In the weeks since the Brexit vote, the global financial community has been trying to determine to the ramifications of the vote results to banking institutions worldwide. Many of our questions will only be answered with time and the actions of the UK government between now and the actual succession from the EU, some repercussions are already being felt.
NYU Stern has created an economic model that executes a sort of digital stress test on financial institutions all over the world. Essentially, this model asks the stock market about the stability and value of the institution’s assets, which forms the basis of how that bank would perform in a severe crisis, taking into account how much added equity capital would be required to avoid the crisis. This model’s reporting shows that the largest U.S. and European banks took a hit of about $165 billion in the wake of the Brexit referendum.
The global financial insecurity led the U.S. Federal Reserve to put off raising rates again in 2016, and profits may suffer with the continued lower interest rates. In spite of inflation picking up and the job creation numbers for the country raising trending solidly in the right direction, the Fed indicated at the beginning of the year the potential for four separate rate hikes over the course of the year. In March the fed indicated that only two rate hikes were likely, but after the Brexit vote, it appears we may not see an interest rate hike at all. Alain Bokobza, head of global asset allocation at Societe Generale said: “This gives some kind of relief to global markets after quite difficult period year to date. We are still at risk in the coming month that we are going to continue to reprice the Fed for 2017, which is as much a boost to global risk assets on one side and, on the other side, it prevents the U.S. dollar from doing what the consensus is expecting, which is to rise.”
All of this turmoil and inspection of banking security led to the realization that Italy’s banking system is mired in non-performing loans (NPLs), which are loans on which debtors have not made any scheduled payments in 90 days. This leaves Italian banks not getting back the money they are lending out. According to data from the Bank of Italy, NPLs of Italian banks amounted to €360 billion in 2015, or 18.1% of all loans they made (see graph below). Of these loans, €210 billion are really bad and no longer collectible. The remaining €150 billion are of slightly higher quality. NPLs equal almost a quarter of Italy’s GDP, and a full third of NPL exposure of EU members in total. Obviously, this lack of funds is prohibiting the financing of more investments and growth in the overall economy, which in turn is a huge threat to the stability of the entire EU.
Under current EU regulation, direct state intervention is not permitted. What Italy is looking at now is most likely needing to inject public capital into the banking system. A lot of people are pointing to what the Swiss did in 1992 that even showed the Swedish government making a profit in sell the share of the banks later on when the crisis was over.
There is also a lot of reorganization that will be needed with US banks that operate overseas. American banks that were authorized to operate in the UK, they were, by extension, allowed to operate in any EU country, and this freedom of business for American banking institutions will no longer be authorized. Does this mean American banks wishing to operate in the UK move, and settle within a different EU country? Will that country authorize American financial institutions? What would the global economic impact of these decisions be? There are widespread fears about how London, once a major financial capital, may see banks unable to keep their main European headquarters in that city. We can expect to see many, many requests for banking licenses in other countries, even from British-based banks who are looking to bank internationally.
With so much at stake globally, we will keep our eyes on the UK’s banking lobby in the process of negotiating the exit to see how they can arrange the best possible situation with the least amount of local and global turmoil. In the states, we will continue to be affected, but we will also see much less fluctuation and impact than the European companies involved. At this point, our only real option is a wait-and-see approach.
Victor Notaro is an accomplished Corporate Banking Executive with a demonstrated record of success leading consultative and relationship management strategies in the financial services industry. Victor Notaro is skilled at building and managing high performing teams of professionals in commercial and corporate banking, fostering relationships with middle market and multi-billion dollar companies. Victor Notaro’s record reveals exceptional performance in the development of business capital strategy, with expertise spanning start-up of business units, leading YOY revenue growth, and producing sales in the millions of dollars. Victor Notaro is the Senior Vice President, Corporate Banking / MidCorporate Banking at Citizens Financial Group.