UK banks and financial services may be transferred to the EU as part of Brexit, according to Michel Sapin, the French finance minister.
"Certain big institutions could be tempted, and we should take them into account, to transfer some of their activities to the territory of the EU to have free, direct and simple access to the full range of markets and financial operations. We should prepare for this," Sapin said in an interview with BBC Newsnight.
UK banks fear they may lose passporting, or the ability to do business with the whole of the EU. Banks and other companies are discussing whether they will need to move European headquarters to the EU to keep the same privileges.
Francois Hollande, the president of France, has been clear that London will lose its importance as a financial centre because of the referendum result.
Hollande said on the first day of an EU summit in Brussels that clearing, an intrinsic process in the European financial system, would have to be moved to mainland Europe, diminishing London's importance as a global financial centre.
Clearing houses in London stand between the buyers and the sellers of derivatives trades in a global market worth $493 trillion. They have become a vital safeguard to protect traders since the Lehman Brothers collapse in 2008.
"The City, which could handle clearing operations in euros thanks to the UK’s presence in the EU, won’t be able to do them any more," Hollande said at the summit.
France may offer the UK membership of the European Economic Area. This would give the UK single market access. But it may seek to exclude passporting in return for the migration cap that was so important to Leave campaigners in the run up to the referendum.
That would mean that in order to guarantee the migration cap, the UK may have to cede its position as a global financial centre. City executives have said that they expect this to happen as the rest of Europe tries to give governments in France and the Netherlands a boost, to avoid the rise of the far right and the threat of other countries leaving the EU.
"It is crucial to understand EU must at all costs stop Le Pen winning in 2017. Best way to do this? Reward France the banks and their taxes," said Ben Judah, a journalist reporting from the City, on Twitter.
There are already warning signs that banks will shift staff out of London.
Before the vote, Stuart Gulliver, HSBC’s chief executives, said that Brexit could see 20 per cent of its 5,000 London investment bankers moved out of London to Paris.
Goldman Sachs also issued several warnings that it would be likely to move some staff out of the City if the UK voted to quit the 28-member bloc.
6 ways Britain leaving the EU will affect you
6 ways Britain leaving the EU will affect you
1/6 More expensive foreign holidays
The first practical effect of a vote to Leave is that the pound will be worth less abroad, meaning foreign holidays will cost us more
2/6 No immediate change in immigration status
The Prime Minister will have to address other immediate concerns. He is likely to reassure nationals of other EU countries living in the UK that their status is unchanged. That is what the Leave campaign has said, so, even after the Brexit negotiations are complete, those who are already in the UK would be allowed to stay
3/6 Higher inflation
A lower pound means that imports would become more expensive. This is likely to mean the return of inflation – a phenomenon with which many of us are unfamiliar because prices have been stable for so long, rising at no more than about 2 per cent a year. The effect may probably not be particularly noticeable in the first few months. At first price rises would be confined to imported goods – food and clothes being the most obvious – but inflation has a tendency to spread and to gain its own momentum
4/6 Interest rates might rise
The trouble with inflation is that the Bank of England has a legal obligation to keep it as close to 2 per cent a year as possible. If a fall in the pound threatens to push prices up faster than this, the Bank will raise interest rates. This acts against inflation in three ways. First, it makes the pound more attractive, because deposits in pounds will earn higher interest. Second, it reduces demand by putting up the cost of borrowing, and especially by taking larger mortgage payments out of the economy. Third, it makes it more expensive for businesses to borrow to expand output
5/6 Did somebody say recession?
Mr Carney, the Treasury and a range of international economists have warned about this. Many Leave voters appear not to have believed them, or to think that they are exaggerating small, long-term effects. But there is no doubt that the Leave vote is a negative shock to the economy. This is because it changes expectations about the economy’s future performance. Even though Britain is not actually be leaving the EU for at least two years, companies and investors will start to move money out of Britain, or to scale back plans for expansion, because they are less confident about what would happen after 2018
6/6 And we wouldn’t even get our money back
All this will be happening while the Prime Minister, whoever he or she is, is negotiating the terms of our future access to the EU single market. In the meantime, our trade with the EU would be unaffected, except that companies elsewhere in the EU may be less interested in buying from us or selling to us, expecting tariff barriers to go up in two years’ time. Whoever the Chancellor is, he or she may feel the need to bring in a new Budget
Both banks reiterated their commitment to the UK after the referendum results came in and said they would not make any immediate staffing changes.
Vodafone, the seventh biggest company listed on the FTSE 100, has said that it is reconsidering keeping its global headquarters in London since the referendum.
“It remains unclear at this point how many of those positive attributes will remain in place once the process of the UK's exit from the European Union has been completed,” a spokesman said.