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What happens to European banks after Brexit?

• Posted on February 06, 2020
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What happens to European Banks after Brexit?

Introduction

Whenever it comes to checking the quality of banks, we never fail to miss out on anything! Especially when it means that a consistent quality check leads to the improvement in the quality service of the banks. A greater service improves a greater clientele, and a large clientele means being more efficient in providing the services. And when there is efficiency, the financial economy leads to a better national economy, and ultimately, the GDP increases.

While we must know this, similarly, it is crucial to know that while providing good quality services plays a positive impact in the national economy, any undoing in the national stage has a greater chance of hindering the financial sector and everything included within.  Considering this, the on-going financial impasse in the European Union (EU) has led to Great Britain deciding to exit from the EU which has been colloquially called ‘Brexit’

But what happens once Britain exits from the European Union? Since it’s the most important member of the group of countries that combine the whole European Union – this move might have dire consequences in many aspects, most importantly in the financial sector, due to which the banks are expected to be hit the most.

But what happens to the quality of service of the European banks once the move’s been made? Let’s find out…

There are always some challenges!

Ever since the global financial crisis, European banks and financial institutions have faced several challenges. But in the recent years ever since Brexit has risen to a global debate - and since in 2018, 52% of the population of United Kingdom voted in favor of leaving the EU - has marked quite a rife speculation among the globe and spectators all over the world have marked this Historic event as a pet peeve for the financial sector.

Not quite surprisingly, just after the announcement of the Brexit vote, the financial sector came to a bleak point where all the stock markets plunged, and in 2017, the sterling silver suffered heavily because it stood at a $1.30 against the US dollars as it fell under $1.21 from the prior year’s $2.51 to the American Dollar. This prospect of the Brexit has led the Investors to believe that the British currency has declined for more than 6% against the US Dollars.

Apart from this, consumer confidence was greatly shaken. And since the EU market is strongly rooted in the economic motivations and also that the most powerful country of the European Union – United Kingdom, has the Financial Industry as the most influential sector in its economy that contributes 12% to its total GDP.

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The calm before another storm

While the European markets have recovered since then, one cannot take eyes off the fact that there is still a fear of the immediate doom of the European economy that is looming over the heads of many investors, banks, and other financial institution leaders. Doubts remain about the long term impact of the Brexit over the European economy.

A Hypothesis

Looking across the spectrum, what happens inside of a bank? For instance, if the Brexit happens, unless there is a good deal that Britain can make with the European Union, it could lead to an ‘ Economic Shock’, as the Bank of England puts it.

Now, what happens in an economic shock?

First, an economic shock means a change to the fundamental macroeconomic variables or relationships that have a substantial effect on the macro-economic outcomes and variables to measure economic performance such as Unemployment, consumption, and inflation.

So hypothetically, if there is an Economic shock, the banks will have to face severe changes in the supply and demand of products and commodities through a series of destructive supply shocks, demand shocks, technology shocks, policy shocks, and most importantly, the financial shocks.

Second, a financial shock will emerge within the depths of the financial sector as the flow of liquidity and credit which is used to fund normal operations and payrolls – and on which the modern economy most gravely depends - will crash. This is bound to happen through a strong stock market crash which leads to a liquidity crisis in the banking system.

This means that banks won’t be able to lend money to individuals and private companies, again leading to inflation and coming back to square one – the European economy won’t be left with any way to generate income.

Now, if the banks aren’t able to lend loans, people would hesitate in investing in the financial institutions due to obvious reasons of course, which is an important factor detriment to the service quality of the banks and also the same time, harming the relationship between the banks and their customers in the long run. This leads to unpredictable changes in the monetary policy by the political state (the government) to make changes in its monetary policies.

This is an endless trap that is to be ensured by the long-serving banks and seems to have no solutions.

Conclusion

In conclusion, it has been made very clear that any political instability will directly lead to the detrimental effect in the financial sector in particular, and that banks will have a deteriorated functioning and will eventually lose their credibility like the rest of the financial sector. Therefore, banks need to provide quality services with vigilance as banks play a major part in shaping the Gross Domestic Product (GDP) of any country. 

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