Comment on the Implications of Brexit and Grexit for a Uk Bank from a Risk Management Perspective

Comment on the implications of Brexit and Grexit for a UK bank from a risk management perspective.

Executive Summary

“Brexit” and “Grexit” are two controversial words in the European countries. There are many discussions of the implications of Brexit and Grexit for a UK bank. According to the knowledge of risk management, this essay will critically discuss the main risks UK banks may be confronted with when Britain leaves the European Union and Greece leaves the eurozone. The essay will pay more attention to make comments on the liquidity risk, credit risk and currency risk. In addition, the positive impacts of Brexit and Grexit will also be included in the essay for comments.

Introduction

The year 2015 started with the possibility of Grexit, when Alexis Tsipras became the Greece Prime minister as a member of ultra-left. The year ended with the possibility of Brexit, when David Cameron gave an opinion of renegotiating the relationship between the UK and the EU (Arunabha, 2016). Here we are going to give comments on the possible implications that both Brexit and Grexit could have, particularly for UK banks from the field of risk management.

Brexit

“Brexit” is a word by merging the word Britain and exit that has become used commonly of saying Britain leaving the EU. Britain is going to set up a referendum on whether the UK should remain in the European Union (EU) by the end of 2017.With the referendum is fast approaching, it is important for individuals and businesses to have a view on the potential implications from a risk management perspective.

Liquidity risk

In the last few years, the increase in the possibility of UK exits from the EU has been one of the key factors holding back growth and investment for financial services especially for the banking sector. If the probability of Brexit is going to rise, the investment plan is likely to be cut back further, and then will weaken the growth. Inadequate investment will lead to the insufficiency of funds, then further harm the liquidity of banks.For example, there are a third of UK banks belong to Eurozone banks. If the UK decides to exit the EU, many of these banks must withdraw from the UK market and even take away the liquid funds, this situation could make banks susceptible to face losses of funding. In addition, Brexit would lead to a loss of access to the single market, and then bring in the increase of costs or a lack of liquidity. The UK could lose its power if the UK does not get its desirable single market, for instance, trading in euro denominated market. As the UK has a leading position in EU, some international financial firms have chosen to establish their headquarters of European in UK in order to offering services more broadly within the European space, under a regime known as “passporting”. Once Britain decides to exit the EU, the UK cannot negotiate the same rights of passporting and may lead to many banks leave the UK, this is also one of the main fears from Brexit. In order to avoid a financial crisis causes by Brexit, the Bank of England offers extra liquidity to protect banks.