Exit for Britain, uncertainty for banks
-by Kuljit Singh and Siddhartha Chanda
We are currently living at a time when global uncertainty has almost become a norm. From the financial crisis in the US to debt problems in Europe, geopolitical tensions in the Middle East, and the migration crisis in Central Europe, we have witnessed it all. The latest to create havoc in the financial market is Britain's referendum on leaving the EU, also known as "Brexit". The referendum, due on Jun 23 2016, has brought along with it uncertainty again - the consequences of Britain voting to leave EU.
Here's a snapshot of UK's presence in the European financial market - in cross border lending, the UK holds around 17% of international market share in comparison to 9% by France and Germany. The UK dominates in hedge fund assets which amounts to around 18% of the market share compared to 1% by France. In addition, it is now the biggest centre in the world for trading the euro.
In terms of numbers, a latest study suggests Brexit has the potential to disrupt 100,000 jobs by 2020 in the financial services industry. Losses are expected to occur to the tune of more than GBP 17 billion and it could reduce the sector's contribution to the national economy by up to GBP 12 billion. Some believe there would be 60% changes in the existing law, which means only one thing - trouble for the financial services sector in maintaining compliance and a possible gold rush for lawyers. Due to these changes in the rules and regulations both in EU and the UK, "RegTech" will be one of the most crucial area of focus for banks. They would need to come up with a comprehensive strategy to ward off the challenges coming from this revised regulatory overload.
Coming to capital markets, the UK is the lynchpin of whole structure of interconnected economy to an extent that more than 3/4th of all capital market business in EU27 is conducted out of the UK. Unsettling this structure could have a domino effect on all the players in the group.
One of the biggest benefits of being in the EU for financial institutions is the benefit of passporting. In simple terms, passporting is the right given to banks in a member state to carry on cross border business and sell services across Europe without obtaining a license. And this is one of reason why many third country banks have chosen to base themselves in London - to have access to the EU markets. Banks are able to access and operate across the EU under CRS or prudential passport which can be termed as a single banking license for the entire region. This leads to a reduction in the complexity and cost for their cross-border operations. Investment banks also work on a similar model under the Mifid passports and can service their clients across the EU. In the event of Britain exiting EU, banks and investment banks may have to find alternatives such as separately capitalized subsidiaries and separate broker dealers. This might challenge London's role as the venue of choice for global firms to conduct their European business.
At this juncture, nobody is sure about the outcome of the referendum. The economist's Brexit poll tracker suggests a marginal lead for the "remain" camp while some other individual polls show a major¬ity favoring a "leave" vote. Nevertheless, what it actually boils down to is that the voters will be choosing between a status quo and a complex process of negotiation and uncertainty.