By Padraic Halpin
LONDON (Reuters) - There is likely to be a significant flight of financial activity out of Britain if companies are no longer regulated on equivalent terms to those in the European Union after Brexit, European Central Bank council member Philip Lane said on Friday.
Many of the world's major banks have European headquarters in Britain, but they face significant uncertainty over the country's future relationship with the EU after its vote to leave the 28-member bloc in June.
Their long-term prospects hinge on what happens to Britain's access to the EU's "passporting" arrangement, which allows businesses regulated in member states to sell financial services across Europe.
Some banks are already preparing to move part of their operations as early as next year, fearing that Britain is heading for a so-called hard Brexit in which it would lose access to the European single market.
"If the UK-EU negotiations deliver an agreement that effectively preserves the single passport for UK-resident entities selling into the EU, the net impact on the structure of the European financial system might be quite minor," Lane said at a Reuters Newsmaker event.
"However, in scenarios in which UK-resident firms are no longer treated as equivalent to EU firms for regulatory purposes, it is likely that significant migration of financial activity from the UK to the EU will occur."
Lane said it is plausible that a larger fraction of trade in euro-denominated financial instruments would take place inside the euro zone and that non-EU banks could also look to set up subsidiaries in the EU.
Cities around Europe are already vying for the potential new business, including financial centers in Germany, France, the Netherlands, Luxembourg and Ireland, where Lane is the governor of the Central Bank.
Lane has said his office has seen a spike in inquiries from financial services companies since the Brexit vote, but he cautioned on Friday that it is unlikely that activity will cluster in a single euro zone location because none offers a close substitute to London.
While the British economy has escaped a short-term hit since its EU referendum, as evidenced in data on Thursday that showed it slowed only slightly in the three months after the vote, Lane predicted that greater pain could lie ahead for Ireland's nearest neighbors.
"The transition toward the phase of active UK-EU negotiations that will begin in spring 2017 may trigger a more substantial reassessment of post-Brexit economic prospects," he said, adding that there would be a corresponding "major downside risk" for the closely tied Irish economy.
(Editing by David Goodman)