For the financial services sector globally, there are some immediate impacts but they are contained. Banks raise money from depositors and more caution often translates into more people putting cash in banks – but bear in mind the value of the highly volatile, crypto-currency Bitcoin also surged as Britain voted to isolate the continent.
Banks also raise money on international credit markets from institutional investors and it is these markets which are most likely to be disrupted in the short to mid-term.
Once the initial volatility settles down, Asian banks might actually be seen as better credit risks relative to European banks with better funding. But they could also be seen as more threatened by a global slowdown hitting emerging markets harder.
The Institute of International Finance, the global banking club, noted “safe haven assets have benefitted, with yields on major government bonds falling further and the Yen and $US strengthening. Within emerging markets, the biggest losers have been in Emerging Europe given their close trade ties, as well as Mexico and South Africa—the usual victims of market stress.”
Coincidentally the global banking regulator, the Bank for International Settlements, held its annual meeting just as Brexit hit the headlines. The official statement from the BIS was “the outcome …has resulted in high volatility in markets”.
“Extensive contingency plans by the private sector and central banks have been put in place to limit disturbances in financial markets,” the statement said. “Stronger capital and liquidity buffers in the private sector have also made financial systems more resilient.”
“Central banks have already communicated that they are closely monitoring the situation and stand ready to take the necessary actions to ensure orderly market functioning.”
The BIS too forecast a period of uncertainty and adjustment, exacerbated by the central role of London as a global financial centre (indeed that is already a point of focus with rival financial centres such as Singapore and Hong Kong putting up their hands to take London’s role, although given timezones Frankfurt is the more likely beneficiary of banks shifting their EU centres of gravity).
Stress testing undertaken by the US Federal Reserve and announced over the weekend also testified to greater resilience in US banks.
The longer-term challenge for banks would be if degrading global growth led to corporate failures and bad debts but such an impact of any scale would require a pronounced downturn either globally or in particular sectors (where it would hit major bank lenders).
By far the most worrying implications go beyond those evident in financial markets, driven by a protracted period of political uncertainty.
The most-dire situation for the global economy and hence the banking industry would be a large-scale retraction of globalisation and a retreat into simplistic nationalism.
That would crunch trade flows, domestic and cross-border investment plans, consumer and business confidence and the local economies ‘nationalism’ supposedly appeals to.
As Triple T Consulting’s Sean Keane noted in his regular What’s happening in the Money Markets? Insight for Credit Suisse: “Potentially the worst long-term outcome for both Australian and New Zealand, and for all nations that that rely on Free Trade Agreements and open markets, would be a President Trump/Brexit combo (Trumpit)”.
“Both of these votes would represent a rejection of the post-war consensus on increasing access to open markets, on reducing border frictions and on maximising the benefits of comparative advantage.”
“Each of those things have benefitted developing nations, and all have been very beneficial to Australia and New Zealand as suppliers of hard and soft commodity product to the worlds markets.”
Is Trumpit likely? Watch the UK polls. And bet on the opposite.
Andrew Cornell is managing editor at BlueNotes
PS: Iceland 2 – England 1. Out of the EU and the Euros in three days… imagine what a quinella on that would’ve paid.