The Brexit effect: what could happen to UK banks?

banks UK and Brexit

As the Brexit deadline draws closer, let’s take a look at the impact it may have on UK banks and financial services.

The outcome

Even though some are still wounded from the last financial crash 10 years ago, UK banks are being tasked with supporting businesses and consumers whatever the outcome of Brexit may be. However, banks are being warned that if there is a ‘no-deal’ Brexit, meaning the UK will fall back into WTO (World Trade Organisation) rules, then the fallout could be disastrous for UK banks.

The impact of Brexit will depend on the magnitude, direction, and speed of the effect of reduced openness on the UK economy.

The Bank of England

The Bank of England (BOE) has claimed that an exit from the European Union could possibly plunge the UK economy into a worse state than after the global financial crisis of 2008. 

An assessment by the BOE covered various scenarios relating to the outcome of Brexit. In the worst case scenario, the economy of the UK would shrink by 8% over the course of a year, unemployment would rise to 7%, and house prices would fall by 30%.

Partnership with the EU

The first scenario stated in the assessment is dependant on whether the UK retains a close economic partnership with the EU. If there are arrangments made surrounding the free trading of goods in businesses and financial services, then there could be a certain amount of recovery of output over five years.

However, if the deal means there is a smaller or no close economic partnership with the European Union, then the outcome could be different. This may result in customs checks and greater regulatory barriers in trading, meaning economic recovery would take a lot longer.

Disorderly and disruptive

The Bank of England has also commented on a ‘disorderly’ scenario and a ‘disruptive’ scenario.

The disorderly scenario would mean that the UK would lose all existing trade arrangements it currently has with non-EU countries. It also added that the UK border’s infrastructure might not be able to cope with the customs requirements that will be put in place.

In a disruptive scenario, unemployment would see a rise of just over 6%. Tariffs and other barriers to trade between the UK and EU would also be introduced.

The future of UK banks

A no-deal Brexit would, at this stage, be the worst outcome for UK banks. The move is likely to cause major disruptions to the pound and the country’s economy. This is in addition to the likelihood of UK banks losing the likes of passporting rights to allow them to freely sell their services in the EU. Banks have already started to move operations to places like Dublin and Paris to ensure they have an EU-based subsidiary with access to the EU market post Brexit.

Regardless of the predictions, it is impossible to know how exactly UK banks will respond once the country has detached itself from the European Union. Therefore, banks may find it hard to prepare and protect themselves.

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