This two-part series is aimed at helping financial institutions with corporate banking services to understand the impacts to their business of Brexit and changing market and economic conditions.
The corporate banking industry has seen unprecedented change since the financial crisis with tighter regulations, increased globalisation, changing client needs and expectations, and a rapid increase in the pace of change in technology. In response to these drivers, corporate banking businesses have responded in different ways:
- expanded to emerging market locations to diversify revenue and obligatory risk
- reduced their physical presence in non-core markets to preserve capital, avoid regulatory pressures, or exit non-standardised local market conditions
- expanded or simplified their product offerings and services to tailor to specific client segments
- invested in their customer channels to mitigate the threat of FinTechs.
With or without Brexit, corporate banking was already on a transformation journey, to adapt to evolving client and market conditions, and meeting current and future regulations.
Brexit does however throw into question the existing corporate banking response to these challenges, with a review of the in-flight transformational, regulatory, and strategic programmes required. Given the range of potential Brexit scenarios, even the best war-room preparations to anticipate or mitigate Brexit, will still mean changes to existing programmes and additional costs to make these changes, if not a wholly different response all together.
It is perhaps important when working through Brexit preparations not to miss the elephant(s) in the room, and note that at a European and international level, there are also other dynamics at play:
- political and macro-economic factors (US and European elections, China markets)
- client business model changes (rise in dominance of Fin Tech players in the industry)
- upcoming regulations on anti-money laundering, data protection and payments, and the application of the UK ring-fencing rules
- emerging risks including financial crime, and cybersecurity.
Key impact considerations
Taking into consideration the above factors, key impacts that corporate banks may need to consider across the lenses of client, economic, and internal include:
- changing client appetite towards emerging market currencies and investments
- potential for UK Corporates to further increase their presence internationally, leading to changing corporate segmentations and business needs
- deposit flight from UK
- risk of corporate bank clients’ loss of revenues from subsidies
- reduced levels of investment activity due to market uncertainty
- potential downgrade of sovereign and bank credit rating leading to increased need for wholesale funding
- foreign exchange volatility leading to changes to, or new short-term and long-term hedging requirements by corporate bank clients
- impact of negative interest rates
- reduction in collateral value leading to higher Risk Weighted Assets
- risk of losing passporting rights
- managing to separate UK and EU regulatory frameworks and delineation of EU rules from the UK, leading to increased regulatory costs from servicing regimes.
Adapting to change as the new norm
The ability of corporate banks to effectively adapt to these changes and continue to meet clients’ needs would become a competitive advantage for corporate banks.
Threats and opportunities
In our next blog, the key impacts above, will be discussed in more detail including the threats and opportunities that would arise for corporate banking from Brexit and changing market and economic conditions.