contracts: Documentation and processing will become more costly

and complex, and the number of suppliers may fall

Very high-volume transactions Very high-volume financing and hedging transactions may face some restrictions Clients seeking such services may establish their own market access to the UK

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Outlook for customers (II)International business Brexit will hardly undermine London’s position as the world’s biggest currency

trading venue; there will be continued access to trading

Economic impact Continuing uncertainty, obstacles to international trade and a reluctance to

invest pose long-term risks to the UK economy Funding the budget and current account deficits will be another long-term

challenge As a major trading partner of the UK, Germany is affected by these risks too; but

overall only minor implications for growth and employment in Germany

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Adjustment to future third-country statusStarting point UK will become a third country At the same time, substantial and complex economic ties have grown up over the

years EU and German laws should be adjusted to reflect this in order to mitigate the

impact of upcoming changes on existing contractual relations

Examples of the need for adjustments (I)

At EU level Clarification of data protection framework Clarification of whether securities denominated in euros will in future have to be

cleared in the EU or the eurozone; arrangements for existing business Amendments to banking regulatory requirements (e.g. in the clearing and

settlement regime) to protect existing contracts

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Examples of the need for adjustments (II)Eurozone Cooperation agreement between eurozone and UK financial supervisors

Germany Clarification of tax arrangements Simplified processing of residence permit applications and grandfathering

arrangements for UK citizens already living in Germany UK real estate should remain eligible to serve as cover assets under the German

Pfandbrief Act Cooperation agreement between BaFin and UK financial supervisors

In Germany we need a law enabling German legislation to be adjusted in the light of Brexit!

€

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Consequences for the EUInstitutional consequences UK is a net contributor the EU budget; EU must have the capacity to act on the

2019 and 2020 budgets and on the medium-term financial framework for the 2021 to 2027 period

The maximum number of MEPs should be decreased; no reallocation of seats vacated by UK MEPs

The EU will lose a member state committed to the market economy; the German government will need to position itself more clearly

European integration The goals should be to consolidate what has been achieved and move forward in

small steps Subsidiarity principle needs to be strictly observed and the internal market

integrated further in terms of economic, monetary, banking and capital markets union with firmly binding rules and effective sanctions for non-compliance

A set of common economic policy principles needs to be developed

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Political commitment

RegulationAdministration

Clear commitment by the federal and regional governments, the city of Frankfurt and the financial industry to promote Frankfurt as the financial centre of the European Union

Call for the European Banking Authority (EBA) to be moved to Frankfurt

Removal of “home-grown” regulatory obstacles

Location factors (schools, transport, administration)

Frankfurt – Berlin fintech hub

Prerequisites for Frankfurt’s positioning

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Five proposals for removing home-grown regulatory obstacles

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Legislation governing terms and conditions

of business

Further enhance personal autonomy by lifting the applicability of general business terms and conditions to commercial transactions

Bank levy Remove the ban on the tax deductibility of the bank levy

(in place since 2010 in Germany and since 2016 for contributions to the Single Resolution Fund)

Venture capital Ensure transparent taxation of private equity investors

Accounting Allow companies to prepare individual financial statements in

accordance with IFRS only, without needing to prepare German GAAP accounts as well

Labour law

Make it easier to fire very high-earning staff Adjust German Working Time Act to reflect digitalisation Refrain from creating further competitive disadvantages

(e.g. German Pay Transparency Act)

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Background Strengths of Frankfurt as a financial centre

Comparison of financial centres

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Frankfurt highly suitable as an EU gateway

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Financial centre of the eurozone

Frankfurt is the banking and financial centre of the eurozone Efficient stock market, which will become even more

important after merging with the LSE Centre of fintech innovation; bridge to startup capital Berlin

Banking supervision

Frankfurt is the seat of the European Central Bank, the SSM and EIOPA and thus the most important centre of monetary and financial policy in the European Union

Location factors

Major centre of financial research and training Good transport and digitalisation infrastructure Cost of living comparatively low by European standards; office

space also comparatively inexpensive and readily available

Sound legal environment

Stable political system Governed by the rule of law with functioning legal remedies Legal certainty and smoothly functioning administration

Dispute resolution in labour law

Dispute resolution is swift, inexpensive and predictable No significant “suing culture” Codetermination does not hamper managerial decision-making

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Comparison of London, Frankfurt and ParisA brief overview

London Frankfurt ParisPopulation(2014; in million) 8.5 0.7 2.2

Foreign banks as a percentage of all banks(%; ECB definition, as at end of 2015)

51.1 37.9 28.4

Financial centre ranking(GFCI1, 2016) 1 19 29

Ease of Doing Business Index2(country-specific, 2015) 6 15 27

Tax burden ranking(country-specific, 2015) 15 72 87

Market value of stock exchanges(market capitalisation in €bn, 2015) 133 15.7 3.34

Share turnover(EOB trades in €bn, 2015) 2,4033 1,410 1,8824

ETF turnover(in €bn, 2015) 388.33 198.1 162.44

Sources: Helaba, World Bank, WFE, Z/Yen

1 The Global Financial Centres Index (GFCI) of the Z/Yen think tank ranks the competitiveness of financial centres based on indices analysing the business environment, development of the financial sector, infrastructure, human capital and reputation and also on responses to a survey of financial experts.2 The World Bank’s Ease of Doing Business Index ranks economies from 1 to 189 on their ease of doing business. A high ranking means the regulatory environment is more conducive to starting and operating a local firm. 3 LSE with Borsa Italiana 4 Euronext, which operates in Amsterdam, Brussels, Lisbon and Paris