Brexit: British Exit From EU Shaking Up Banks

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Includes: BAC, JPM
by: Kal Telage

Summary

Brexit stands for a British exit from the EU. On June 23, the British people will vote to stay in or leave.

There is a long-standing desire of the Conservative Party in Britain to maintain independence from continental Europe.

Odds of an exit are 50%, creating uncertainty with some early negative impacts in British markets.

Changes in banking regulations can have profound effects on staffing, central planning and the cost of capital for major global banks.

A British exit is a trigger point for global financial markets that investors need to watch.

British Prime Minister David Cammeron Meets With EU Representatives

Click to enlarge

A Possible Big Change in Europe

Yes, it is a possibility. Britain may vote on June 23 to exit the EU and there is a sense of anxiety permeating Europe and the U.S. about economic ramifications that may be the consequence of secession. Unquestionably, such an action could produce other myriad dire results that center on the EU's survival, the structure of global finance and U.S. ties to our European allies.

Early Signs Seen

Historically, the Conservative party in Britain has been leary of involvement with Continental Europe for more than a century.

Subsequent to the financial crisis of 2008, marked skepticism of the EU was voiced by Britain's United Kingdom Independence Party and the chorus of anxious concerns about the EU have continued giving the appearance of a love-hate relationship.

One recent ramification of this isolationist tendency on Britain's part was maintaining the pound currency when the euro was adopted.

Arguments Pro and Con

Arguments for staying in the EU are that a medium-sized island nation like Britain will be more secure and can wield greater influence in the world as part of a larger block of like-minded countries.

Arguments for leaving contend that the EU has undergone major changes that include the growth of a large bureaucracy that undermines British sovereignty and diminishes global influence.

Uncertainty

Clearly, the uncertainty has already begun and uncertainty is an enemy of the markets. During the last year the British pound has declined against both the U.S. dollar and the euro, and with it, so have British stocks.

Furthermore, consumer confidence for the year ahead is now at its lowest ebb since December 2014. Statistics reflect consumer concerns, as new hiring is at its lowest since 2013. To add to this, construction activity has slowed, reducing new hires to the slowest noted since 2013. These data feed the uncertainty.

Jacob Funk Kirkegaar, a senior fellow at the Peterson Institute for International Economics, summarizes the above by stating "As we go closer to the actual referendum date, this uncertainty will have a negative impact on U.K. financial markets."

Shaking Up the Banks

The European banking industry will undergo profound changes if Britain exits from the EU. Bluntly, expect "wholesale staffing changes at European and British banks" and the bigger impact of "jolts to central planning and the cost of capital." Ryan Caldwell at Chiron Investment Management believes "the real issue is how the market treats funding costs." Effects might be the widening of spreads on bond deals that disrupt balance sheets, which have been impacted in 2016. Credit spread pain contagion might extend into the U.S.

Brexit would confound the operations of British and European banks. Bank regulation is concentrated in London hubs, but it extends to numerous European banks. This is another question the U.K. and the E.U. would have to resolve.

Barclays (BCS-PD), Standard Chartered (STD.F) and Lloyd's (LLOY-GB) would encounter changes in regulatory requirements when continuing to operate in the EU in the event of Brexit.

While many banks have shunned the topic, JPMorgan Chase (NYSE:JPM) CEO, Jamie Dimon has quipped, "One can reasonably argue that Britain is better untethered to the bureaucratic and sometimes dysfunctional European Union." To show how sensitive the Brexit topic is in banking circles, Bank of America (NYSE:BAC) has banned senior staff from mentioning the term when speaking to bank clients.

Brexit Fears Rising

The prospect for a British exit from the EU is a trigger point for financial markets across the world. The polls among the British people have tighten considerably with 70 days to go. Both sides are at 50% which makes it for the moment, a dead heat.

Take-Away

The potential for financial disruption in the EU and UK is high if Brexit happens. Ramifications across global markets are possible and the serious investor will pay close attention.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.