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Brexit: Implications for US banking and capital markets

Brexit is the decision made by the voters of the United Kingdom to exit the European Union. FSI or the Financial Service Institution bears the burden of this decision over short and long term issues. In this article, we would have a closer look at the Deloitte centre for the financial services on the impact of Brexit for banking and capital markets in the United States. We would understand the impacts on the FSI sectors including commercial, insurance and investment management.

  1. The world turned upside down

This full separation is for two long years following the invocation of Article 50 of the Lisbon treaty. For the big US firms operating globally, the impact of this brunt is more direct and immediate.

  1. Recalibration post-Brexit

US business views changed from self-congratulations to the fear of fallout of the Brexit vote. Some fundamental conditions that are going forward are:

  • A prolonged and complicated negotiation process that fuels political and economic uncertainty.
  • A higher degree of trade friction between the United Kingdom and the European Union post-separation.
  • Less free movement of people between the European Union and the United Kingdom due to immigration restrictions.
  • A more complex and uncertain regulatory environment during the transition period as some EU rules are modified, replaced or eliminated for UK specific regulations.

In the coming weeks and months, US banks will face the following critical issues as the sense of urgency to execute the separation process gains steam:

  • Continuing political and economic uncertainty will hobble attempts to reliably reassess returns on equity (ROE) from UK and EU operations, potentially forcing a scaling back of investment commitments in the region.
  • The likely absence of a flexible “passport” arrangement for transactions means business scale in each region will need to be resized for the new reality.
  • The costs and barriers of erecting and running a dual UK and EU business model will force a re-evaluation of transaction booking models and the distribution of assets and wealth management products.
  • US banks will have to balance the cost and speed of operational restructuring depending on how separation occurs (i.e., orderly or disorderly, immediate or gradual). Correspondent banking partnerships and vendor relationships with firms in the United Kingdom, and possibly even in the European Union, will demand close attention through the coming transition.

Regulatory standards in the United Kingdom could diverge and possibly become less stringent than those in the European Union, as London attempts to retain its status as a leading global financial centre. Beyond impacting US banks that have a UK presence, this divergence may influence future investment decisions of domestic banks with international ambitions.

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