Danielle MylesFollowDanielle Myles
Capital markets editor at The Banker* Dal Profilo Linkedin
For many, the penny dropped just two or three weeks ago. Despite the polls, there had been a wavering sense of calm within many banks that the UK would not vote to leave the EU. The markets had not priced in a Brexit, with the pound – perhaps the best benchmark – hovering between 1.50 and 1.45 for much of this year before rallying four percent in the week before the referendum. Brexit-specific hedging was at a minimum, and M&A decisions had been postponed until there was, one way or the other, certainty.
That certainty has not come in the shape or form that much of the financial world had hoped or expected. Research by TheCityUK showed that 84% of London banker and finance professionals wanted to remain, while just five percent backed Brexit. Anecdotal evidence reveals quiet confidence that the status quo would prevail.
The markets felt the full force of that incorrect presumption when they opened this morning. Sterling had plunged 11% to a 31-year low of $1.32. The FTSE 100 lost more than seven percent (circa £110 billion) led by the banks including Barclays (more than 30% down), RBS (more than 35%) and Standard Chartered (down 17%). By midday, the FTSE had regained one-third of its initial losses, but volatility means where it is tonight is anyone’s guess.
IAG Airlines was the first corporate to fire a warning, stating it no longer expects to achieve profits similar to last year. But its the financial institutions that will no doubt take the biggest hit; London’s reign as the world’s leading financial centre (as determined by Z/Yen Group’s 2015 ranking) will surely come to an abrupt end.
The BoE governor and FCA’s carefully-orchestrated messages designed to reassure were, inevitably, underwhelming. But some of the City’s private sector leading figures/institutions had this to say.
S&P reiterated its comments over the last few months that the UK sovereign rating, as well as entities directly linked to that, may be affected sooner rather than later. “A vote to leave would, in our view, deter investment in the economy, decrease official demand for sterling reserves, and put the U.K.’s financial services sector at a competitive disadvantage compared with other global financial centers”.
The Association for Financial Markets in Europe said the “decision will significantly affect UK-based financial services firms and their ability to serve their clients and customers across Europe…We are in uncharted territory and the details of the new EU-UK relationship will now need to be worked out over the coming months and years.”
Derivatives trade group ISDA said the “momentous decision…will have significant implications for financial markets” and that it has “conducted detailed analysis on the contractual implications of Brexit, and has highlighted a number of potential issues that counterparties will need to consider during the two-year negotiation period.”
James Coiley, a partner at law firm Ashurst, said it will have a “profound effect on the City, the UK, the EU and the wider world for many years to come, and will undoubtedly give organisations cause to reconsider their business strategies, both in the UK and the EU. The uncertainty as to what a post-Brexit world will look like means that assessment of key legal and risk implications and forward planning for businesses may be challenging.”
Capital markets trade group ICMA today posted a working document on its website titled Brexit: Implications for Capital Market Regulation.
Before the final results came in, Nigel Green, founder and CEO of deVere Group, which has more than $10bn under advice, said: “It goes to show just how falsely complacent they were before the count began.”
Pre-vote, some City bankers suggested a Brexit would lead the ECB to step-up its corporate bond-buying programme, pushing yields even lower.
