By Sinead Cruise and Andrew MacAskill
LONDON (Reuters) - Britain's banking industry will emerge largely unscathed from Brexit and retain its position as one of the world's top two financial centres for the foreseeable future, Barclays' Chairman John McFarlane told Reuters.
Home to the world's highest number of banks and largest commercial insurance market, the City of London and its sister district in east London's Canary Wharf are scrambling to prepare for Britain's departure from the European Union, the biggest challenge the UK financial sector has faced since the 2007-2009 financial crisis.
McFarlane shrugged off fears expressed by some bankers and politicians that a blueprint for Britain's future trading relationship with the European Union, proposed by Prime Minister Theresa May, would cripple job creation and trigger London's rapid decline as a global financial services centre.
"I don't think in the long run that there will be terminal damage [to London]," McFarlane said in an interview in his capacity as chair of lobby group The CityUK.
Brexit will cost Britain up to 12,000 financial services jobs in the short term, the City of London financial district's leader, Catherine McGuinness said on Tuesday, and many more jobs might disappear in the longer term.
But McFarlane said London would remain Europe's primary hub for financial services because the city has the continent's deepest markets and broadest pool of talent, scotching doomsayers who claim the sector could end up the biggest loser from the end of unfettered access to EU markets.
Supporters of Brexit admit there may be some short-term pain for Britain's $2.9 trillion economy, but that long term it will prosper when cut free from the EU which they cast as a failing German-dominated experiment in European integration.
A sharp spike in Italy's cost of borrowing in late May also handed EU stakeholders a sobering reminder that the EU needs London's markets as much as London needs the EU, McFarlane said.
Short-term Italian bond yields suffered the biggest one-day jump since 1992 on May 29 after a fresh phase of political turmoil forced the government to pay the highest yield in more than five years at an auction of six-month debt.
And when prices tumbled, London-based traders and market makers with age-old relationships with the world's biggest investors executed the largest volume of Italian government bond trading, McFarlane pointed out.
"The only reason that was dealt with is because London existed. Given that we have a competitive advantage in those areas that is not easily replicated, that is a fair argument for why people need to use this system going forward. Because it is better than the alternative," he said.
The financial sector accounts for 12 percent of Britain's economic output, but McFarlane said the government's dismissal of the sector's preferred plans for access to the EU single market post-Brexit will not be as destructive as some commentators have predicted.
Many had pinned hopes on a bid for "mutual recognition" - whereby Britain and the EU would accept each other's rules in exchange for broad two-way market access - as the best way to protect financial contracts and activity worth trillions of euros once Britain exits the EU on March 29.
Prime Minister May has instead chosen to build trading ties on a legal mechanism known as "equivalence", whereby the EU deems a country's rules to be as robust as its own.
McFarlane said the government now needed to act fast to negotiate "expanded equivalence" for Britain after critics said the regime exposed firms to sudden loss of EU market access.
"You need to get on with it. Aggressively. Because radical change in this space is difficult," he said.
The EU has so far opposed any attempts to modify equivalence and said it has no plans to reform the regime.
McFarlane, who has chaired the British lender and TheCityUK since 2015, said he was confident May would avert a potentially chaotic 'no deal' scenario, despite recent ructions in Westminster that have put further strain on Britain's relationship with EU negotiators.
"I am always optimistic until I am pessimistic, and that line has not been crossed. While it is all to play for, we should play for it and secure it ... Economic logic must win through somewhere and therefore we have a very good chance of securing something," he said.
Concerns about the future prosperity of Britain's financial services sector have surged since some of its biggest employers scrapped 'wait and see' policies on relocation, and began executing plans to shift people and resources from the UK to multiple EU outposts.
Barclays has announced plans to shift up to 200 roles to the continent as part of its Brexit planning.
McFarlane, however, said he felt reassured that May and her cabinet were striving to protect the interests of the private sector, despite statements to the contrary made by ex-ministers.
Recalling a recent dinner attended by May, UK Finance Minister Philip Hammond and around 20 senior banking executives from all over Europe, McFarlane said both politicians impressed with their grasp of the biggest problems the industry faced.
"She came, she had no notes but she was fully prepared and she was impressive. It was highly symbolic to that group that she cared," he said.
"I don't think the official part of government is dismissive of business ... if anything, they are fighting our corner."
(Editing by Silvia Aloisi and Susan Fenton)