Brexit and banking sector stability

By Syed Sadaqat Ali Shah

While the world economies, in the foreseeable future, are in no mood of financial and economic revival the Britain in a much awaited referendum voted to leave the bloc of 28 member states,  triggering financial distress and discomfort across the integrated European economies. Pound sterling experienced 10 percent historical slump following the vote to exit European Union, a club of 28 member states. What does the Leave vote means for British economy in general and its banking sector in particular is a query to be answered by concerned quarters in coming days. What dire ramifications to exit EU will be borne by British banking sector and among all what does Exit vote means to the banking sector?

It is indeed unarguable fact banking sector in almost every form suffers from country’s endogenous crisis. The crisis does not take long in surrounding the entire economy. Besides leading wealth managers the top lenders in Europe including France’s Societe Generale bore the brunt of Brexit by experiencing nose dive trend in almost one fifth of its stock value. The ‘Vote to Leave’ has triggered impact on the economy and fears of effects on jobs are not uncertain now. Banking sector stability and job security of 2.2 million bank employees is at stake for now at least and uncertain in the future. The plebiscite has made things uncertain particularly selling of financial products in the European market banks in British used to sell to their customers.

The British market without any doubts will have to embrace repercussions, following the ‘Vote to Leave’, before the financial markets bounce back to pre-referendum equilibrium. The vote has triggered unwanted and undesired shocks and has furthered probabilities of expected fragility in the banking sector which is thought by many concerned circles as already engulfed by crisis worst in almost every form and style than financial crisis of 2008 which swept world economies. To prevent the ailing sector and system from any disaster early reforms aimed at reforming and restructuring banking sector and the overall financial system is of king-sized significance.

Banking sector stability will be compromised terribly if the need to dislocate and relocate emerges. Massive dislocations would only worsen circumstances for the domestic economy by encouraging banks to relocate their services across other European countries, particularly Paris, Dublin and Frankfurt, which in turn could undo growth of international banks thereby pushing the sector toward historical downturn and financial crisis worsen than 2008 financial crisis.

Antonio Horta-Osorio, Chief Executive of Lloyd Bank, comments otherwise on implications for U.K banking sector after Brexit by glorifying underlying resilience of the domestic economy. Mr. Horta-Osorio is confident that his bank as Brittan’s biggest lender would make steady progress outside European Union and that decision to remain or leave EU is matter of the people. The overall position of banking sector however has been affected and will be influenced when formal negotiation takes place.

Stability of the sector would not prevail by bifurcating economy and voting right. How could economy in general and banking sector stability in particular be ensured when people of the country opt to leave the 28 member club? This is a question answered by referendum when banking sector bled and experienced colossal losses in banks’ stock value. London is home to 250 foreign banks. The impact therefore on banking sector would be considerable if timely and sufficient measures are not taken by governing bodies. The situation is uncertain and fragile. Any minute mistake may trigger unsought ramification for the sector which would not impact merely banking sector but the overall economy will have to face undesired repercussions.

The decision by non-British banks to leave or not to leave British market is yet to be decided when policy makers, after negotiations take place, shape terms and conditions with British as part of requirement. In addition to explicit effects of decision to leave British market the banking sector will experience concentration of wealth as an implicit outcome of the move. The regulator and policy makers in this regard should be extra vigilant and prudent to prevent banking market fall in few hands. To preserve such situation the gap between time periods, application for winning license and finally gaining the right to execute operations, should be optimal. The plan nevertheless should be treated as contingency plan if banks- although not all banks, are granted passporting rights for the purpose of executing and continuing their operations in the British banking market. Passporting into EU however will be unachievable unless particular arrangements can be agreed upon.

Worries about selling of EU securities should not influence decisions nor should they be perceived as unbeatable threat. Threats bring opportunities. The decision by banks to sell their EU securities and to relocate their investment portfolios should be sensed as opportunities by domestic banks by fully availing the opportunity of gaining prospective fat profits by the banks.

Prudent liquidity management by the central bank although is paramount, earliest initiatives to reform the sector to avoid any further dents and effects on jobs too should be of chief concern, a situation about which the policy makers are knowledgeable and vigilant enough to limits the impact of decision made by denizens to exit the 28-nation club.

Curbing any scathing reaction of the financial system in general and banking sector in particular depend, to a larger extent, upon how well policy makers are prepared to respond appropriately to any decisions to be made by the European Union. Terms and conditions by European Union after Brexit to trade with British are yet to be disclosed and the outcome of terms and conditions to be embraced by the domestic economy, besides other internal shocks the economy is so far absorbing difficultly.

Lastly, it is of enormous significance to act diligently and prudently for sustaining banking sector stability. Regulator and policy makers together should be highly prepared and proactive to prevent stability by remaining in touch with the sector. Better supervision and quickly detecting any menace and timely response would ensure stability. The situation however to a larger extent depends how the new government guides the economy through re-regulations and the expected reforms the economy and the banking sector is expecting.

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Syed Sadaqat Ali Shah

Syed Sadaqat Ali Shah is a researcher and works on banking regulations, competition and reforms.

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