Central banks and private entities are restlessly awaiting the results of the referendum on June 23rd. If the United Kingdom finally leaves the European Union, QE, job cuts and much uncertainty will be the reactions of the banking sector.
17 june 2016
ECB is afraid of it. The Bank of England is too. And the IMF. Even the Fed. Almost all financial institutions are afraid of the effects Brexit would have on a still fragile global financial situation. And yet the polls indicate that, in six days, this is what it actually might happen. The predictions gathered from experts are varied but almost all of them paint a disturbing picture.
The banking sector is now preparing itself for a high-risk situation. The challenges are different for each individual firm and institution and the solutions are complicated and uncertain. Let us go over how the great monetary and financial bodies will react if a Brexit occurs.
Bank of England:
According to The Guardian, the Bank of England has already detailed the operations they would follow after the referendum. Emergency meetings with the Monetary Committee and the Financial Policy Committee, with, basically, two solutions on the table: raise interest rates to avoid a weakening Pound shooting up inflation (currently it is at a 0.5%), or relax monetary policies (cutting prices on lending or expanding their own Quantitative Easing programme) to support growth.
European Central Bank:
The ECB has already promised, along with the BoE, to open swap lines right from the 24th. Short-term, this policy will “reduce tensions between the agents who exchange foreign currency and financial flows” and maintain liquidity on the markets, according to elEconomista.es. Apart from that, the ECB’s actions are limited since, as Reuters indicates, it would be difficult for them to extend their Quantitativge Easing programme.
On top of that, the ECB, under its Banking Supervision responsibilities, has requested from those European banks more exposed to the UK (mainly sterling, but also bonds and other titles) an exhaustive report about their plans if the Brexit occurs.
Spanish banks would feel a Brexit the most: their exposure to the UK triples the EU's average.
Spanish banks:
The Spanish financial sector has 16% of its assets in the United Kingdom, compared to a European average of 5%. However, the larger Spanish banks have asked to “dedramatise” the situation. The United Kingdom will have two years to negotiate its exit from the European Union, and private banks will have more leeway to act and protect their investments, although in its current context of revamping business and the sector’s difficulties for obtaining profitability, a Brexit would not precisely be favourable for their interests. For the moment, Santander has already presented its Contingency Plan to ECB.
United States’ Federal Reserve:
The Fed has also given its opinion about a Brexit. In fact, it has already modified its plans because of the uncertainty created. The awaited interest rate raise has now been frozen until, at the very least, July or September (and probably, until the end of the year). If a Brexit happens and markets suffer, it’s likely that the Fed’s will to raise interest rates will be stopped once again.
Other banks:
London (in particular, the City) is the financial capital of Europe and one of the world’s biggest economic axes. But it is estimated that only 5% City of London workers favour Brexit. Multinationals that operate from the City have already set down emergency plans in case a Brexit happens. Citigroup announced to their employees that part of its business would have to be moved away from London and Belfast. JP Morgan estimated that over “4000” workers would need to be fired from its UK-based offices. And the HSBC is planning to move at least a thousand jobs from London to Paris if there is an exit.
Related links:
‘Brexit’ Plan for the Financial World? Cross Your Fingers - New York Times
What would Brexit mean for the City of London? - Financial Times
