Posted 29 Jul 2016

Brexit's impact on the UK's banks

Brexit became a reality on the 24th of June as the UK woke up to a Britain that had officially voted to leave the European Union. The decision led to a significant drop in the value of the pound while uncertainty saw the value of stocks and shares in the FTSE 100 and 250 plummet. 

Brexit became a reality on the 24th of June as the UK woke up to a Britain that had officially voted to leave the European Union. The decision led to a significant drop in the value of the pound while uncertainty saw the value of stocks and shares in the FTSE 100 and 250 plummet.

This knee jerk reaction was severe, and luckily a lot of these figures are now much closer to pre-Brexit vote levels. Still, in this time of national uncertainty, people have naturally turned to the banks for stability, security and reassurance.

The state of the banks  

The financial sector in the UK accounts for over 2 million jobs across the UK, the type of jobs which could be moved outside of Britain if we no longer have the automatic right to sell financial services to the EU.

The Bank of England were keen to comment on how nothing definitive could be said either on the state of the UK’s economy or the banking situation before more evidence is made available. Mark Carney, governor of the BoE addressed discussions over interest rates and whether these will alter post-Brexit saying, “some monetary policy easing will likely be required over the summer.”

Consumer confidence in the UK has dropped dramatically. According to studies, the number of people at British shops fell almost 3.5% in the 10 days following the vote, as the decision to leave the European Union put people off spending. What was also concerning was the slow of economic business activity happening in the capital.

Still, many economic advisers are insisting that people should try to carry on making their purchases as normal. Often, a perception of change can become reality in terms of an economy’s finance.

FTSE and the Pound

The FTSE 100 refers to the 100 biggest companies on the London Stock Exchange, and the first day following the Brexit vote saw the value of these businesses plummet. This value has since returned to pre-Brexit rates, but the FTSE 250, a better indicator of our economy, dropped by 7% has still not recovered from the staggering drop in value.

The same dip and recovery has happened with the pound, which fell to a never seen before low after the exit vote had been decided on. Banks will have been concerned to see this fall and Mohamed El-Erian, Chief Economic Adviser to Allianz, said that the value of the pound could drop again, “the future value of sterling is a function of how quickly the structural uncertainty is resolved.”

In comparison the US dollar, our British pound fell to a 31 year low, and it fell more than 10% against the Euro. Both of which are concerning, as imports from the single currency bloc are worth more, which could lead to inflation in the UK if the pound doesn’t recover from this dip.

Investment

Commercial and residential real estate has been impacted by the decision to leave the EU. Mortgage rates have fallen because of the reduced investment in property and this means that it could be better for consumers looking to get an affordable mortgage on their property.

Similarly, outward investment in the British housing market is temporarily seeing a dip, which will mean there’s more houses available to meet demand, bringing continually rising house prices down.

This uncertainty across the market should settle itself as the impact of the Brexit vote becomes clearer. What’s key to remember is that Article 50, the official legislation for our departure from the EU, has not been issued yet so until this is done it should be business as usual because nothing has formally changed.