With the referendum scheduled for next Thursday to decide whether or not the UK will leave the European Union, many have speculated on the potential impacts of a vote to leave.
There has been plenty of scaremongering (which has been subsequently dismantled by a JPM CIO), and even the obligatory Barack Obama op-ed telling the British how to behave (which has also backfired). To be sure, there will be consequences to either decision that gets made and no doubt the truth of the impact is somewhere in the middle of what has been said in the verbal tug of war back and forth between proponents of both sides.
However, as Brexit odds hit an all-time high, the WSJ gives a succinct overview of the banks that would be the most affected should the UK vote to leave.
To start, the problems that UK banks will encounter would be twofold. The banks would potentially lose access to European markets, and the next wave of concern would be presumably a weaker pound accompanied by higher interest rates - the latter hurting those who are already highly indebted.
Before getting into the negative impacts for the UK banks, there is one bank who may high five voters if a leave vote is pushed through. The Royal Bank of Scotland, who is mostly state-owned, is struggling with the cost and complexity of splitting off a chunk of itself to satisfy European rules - this would potentially go away if the UK were no longer a part of the EU.
As far as the banks that would be most negatively impacted, the WSJ notes that Barclays and HSBC have the most business in Europe. Barclays achieved just under 9% of its profits from continental Europe in 2015, while HSBC derived 5.5% of its profits from continental Europe.
As the WSJ points out, local businesses could become more difficult to run from the UK
Local businesses could become much more difficult to run from the U.K. if a Brexit vote provokes a big change in the trade arrangements with the rest of Europe. Meanwhile, their large London-based investment banks—and those of other European and U.S. groups—would also face losing direct access to Europe without a new trade deal that preserved Britain’s “passport” for services.
In this case, Deutsche Bank, BNP Paribas and Société Générale, for example, would suffer some of the same disruption and relocation costs as Barclays or HSBC.
Another group at risk of disruption would be UK mortgage lenders such as Lloyds Banking Group, Virgin Money and OneSavings. If international investors react badly, pulling capital out of the country, the pound will fall further and the bank of England may feel compelled to lift interest rates to attract investors back into the UK. As low rates have kept debt-service costs minuscule, a situation that could be changed quickly if rates rise. Then again, with the entire world going mad and global yields plummeting to all-time lows, it would only be a short time before investors pile into UK debt in search of yield, eventually bringing rates back down.
As the reality of a Brexit draws closer, the aforementioned stocks have begun to fall - the question is, if the UK votes to leave next Thursday, how much further will they drop.
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No matter the pain that bank stocks may or may not feel as a result of an exit from the EU, we want to leave you with some words from The Spectator to sum everything up properly:
No one — economist, politician or mystic — knows what tumult we can expect in the next 15 years. But we do know that whatever happens, Britain will be better able to respond and adapt as a sovereign country living under its own laws.
The history of the last two centuries can be summed up in two words: democracy matters.