Tuesday 10 September 2019 1:00 am

EU capital markets post-Brexit will look 'smaller, less developed and more French'

Capital markets in the European Union will look “smaller, less developed and more French” in the wake of Brexit, according to a report released this morning.

Britain’s split from the EU is likely to reduce the trading bloc’s footprint in capital markets from 21 per cent of global activity to 14 per cent, putting it on a level pegging with its nearest rival China and further behind the US, think tank New Financial has said.

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EU capital markets post-Brexit will be nearly a third smaller than they are today, as the body looks poised to lose “its largest and deepest capital” amid Britain’s planned exit from the EU with or without a deal by the end of October.

With the UK out of the picture, the report has said France will be by far the biggest capital market in the EU on the other side of Brexit, with a share of total activity of around 24 per cent, ahead of Germany on 19 per cent.

“The extent to which France will be dominant in European capital markets has surprised people,” said William Wright, managing director of New Financial.

He told City A.M.: “A lot of people would have expected Frankfurt, and people were surprised the Netherlands might be higher up, but France has got all the big markets – the biggest asset management firms, insurers, banks, bank lending – it has pretty much got a clean sweep.”

Pensions assets and assets under management will shrink by more than half, while bond markets in the EU will be around one fifth smaller and equity markets will shrink by around one quarter.

“The overall depth of capital markets relative to GDP will fall, and the EU economy will be even more reliant on bank lending and bank savings than it is today,” the report added.

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New Financial has also forecasted that the EU will witness a change in tone and direction of policy and regulation in EU capital markets on the other side of Brexit: “Not least, the capital markets union initiative is likely to look very different under the leadership of France and Germany than it does today.”

France, Germany and the Netherlands have been looking to develop a “capital markets union” aimed at breaking down barriers to cross-border investment, saying in recent months that Brexit has raised the importance of an integrated arrangement.

Wright added: “There will be some dislocation but London is fundamentally a dominant financial centre in Europe – I don’t think that’s really up for grabs or discussion anytime soon.”