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

  • Fabian J. BaierEmail author
  • Paul J. J. Welfens
Original Paper


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.


Brexit UK FDI Banking Financial markets 



United States


Foreign Direct Investment


United Kingdom


Gross Domestic Product


European Union


Mergers & Acquisitions


European Systemic Risk Board


European Banking Authority


Asian Infrastructure Investment Bank


European Securities and Market Authority


Organisation for Economic Co-operation and Development


European Central Bank


Bank for International Settlements


United Nations Conference on Trade and Development


Locational Banking Statistics


Coordinated Portfolio Investment Surveys


International Monetary Fund


Balance Sheet Items Statistics


Pseudo Poisson Maximum Likelihood


Loan to Value

JEL classification

F02 F4 F21 G1 G2 



This paper is part of EIIW research funded by the Deutsche Bundesbank. While the authors gratefully acknowledge funding from the Deutsche Bundesbank within the project “The Influence of Brexit on the EU28: Banking and Capital Market Adjustments as well as Direct Investment Dynamics in the Eurozone and other EU Countries”, opinions expressed within represent those of the authors and do not reflect the views of the Deutsche Bundesbank or its staff. We gratefully acknowledge research assistance by Christina Peussner and editorial assistance by Kennet Stave and David Hanrahan (EIIW), as well as comments from the participants of the 4th FDI workshop November 2019 in Mainz; and the EIIW project workshop 2018 at HIS Markit, Frankfurt. The usual disclaimer applies.


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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Authors and Affiliations

  1. 1.EIIW at the University of Wuppertal and Schumpeter School of Business and EconomicsWuppertalGermany
  2. 2.Johns Hopkins UniversityWashingtonUSA

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