all / humanities and social sciences

Brexit may increase the costs of banking services

The UK’s decision to withdraw from the EU means that a number of banks could pull out of the country due to obstacles to trade and increased costs of operation, scientist warns.

“Financial institutions may lose their EU passport, as a result of Brexit. So far, many international banks can provide services across the European Union from its UK home. This situation was especially favourable for Swiss and American banks, which can do the same from a subsidiary established in the UK. After the Brexit, passporting into the EU from the UK will not be possible unless any special arrangement will be established. Most probably, the financial institutions will have to pursue additional British licenses. This can affect the prices of banking services, and so many financial institutions are already in search of new places to register offices. Paris or Frankfurt are even mentioned as the financial centres of the future,” says Professor Aneta Hryckiewicz of Kozminski University – the best business school of Middle-East Europe according to The Financial Times.

A team led by Professor Hryckiewicz studied the effects that a withdrawal of foreign banks may have on the domestic banking sector. Subject to the analysis were 224 cases of such withdrawals and the consequences of such actions on banking sectors between 1996-2014. This globally unique study covers 54 developed and developing countries. The research took into consideration a variety of withdrawal procedures: sale, take-over or winding up.

As it turns out, the consequences of banks withdrawing from a given country are similar in all the cases, i.e. boosted position of individual market players, decreased the liquidity of the banking sector and reduced supply for loans.

“Banks lend capital to each other, and international institutions who have access to their parent banks’ capital supply the local markets. Withdrawal of a significant lender on the inter-banking market may lead to a drop in the supply of capital, problems with liquidity for local banks, and consequently – upset the entire banking sector’s stability”, explains Professor Hryckiewicz.

The researcher points out to the fact that a decreased liquidity in the banking sector is mostly observed in the countries in which banking sectors are largely dependent on foreign capital. These effects are less notable in countries where banks have access to international markets, which will not be a case for British banks following the Brexit.

A decreased liquidity of the banking sector often entails a slump in loan action. This was evident during the last financial crisis of 2007.

“In the long run, for clients, this may mean more limited access to loans and significantly higher costs of those. Such barriers do not only emerge as a negative result of decreased liquidity in a sector, but also in consequence of boosting the market power of domestic banks. Their market position is growing, but the competitive environment suffers. Clients may then face harsher criteria for inclusion in the service catalog and increased prices for products,” adds Łukasz Kozłowski, PhD, one of the researchers.

London may expect to see such perturbations as soon as next year. The first bank to mention abandoning London was HSBC. Deutsche Bank and the European centre for Citigroup followed suit. BNP Paribas has already made a decision to move some of its staff to Dublin, Lisbon, and Warsaw.