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Global Investing: Will Brexit reconfigure international banking?

Dubai - How would the shock vote impact one of the world's most critical sectors?

Brexit will have a profound impact on international banking. It was no coincidence that the shares of UK, German, Swiss, Italian, Spanish and other banks fell 20-25 per cent in a single trading session on news of Brexit. Even American money centre banks and investment banks with a large footprint in the City of London fell eight to 10 per cent on Friday, June 24, 2016. As Deutsche Bank CEO John Cryan has conceded, Brexit, is "negative on all sides".
Investment banks will be hurt by a lower risk-taking appetite, shut windows for IPO/merger deals and lower trading volumes. Asset managers will be hit by a vast exodus of retail investors, who had already yanked $40 billion from European stock exchanges in the longest period of outflows since the autumn of 2008. UK fund managers will find it difficult to use their London platforms to sell equities and funds in continental Europe. As sterling plunges, European banks with UK exposure as varied as Banco Santander and Bank of Ireland lost 20-30 per cent amid shock results of referendum. After all, global financial markets lost $2 trillion in a single day on June 24 after the verdict on the referendum. The epic volumes in foreign exchange trading are a testament to the raw fear and uncertainty that now grips financial markets. Yet the potential for a 2008 crisis, a run on a major bank or hedge fund followed by global contagion, cannot be dismissed even by the most bullish of bankers.
International banks face a legal minefield. Many banks will no longer be able to sell "passported" funds from London into the money markets of the European Union countries. This will benefit Frankfurt, Amsterdam, Dublin and Paris at the expense of London. Jamie Dimon of JPMorgan has said the bank could relocate 4,000 out of its 16,000 staff from London. Volatility and risk premia in financial markets will continue to rise. The political, trade and legal wrangling between Berlin, Paris, Westminister, Edinburgh and Brussels has barely even begun.
A recession in the UK (until Scotland secedes) will be catastrophic for international bank profits. The Bank of England will be forced to respond to a growth slump with a £100 billion gilt purchase programme. This could cause sterling to fall to 1.25 or even lower. The Tories are divided even as they seek a new leader, who will have to deal with a bitter and polarised House of Commons. This is not exactly positive for international bank regulation, ring-fencing and capital adequacy rules. The City will no longer be able to freely employ, say, French derivatives experts or German bond salesmen or even trade euro-denominated instruments. Banks, insurers, brokers and fund managers will downsize staff in London. The real tragedy of Brexit is that the decision to Leave was made for reasons unrelated to economic logic. Now both the UK economy and the EU must pay a bitter price for David Cameron's epic failed gamble.
The geopolitical shock waves of Brexit will change the course of British, European and, yes, world history. Scotland's chief minister wants a referendum since it is more important for the Scots to remain in Europe than in the UK.
The six counties of Ulster could well seek to reunite with the Irish Republic and resurrect the ugly ghosts of the Troubles. It could make more sense for Belfast to stay in Europe then stay in the UK even though a dear Anglo-Irish grandee friend from Chase's grandfather, a lord of the Ascendency defended Trinity College in Dublin Town in April 1916. The Unionists will go to war, as they did for the last hundred tragic years to preserve their umbilical cord to Westminster.
The dark side of Europe's lurch to the far right will be magnified now that the National Front's Marine Le Pen has called for a French referendum, positioning herself for the 2017 presidential election. Spain and Italy could turn their backs on the EU in elections this autumn. Germany has become isolated in the EU and Angela Merkel, Mutti Europe, is threatened by the rise of her own AFD fascist. The EU's military and economic clout on the global stage will irrevocably shrink with Brexit.
A Europe in recession and divided by deep political rifts becomes vulnerable to Putin's Kremlin as Russia exploits the spoils of its military aggression in Ukraine. Erdogan's autocratic rule in Turkey will continue unchecked. Britain will lose some of its influence in the US, Europe, Gulf and Asia. These macro trends will drastically reconfigure UK and international banking.
The writer is a global equities strategist and fund manager.

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