U.K. Banks Prepare for 'Brexit' Ahead of EU Poll
May 04 2016 - 6:25AM
Dow Jones News
By Max Colchester
LONDON--As a U.K. referendum over whether to quit the European
Union nears, British banks have battened down the hatches.
In the event of a "Brexit"--or a U.K. exit from the EU--bankers
say frozen capital markets and sharp currency swings could make it
harder for banks to fund their businesses.
To inoculate themselves ahead of the June 23 vote, British banks
are maintaining extra stocks of assets that can easily be sold to
fund their activities, tapping markets for funding earlier than
planned and holding off issuing certain types of securities.
Lloyds Banking Group PLC has raised roughly GBP7 billion ($10.2
billion), or about half of its annual funding requirement in the
first part of the year, according to a person familiar with the
matter. "We went earlier than we were proposing to do," George
Culmer, Lloyds's chief financial officer, said recently.
Barclays PLC is holding larger stocks of liquid assets than it
would in normal circumstances, group finance director Tushar
Morzaria told analysts last week.
Even deposit rich banks like HSBC Holdings PLC are stepping up
preparations. "We're making sure that we're extremely liquid over
the June/July period," HSBC Chief Executive Stuart Gulliver said on
Tuesday.
Royal Bank of Scotland Group PLC has held off issuing GBP2
billion of convertible bonds until after the referendum, according
to a person familiar with the matter. Investor appetite for the
bonds, which switch into shares if the bank is in trouble, has
dried up making any issuance expensive. RBS completed most of its
planned annual debt issuance in the first part of the year.
In February the Bank of England began probing lenders'
vulnerability to financial-market turbulence in the wake of an exit
vote, in particular heavy swings in the value of the sterling. Bank
officials say that 2014 balance sheet tests give them comfort that
the British banking system would survive a major downturn.
Nevertheless the central bank will hold three extra cash auctions
in June to ensure lenders have access to liquidity ahead of the
vote.
No bank wants to been seen tapping any Bank of England emergency
funding after the vote. Hence the flurry of activity, says
Chirantan Barua at Bernstein Research.
Unlike foreign banks based in the U.K., British lenders are less
concerned about losing their right to "passport"--or sell their
services across the EU. Most have already ratcheted back their
European operations to refocus on their domestic market. Instead
they worry about the impact of an economic slowdown in Britain
hitting their balance sheets.
Economists warn that regardless of any potential long-term
upsides of exiting the EU trading bloc, that there could be short
term economic pain. Investment may dry up while the U.K. embarks on
protracted negotiations over its future relationship with the EU.
Housing prices could fall and economic growth could stall.
Market fears over Brexit have eased of late. Sterling has
rallied in past weeks and there was strong international demand for
U.K. government bonds at an auction late last month.
Nevertheless several British banks are dusting off contingency
plans they prepared ahead of Scotland's independence referendum in
2014. "It is a case of preparing for the worst, and hoping for the
best," said one British bank executive.
(END) Dow Jones Newswires
May 04, 2016 06:10 ET (10:10 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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