JPM JP Morgan Chase and Co

By Max Colchester 

LONDON -- A group of 75 J.P. Morgan Chase & Co. staff spent the last nine months evaluating European cities on factors ranging from employment law to the frequency of flight delays at local airports.

They are picking the bank's new homes after Britain's exit from the European Union.

The bank is checking out as many as eight cities including Paris, Frankfurt, Luxembourg and Dublin, people familiar with the plans say. Its staffers have begun pulling together paperwork to apply for licenses. It has scouted for real estate in locations including Dublin and Frankfurt. A final decision on its Brexit plans will be made in the coming months.

J.P. Morgan is a U.S. giant, but it employs 16,000 people in the U.K., and in 2015 a third of its $33.5 billion of investment-banking revenue came from Europe, the Middle East and Africa. That makes it Europe's largest investment bank and one of the most prominent among scores of foreign lenders trying to figure out their post-Brexit futures.

On Wednesday, British Prime Minister Theresa May is expected to officially declare the U.K.'s intention to quit the EU, touching off fraught negotiations with Brussels. London's banking industry will be a key sticking point.

Like its American peers, J.P. Morgan concentrated much of its European corporate and investment-banking activities in London. A cluster of British legal entities also handles its clients in Asia and Latin America, and a sprawling back-office operation in the English seaside town of Bournemouth helps process transactions for its global clients.

For its European clients, that compact setup may not function after Brexit. Under current EU rules, J.P. Morgan can sell products to European clients from London and set up a network of branches across the continent. But after Brexit that will probably no longer be the case. J.P. Morgan Chief Executive Jamie Dimon has said up to a quarter of J.P. Morgan's staff in the U.K. may have to move.

Fixing for Brexit isn't easy. Maintaining an office on the Continent isn't enough to insulate the bank from Brexit's effects. For instance, J.P. Morgan has operated a fancy office on Paris's Place Vendome for over a century. But that Paris office is only a branch, or outpost, of its U.S. business. If J.P. Morgan decides to turn Paris into a hub that can sell products across the whole of Europe, it has a choice. It can either connect the Paris branch to another European subsidiary or get regulatory clearance to transform it into a subsidiary and pump in capital.

Currently, J.P. Morgan has three European subsidiaries with banking licenses: a bank in Dublin, one in Luxembourg and a Frankfurt-based investment bank which handles some of the lender's euro clearing operations. It also has branches in several major European cities including Amsterdam, Milan and Brussels.

The bank's executives are still deciding which operating model to use. Given the uncertainty around Brexit negotiations, the bank is hedging its bets and considering plans to scale up both branches and subsidiaries, according to people familiar with the plan.

Each venue has distinct pros and cons. The bank's Frankfurt office, for instance, doesn't have the infrastructure to host a major trading platform. Space in existing offices might be tight; the unit already houses around 450 employees. There are also external factors to consider. Germany will hold elections later this year featuring candidates with varying views on business. The bank also has to make sure there is enough space in schools for its staff's children. On the plus side, Frankfurt is home to the European Central Bank and near some big German corporate clients.

Once the divorce talks begin, banks will embark on a balancing act. The longer they wait to adjust operations, the more clarity they will have regarding the Brexit deal the U.K. may get. But if they wait too long, they may not have enough time to implement changes before the two-year negotiations finish.

"It's complex and there is no easy solution to this," said Joe Cassidy, a partner at consultancy KPMG. Closely watched factors include upcoming French elections and whether the EU allows the U.K. to gradually transition out of the trading bloc, Mr. Cassidy said.

Each U.S. bank is different, but their plans share common themes: to build on infrastructure in existing offices across Europe, keep as much as possible in London and see what happens, executives say.

Goldman Sachs Group Inc., which already has a banking license in Frankfurt, is upgrading infrastructure in several European cities and is preparing to shift hundreds of staff, Richard Gnodde, a vice chairman at the bank, said recently. Morgan Stanley favors Dublin as its main European subsidiary but is considering Paris and Frankfurt as secondary options, according to people familiar with the plan. At Citigroup Inc., executives have a spreadsheet rating cities on 26 factors as it decides where to shift a chunk of its London-based investment bank, according to executives. These banks are hoping to initially only need to move hundreds of jobs each, executives say.

Once new sites are selected, applying for new banking licenses could take up to a year. In J.P. Morgan's case, any decision to shift capital and expertise from its U.K. subsidiary into a European unit then requires sign off from multiple regulators including the U.S. Federal Reserve, Britain's Prudential Regulation Authority and the European Central Bank. European client contracts would then have to be rewritten out of that new entity. Staff would have to be gradually hired or moved into European locations.

Write to Max Colchester at max.colchester@wsj.com

(END) Dow Jones Newswires

March 29, 2017 05:44 ET (09:44 GMT)

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