Brexit spurs European banks to trim exposure to UK assets
LONDON: European banks pared their exposure to Britain in the aftermath of its vote to quit the European Union (EU), slashing their UK assets by US$425bil in the span of a year.
The decline was driven by a 35% drop in derivatives exposures, showing European banks are preparing for the risk that the UK fails to reach an agreement on its future relationship with the bloc before its departure.
Banks in the 27 other EU countries had 1.59 trillion euros (US$1.9 trillion) in total assets tied to the UK at the end of June, about 356 billion euros less than a year earlier, data from the European Banking Authority (EBA) shows. Britons voted to leave on June 23, 2016.
More than one-third of banks questioned by the EBA are worried that Brexit could upend derivatives and other financial contracts, leading to potential losses and legal risks for banks. The EBA, which coordinates regulatory standards across the bloc, said firms need to prepare for a possible cliff-edge, in which EU rules cease to apply in the UK and a new agreement isn’t in place when the UK exits in early 2019.
“It is important that banks and their counterparties, as well as consumers and public authorities, consider appropriate mitigating actions and contingency plans to address these concerns,” the EBA said in the report.
Regulators on both sides of the Channel have sounded the alarm about the risks Brexit poses to derivatives and other financial contracts.
The Bank of England has said a “comprehensive solution” is needed as part of the Brexit process to protect the “long-term validity” of £20 trillion (US$26.7 trillion) of existing derivative contracts.