Brexit and banking: boom or bust?
In this post Dr. Maurizio Fiaschetti discusses the implications of Brexit on the UK banking industry.
There is no doubt that 23 June will be considered as a singular event able to change the economic perspective for UK and Europe as a whole. How this perspective will evolve is hard to say as there are far too many variables involved and uncertainty is the only sure driving issue.
Focusing on the potential effects of Brexit on the banking sector, below are some points about specific aspects to help our understanding.
Firstly, the UK economy is crucially affected by the financial sector – in 2014 the contribution to the gross value added (GVA) of financial and insurance services was £126.9 billion (8% of the total), employing 3.4% of the whole workforce in the UK (1.1 million jobs) and London itself accounted for 50.5% of the overall industry GVA in 2012¹.
Secondly, focusing on the banking sector we need to consider at least two time frames, short and long term, and two players, customers and banks. In the short term (presumably until the end of the year) very little is going to change for both the players. Assuming Theresa May’s scenario, article 50 won’t be triggered until then, therefore no changes are expected in the agreements between the ‘former’ members of the EU (among which the UK is included). From a customer point of view, as also stated by the British Bankers Association², this means no changes (in fees and technicalities) regarding (i) SEPA (i.e. euro) payments from the UK, (ii) the rules to open a bank account and (iii) the Financial Services Compensation Scheme (FSCS), that is to say the protection of the deposits up to a limit of £75,000 per person.
Of course, some changes may occur in the pricing of some specific financial products and services (e.g. current account denominated in euro), but this would be entirely due to the exchange rate dynamic and the weakness of the pound – currently 0.85 – 0.83 with respect to the euro, at its lowest in two years. There will be little change for the banking system too unless the mist of uncertainty will suddenly fade making a specific scenario particularly probable. Banks will keep providing financial services within and outside the UK with the current rules.
The case for the long term effects, once article 50 is triggered and the negotiations start, is completely different . In this timeframe, the UK will presumably formally no longer be a member of the EU. This means that the agreements for the payment system may change (especially the fees, because it is hardly conceivable to completely change in the technical executions of the operations). The rules to have a current account in the UK may change as well. Currently, the Immigration Act allows banks to open accounts only to those who are legally resident in the UK, should the rules change this will affect the banking system as well. On the other hand, though, nothing will change (unless differently stated by Parliament) for the deposit insurance because the compensation scheme is part of the UK law.
On the other hand, there is one big issue crucially determining the future dynamics of the industry – the so-called ‘passporting’ rule. Fulfilling the conditions of the single market directive, any firm with a licence to provide financial services granted by an EEA country is allowed to offer its products and services in other EEA countries³.
Once article 50 is triggered, the access to the single market for UK financial firms will be part of the negotiation and this may constitute an incentive for firms to relocate to an EU member state. In addition, the new status of the UK may induce the ECB to tackle an old ongoing issue – London clearing houses are currently handling a large share of the financial transactions denominated in euro. This was an anomaly before 23 June, given the UK decision to opt out the single currency, but it could be seen as a paradox if the UK won’t even be a member state.
Finally, from both the client and banks point of view, the effect of uncertainty and future evolution of the macroeconomic situation must be taken into consideration as it unfolds since it is not predictable at the moment but there is a strong consensus foreseeing dark clouds ahead, at least in the short term.
Dr. Maurizio Fiaschetti is an academic with the Centre of Financial and Management Studies at SOAS University of London and is Programme Director of the MSc Finance (Banking).
1. Data from the standard note to the House of Commons SN/EP/06193 ‘Financial Services: contribution to the UK economy’, 26 February 2015. The note was explicitly dealing with the need set by the Government to rebalance the economy across the sectors.
2. For further reference see the Q&A section on the website of the BBA: https://www.bba.org.uk/eu-referendum-qa/?utm_source=bbahomepage&utm_medium=banner&utm_campaign=referendum-QA
3. See the PRA website for further reference: http://www.bankofengland.co.uk/pra/Pages/authorisations/passporting/default.aspx