After the results of Brexit, the shares of British banks tanked as the Brexit decision triggered a huge sell-off and was expected to impact future economic growth, increase banks’ non-performing assets (NPAs), increase funding and restricting costs, increased operational costs and decrease revenues.
Figure 1: Drop in share price after Brexit.
Some of the most significant implications for banks are as follows:
- Impact on Human Capital and Operations: However with Brexit, Banks are now being forced to shift their operations and relocate employees outside the United Kingdom, with cities such as Paris, Luxembourg, Frankfurt, Dublin, looking to capitalize on the need for a new central financial hub in Europe facilitating the free movement of human capital and non-draconian financial regulations. Banks are working on their own Brexit strategy in order to reap the benefits of the EU Financial regulations, access to the single unified EU market and the “passporting rights” that allow them to serve clients across the entire EU bloc. According to the Boston Consulting Group, after Brexit, European banks will need to invest 40 billion euros to continue their UK operations. Banks will also need to evaluate their operational strategy with an extreme possibility being moving completely outside UK. Brexit will certainly lead to most banks scaling down their operations from within the UK. Further, hiring of new employees will be impacted as visa free recruitment will no longer be possible within the UK bank branches.
Figure 2: Number of bank employees likely to be relocated
- Impact on Reporting Trades and Trade Clearing: The existing European Markets Infrastructure Regulation (EMIR) governing banks trading derivative instruments lays down rules related to trade clearance, trade reporting and risk management. Post Brexit, this will no longer be applicable. Banks will have to conform to new regulations that shall be established within UK. Also, since EMIR regulations will apply to EU based counterparties of a UK bank, Brexit will lead to increased regulatory and compliance pressures for banks. Banks will have to move beyond a single regulatory framework and this will lead to increased costs. Further there would be significant impact on ISDA agreements due to legal requirements.
- Impact on Foreign Exchange Trading: London is the world’s largest and most dominant centre for trading of the Euro currency. In 2015, an attempt by the European Central Bank to debar clearing houses outside the Eurozone from engaging in euro trading failed because of the European Union court. This could change as a result of the UK losing its membership to the EU.
The Banking sector appears to be one of the most vulnerable and significantly impacted as a result of the Brexit vote. It presents a very uncertain environment for the future of the global banks. The effects will depend largely on the forthcoming negotiations that shall take place once Article 50 comes into place that allows a provision of two years to exit the EU. The possible negative impacts as mentioned above can be controlled and reduced through successful negotiations that provide reasonable alternatives and legal amendments. The most ideal situation would be if the UK authorities develop parallel EU compliant frameworks and legal regulations that allow UK to remain the financial centre of the post-Brexit world.
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