Investors face months of market volatility as the repercussions of the shock vote for Britain to leave the European Union unfold, including moves by other member states for their own referendums and a drawn-out process of negotiating terms with Brussels.
Global markets reeled over the weekend and the pound fell to a 30-year low as traders and investors reversed their expectations of a “remain” vote and have predicted a slew of negatives, including a downgrade to British growth forecasts as companies withhold investment.
The Bank of England is expected to slash rates to 0.25 per cent as it uses its limited firepower to head off stagnation, and could even restart its money-printing program according to speculation in Britain.
But while the impact across financial markets will be uncertain for some time, the global financial system and Australia’s largest banks are thought to be far more resilient to a potential systemic shock than during the 2008 global financial crisis.
“There was a degree of shock on Friday,” Australian Bankers’ Association chief Steven Munchenberg said. “But once markets reopen this week, whether or not the banks can take it in their stride is still an unknown at this stage.”
“It’s going to come down to sentiment, but I think the biggest impacts from Brexit are going to unfold gradually over weeks and months,” Mr Munchenberg told The Australian.
Treasurer Scott Morrison said he had consulted widely on the ramifications of the Brexit vote and spoken with the Australian Prudential Regulatory Authority, the Reserve Bank, the Treasury Department and the heads of the big four banks.
“Australia is well placed and well prepared for the situation that we now face,” Mr Morrison said.
An executive at a big four bank said his lender was monitoring for signs of stress on money markets. But he noted most banks had reduced their exposure to the pound in recent weeks. The RBA is understood to have indicated it would have a cash facility on standby to ensure money markets continued to function but over the weekend felt this was unnecessary.
Central bank body the Bank for International Settlements said there would likely be a “period of uncertainty and adjustment” but that “extensive contingency plans” by private and central banks had been put in place to buffer financial volatility. “Stronger capital and liquidity buffers in the private sector have also made financial systems more resilient,” the BIS said.
One area of concern, however, is global funding markets. While Australian banks are well ahead in their current-year funding needs, any jump in pricing on the back of volatility could raise the cost of finance in Australia for business. Mr Munchenberg said if volatility increased for a prolonged period it could have an effect on funding costs for local banks, which would flow through to consumers.
“But banks have got their funding into a strong position now where they do not have to go into the market during particular times of volatility,” he said.
Former Business Council of Australia president and banker Graham Bradley said he saw no particular risk to the stability of global banking system. “Most of the international banks would have hedged significantly against the possibility of a Brexit because it was a very close run referendum but I don’t see that this will cause any prudential capital issues,” Mr Bradley told The Australian.
For Britain’s banking sector, Friday morning revived painful memories of the 2008 global financial crisis. Lloyds and Royal Bank of Scotland lost a fifth of their value as investors contemplated a messy fallout that will cripple future profits. Bankers fear a fee drought over the summer with up to £15 billion ($27bn) of floats — headlined by the second biggest mobile company, O2 — under a cloud because of the Brexit vote.
A £20bn merger between the London and Frankfurt stock exchanges that is due to be voted on by shareholders next month is also under renewed pressure as politicians in Hesse, the German state that includes Frankfurt, round on a deal that would see the merged company headquartered in London.
JPMorgan slashed its outlook for economic growth in Britain to between zero and 0.5 per cent “in the next couple of years”. Businesses across the continent are likely to defer investment plans as the two-year break-up is negotiated, although EU governments are pressuring Britain to leave as soon as possible.
Analysts expect US interest rates to remain lower for longer, while other sovereigns, including Australia, will likely be forced to cut rates even deeper.
The BIS said Britain was closely integrated in the global economy and hosted one of the world’s key financial centres, but that uncertainty could be contained with “good co-operation at a global level”.
Mr Munchenberg said the immediate economic impact was likely to be minimal.