Goldman (GS) To Shift To Frankfurt, Retain Passporting Right

As per Reuters, Goldman Sachs Group, Inc. (NYSE:GS) is likely to consider moving part of its base from London to Frankfurt. This move is being made in order to secure its presence in the European Union (EU) market post Brexit, along with retaining its “passporting rights.”

Frankfurt is one of the main commercial hubs in the European continent and also Goldman’s largest European operation outside London. The bank is examining this move as a gateway to qualify for supervision by the European Central Bank (ECB) before Brexit, by placing part of its assets and operations under the observation of the EU’s chief banking regulator.

Reuters cited three sources with knowledge of the matter. One source stated that moving under the supervision of ECB is one of the options that the bank is considering. Another source mentioned that Goldman has had talks with ECB officials in Frankfurt regarding this move. According to the third source, the company will be able to offer its services to clients across the Euro zone and the wider EU, post-Brexit, once it comes under the ECB's jurisdiction.

Notably, all the sources stated that the bank has not taken any final decision on the matter since it will be navigating to an unchartered legal territory resulting from a formal split between the UK and the EU.

Per a spokesman of the bank, there were "numerous uncertainties" about the outcome of Brexit negotiations. "We continue to work through all possible implications of the Brexit vote," he said. However, an ECB spokesman declined to comment on the matter.

At present, Goldman relies on the EU’s “passporting rights” to sell its products. This allows the bank to conduct business with other members of the European Economic Area (EEA), without the need to get further authorization to sell in each member state, while operating under the supervision of U.K. authorities. However, post Brexit, the bank’s U.K. operations will likely lose this luxury of cross-border services, resulting in a lot of red tape involving lengthy authorization process and huge costs.

Further, the bank needs to increase its Euro zone assets to $33 billion (or 30 billion euro) to qualify for ECB supervision. The company noted that according to its 2015 filings, it had assets of 551 million euro in Germany. Notably, the bank’s overall assets are higher, including other entities in Germany and the rest of the Euro zone.

Though Goldman enjoys a comprehensive banking license in Germany, some of the services are offered through London – the bank’s headquarter for operations in Europe, the Middle East and Africa. Also, Goldman’s assets in Germany are less compared with nearly $850 billion of assets in London.

Even if the company comes under ECB supervision, its operations in London would still be under the control of U.K. authorities. However, on a broader scale, Goldman’s shift of operations to Frankfurt may result in London losing its status as the financial guard for the bank.

Our Viewpoint

Global uncertainties have been a drag on the banks so far this year, with the U.K. voting to exit the EU in late Jun 2016, adding numerous fears in the financial markets.

Goldman’s decision largely highlights the move deployed by many banks, opting to shift their base from London.

UBS Group AG (NYSE:UBS) , Morgan Stanley (NYSE:MS) and JPMorgan Chase & Co. (NYSE:JPM) are some major banks that have been contemplating to shift their operations/workforce to continue providing services to the EU countries if Brexit makes it impossible to run such services from London.

Currently, Goldman carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

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