Now that the plural democratic process has played out, it is time to begin the process of tallying the consequences of Brexit upon the banking sector. But what consequences you ask? For UK banks, the consequences are broad. To begin with, cross-border banking (including lending activities, client interface/KYC, custody and payment systems) relies on EU established frameworks or otherwise fail back on equivalence processes for non-EU institutions. So-called pass-porting arrangements and relying on the CRD for deposit-taking across the EU may be jeopardised. It can not be clear at this stage if the equivalence processes will be fully accessible to UK firms, for example. If the equivalence standards can be met (see Article 46 of MIFID), EU access may be granted subject to necessary registrations. However if these standards are not met, setting up a new banking subsidiary may need to be considered to access the EU. At a time when many banking firms are already considering narrowing their customer and geographical focus given their risk appetite underpinnings, will the need to set up new legal structures to serve EU-based clients provide dis-incentives to lend? Could the costs entailed in running dual EU and UK platforms result in an re-assessment of cross-border lending, deposit taking or wealth management activities by banks?
Another interesting possibility is that authorities in the UK could actually backtrack on EU led regulatory initiatives as a means to protect its now threatened financial services sector interests. One specific area of divergence one could see movement on are bail-in provisions, for example. Once again, North American banks may benefit versus their UK counterparts which now face greater uncertainty and potential friction costs as they grapple with Brexit.
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