The UK’s banking FDI flows and Total British FDI: a dynamic BREXIT analysis

The City of London has been the global leader for the provision of international banking services since the 1980s when Thatcher-era deregulation, followed by the EU single market program, stimulated big international FDI inflows – mainly of US banks – into the UK. The “single passport” rule allowed international banks in the UK to serve the whole of the EU28 market from London whose supply-side dynamics contributed to economic growth in the UK and a rising output share of the UK banking system in British GDP. With the expected BREXIT, there are serious challenges for the City since the passporting of banks will end and the regulatory framework will be adjusted; EU equivalence rules for UK banks that might be valid after the implementation of BREXIT cannot be a substitute for passporting so that lower FDI inflows and higher FDI outflows in the banking sector should be expected; inflow dynamics should also be shaped by international M&A dynamics influenced by the real Pound depreciation in 2016, while the prospects of reduced EU market access post-BREXIT also became relevant in 2017/18 and should influence the FDI dynamics of the UK – a similar pattern might occur in the BREXIT implementation year (i.e. 2019) and the following adjustment period where the change in City banks’ access to the single market will matter; as regards the latter, quasi-tariff-jumping FDI outflows from the UK can be expected where the FDI of City of London banks could go primarily to the EU27/Eurozone or the US. The empirical findings confirm the expected FDI pattern for the UK banking sector – overall FDI inflows in the wake of the BREXIT referendum have increased, in line with the Froot-Stein effect, while FDI inflows to the UK banking sector have declined.