Brexit – 8 Ways Brexit Will Affect Banks
On 23rd June 2016 just over 30 million people of voting age in the UK turned out to vote in the referendum on whether the UK should remain in the EU or leave, this has become known as Brexit, British Exit.
In what is arguably the most important vote this generation will ever make the turnout of 71.8% was the highest UK wide attendance of a vote since the 1992 general election.
This historic vote had the whole of Europe, and indeed the rest of the world watching with bated breath as commentators in the run-up to the referendum believed the voting would be too close to call, the predictions were however in favour of a narrow margin for the remain campaign.
On 24th June 2016 the UK woke up to the news that the Leave vote had won by a narrow margin of 52% to 48%. Currency and stock markets, together with the world of investment management reacted accordingly.
1. In the immediate aftermath of the Leave result, the value of the Pound Sterling versus the Euro increased a little as exit polls indicated that remain would win by a small percentage.
When the first constituency to return a leave vote was announced it plummeted to levels that hadn’t been seen since 1985. While this rate has gone up slightly in the weeks since, it has not returned to pre Brexit values, and it looks unlikely that it will – certainly in the short term.
It is worth noting that currency values also took a large drop in February 2016 when David Cameron announced the date for the Referendum vote.
2. Share prices also plummeted both the FTSE 100 and the FTSE 250 (the more UK focused of the two) fell more than 8%. Although both regained a little by the end of the day, they were still significantly down by the close of business.
Just like the currency market it is expected that share prices will be very up and down for the foreseeable future before hopefully settling.
3. Bank shares also fell dramatically – Barclays and RBS both fell about 30% before settling at 20%. The drop was so drastic that trading had to be suspended temporarily in order for manual intervention to take place.
4. It is expected that Brexit will cause a reduction in a number of bank employees working in London for some of the non-UK banks, while possibly forcing some banks to find other locations for their European operations.
5. It seems that a long-awaited interest rate rise is unlikely to happen in the immediate future, with experts believing that rates may remain static through the second part of 2016 and for most of 2017 as well. This is due to the level of uncertainty that surrounds Brexit. Low interest rates mean banks are making less money, which could have implications for the banks themselves.
6. Royal Bank of Scotland (RBS) who have posted losses for their 8th year in a row were concerned that a win for Brexit could trigger a second Scottish Independence referendum. The costs of restructuring the banks as we exit the EU are already thought to be significant, the implications of restructuring a second time could be crippling.
7. With the dramatic fall in the value of sterling, overseas banks will also see a fall in any profits that they earn in the UK. Santander was already showing the impact of this in its first quarter earnings, and as the pound has fallen further against both the euro and the dollar, it is believed that their second quarter results will have fallen further.
8. With the UK in limbo while the government discuss the process of implementing Article 50, the formal mechanism for leaving the EU. It is unlikely that many companies will be willing to risk investment opportunities in the UK market, a decision that could put further strain on the banks
The truth is that Brexit and the triggering of article 50 are unchartered waters. With no country previously having left the EU before, and others making noises about possibly following the UK nobody can predict what lies ahead, how the markets will react and what effect it will have on our banks. One thing we can say is it looks like we will be in for a bumpy ride.
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