International Monetary Fund (IMF) said that Brexit has unpredictable outcome that may risks the global financial stability. The risks are particularly attributable to three factors, including threats from the heavily indebted US Corporation, weak European banks, and China’s credit bubble. IMF also said that banking sector is the most severely affected sector because of Britain’s departure from the European Union. This is particularly because of costlier business operation and more complicated regulation.
How Brexit Could Affect the Financial System
Weaker European Banking System
Brexit has severely affected EU banks. It may even pose risks to financial stability. London served as a global financial hub, and it benefited from the economies of scale as well as established knowledge and expertise in doing business in various industries. However, IMF did not specify how the financial stability might occur, as it is difficult to predict. On one hand, financial stability may come from the less concentrated European banking system.
The International Monetary Fund said that recovery of economic sector in Eurozone would not automatically improve problems related to weak banking system. Banking institutions will be faced with difficulty in keeping up with the global competition. The problem is related to declining profitability within not only the European countries but also large-scale financial institutions in Europe.
European Banks now have limited access to private capital. They are also faced with terrible debt burdens, which may impede recovery and even lead to the systemic risks. Furthermore, European government that previously depended upon City’s bond markets to raise money would find it more difficult and costly after the Brexit.
Heavily-Indebted US Corporations
Another thing that may affect the global financial system is the pressure from heavily-indebted US corporations. Global financial stability actually improves due to higher economic growth. However, the IMF doubted the ability of US corporations to fund costlier investment because of rising interest rates. In addition, investment will become more difficult because the Federal Reserve and the America’s central bank tighten the policy.
These are made worse by the rising protectionism. As a result, US firms that operate in emerging world will become more vulnerable. Their debts are predicted to increase between $130 to $230 billion.
China’s Credit Bubble
IMF also said that China’s credit bubble might lead to global financial instability. China is the IMF’s biggest concerns among emerging economies, since China’s bank assets are now more than three-fold of its economy. When the credit keeps rising in a rapid way, China will face rising risks when it comes to financial stability.
As mentioned above, IMF warned that banking system will be the most severely affected by the Brexit negotiation. The banks would have to anticipate Brexit-related costs and worst-case scenarios to avoid possible disruption of their business and services. Their choices include duplicating some of their activities to different locations. This also represents additional costs and burdens due to different regulations in different regions. However, they can save the operation in case that the worst scenario happens.
In conclusion, after the Brexit negotiation, financial institutions will have to seek or develop new strategies to maintain operations. New strategies are also important to keep up the ever-tightening global competition in banking sector.