Impact of hard Brexit on banking raises concern for SMEs

The report (44 page / 3.83MB PDF), produced for the Association of Financial Markets in Europe (AFME), found SMEs are not ready for a change in the wholesale banking landscape and are likely to find access to credit limited.

Both SMEs and large corporates interviewed said they were worried about access to credit and feared risk management would become more expensive. Businesses said they were most concerned about financing capital expenditure and managing risk, according to the report.

Investors are concerned that Brexit would induce a complex exercise of re-documenting existing derivatives and other trading relationships, it said.

The study suggested businesses of all sizes could be underestimating the risk of a hard Brexit, where the UK would lose its access to the EU single market. It said around €1.3 trillion in assets would need to be rebooked from the UK to the remaining 27 EU member states. These assets were supported by €70 billion of Tier 1 equity capital of the banks affected, approximately 9% of equity capital for affected banks.

There was most potential for disruption in securities and derivatives trading and bank lending would be affected to a lesser extent, the report said. A hard Brexit could lead to some UK-headquartered banks to withdraw from lending to EU clients, which would reduce aggregate lending in the EU, it said.

Despite their concerns, corporates and SMEs expected banks to provide the same level of service after a hard Brexit. The report said this could only be achieved if banks incurred additional operational and capital costs, estimated at a total €15 billion, reducing the return on equity for affected banks of 0.5 to 0.8 percentage points amortised over three to five years.

SMEs would be hardest-hit by rising prices and restricted access to wholesale banking should a hard Brexit occur, it said.

AFME chief executive Simon Lewis said: “The clear message from our report is that our interviewees, especially small firms with customers or suppliers cross-border, believe that a hard Brexit could impact their business and growth. Large corporates, in particular, are concerned about loss of efficiency and fragmentation in conducting cross-border business."

“Both SMEs and large corporates also face potential disruption in the provision of wholesale financial services which in turn will lead to a higher cost of capital for businesses. That is why above all else business would like the status quo preserved,” Lewis said.

Prime minister Theresa May said in January the UK should leave the single market as it withdraws from the EU. However, experts said recently that the result of the general election, which resulted in a hung parliament, meant this was less likely.

Financial services expert Alexis Roberts of Pinsent Masons, the law firm behind Out-Law.com, said after the election: “The result might mean that the prospects of a soft Brexit increases, particularly if the new government decides it has to build more consensus in parliament to get its agenda through. That would certainly be welcome to UK financial services businesses, as it would potentially make access to European markets after Brexit more straightforward.”