Yesterday, Prime Minister May presented to her cabinet the 585-page exit agreement negotiated with the EU commission. The media and markets rated the cabinet’s approval as a success. Today, three ministers of this cabinet resigned and more might follow shortly. This makes it very questionable whether Prime Minister May will succeed in mobilising her wafer-thin majority in parliament if it comes to a vote at all. Prime Minister May is threatened with a vote of no confidence. Consequently, hope in media and markets evaporated as the risk of a hard landing on 30th March 2019 is by no means off the table.
The Brexit presents the financial industry with major challenges. In addition to the interbank market, client business will be severely affected. An end to the free, cross-border provision of financial services (EU passporting) concerns banks that serve customers in Europe from the United Kingdom. It also affects the relationship between German banks and their customers in the United Kingdom, provided they are served from Germany.
But there is also a risk of major upheaval beyond financial services. The links between many German companies and the United Kingdom are close and significant. After France, the United Kingdom is the most important European market for German companies. Around 12% of annual exports to the EU, or around EUR 82 billion, go via the English Channel, while goods worth around EUR 35 billion are imported.
Depending on the outcome of the negotiations between the EU and the UK, the real economic implications can be immense. According to a study sponsored by the ESCR (Economic and Social Research Council), around 12% of UK GDP is affected by the Brexit. In individual regions and sectors, values above 40% are reached. But also in the remaining EU27 countries there are high swings. Although Germany is expected to be affected by only 5% across all regions and sectors, double-digit values are sometimes reached, with a peak of 18% for the manufacturing industry in the Greater Hamburg area.
So far, there has been no clear decision on future cooperation between the EU and the United Kingdom. If there is no agreement – e.g. due to the future status of Northern Ireland – there may not even be the transitional period currently planned until the end of 2020. A “hard Brexit” therefore has the potential to dampen GDP in the short and long term. Fluctuations in the EUR-GBP exchange rate are likely in the course of the transformation and even prolonged level shifts are conceivable.
According to a recent survey by Der Treasurer, 65% of German treasurers surveyed are “very satisfied” with their Brexit preparations and 20% are “partially satisfied”. This means that at least six out of seven treasurers surveyed (85%) are satisfied. However, asked whether they had an emergency plan in case of a “hard Brexit” at least five out of seven (70%) declined. This confidence in a “things will work out well in the end” is surprising, as an unregulated Brexit entails serious risks for German companies, especially the exporters among them:
- operating effects
- Customs slow down shipments and make trade in goods more expensive in both directions
- Existing supply chains are derailed
- Legal and product standards might be changing
- Uncertainty regarding taxes and accounting
- exchange rate effects
- Possible short-term depreciation of the GBP against the EUR
- Sustainable shift in exchange rates
- Negative sales development due to volume and price effects
- Possible loss of competitiveness, also in the domestic market
- interest effects
- Rising volumes of raw materials and finished goods increase inventories and working capital
- Rising receivables (payment terms) and liquidity (safety buffers and changes to cross-border cash pools) increase working capital
- Increased investments in warehousing, distribution and administration
Whether the negotiating parties choose the gradual transition to some sort of privileged partnership or force the “hard Brexit”, many questions arise for banks – even beyond bank-specific issues. And yet there are opportunities in addressing (potential) customers in a well thought out manner.
attract new customers
Banks from the United Kingdom will possibly be able to serve EU27 customers only out of an EU27 subsidiary. There, these customers must be made business-ready once again: e.g. KYC and onboarding for various transaction types. The limited time window and the current uncertainty in these customer relationships make it possible to attract new customers.
expand share of wallet
As shown above, there are many reasons why the Brexit might create a need for action: exports to the UK will be burdened by a possible appreciation of the EUR against the GBP. Tariffs, quotas and other trade impediments make trade even more expensive or delay it. Even intra-group transactions (production / supply chains) are affected. Working capital will have to be adjusted. Thus, additional demand in interest rate and currency management is created.
There are many different starting points for discussion, given banks have the capacity to act. Read more about how LPA supports you in the analysis of your individual needs here.
 Wen Chen, Bart Los, et al. ‘The continental divide?’ in ‘The trade, geography and regional implications of Brexit’ (Regional Science, Vol 97/1, March 2018)
 DerTreasurer, Vol 21/2018, October 2018 (survey among 65 German treasurers)
Jan-Henning Becker is Senior Manager at LPA’s Distribution Advisory team. He has more than 10 years of experience in capital markets, having worked at a German investment bank before joining LPA. He is CFA charterholder and has earned the FRM certificate. At LPA, Jan-Henning focuses on consulting topics related to trading and sales of risk management products.