Impact of Brexit and financial crisis on UK and EU banking system
Introduction
In 2016, the UK population voted in favor of leaving the EU, accounting for 52 percent of the total population. This historic event was then branded as Brexit. Brexit has subsequently had a significant impact on the UK economy and particularly the financial sector. The study herein seeks to explore the effects of Brexit on the UK and EU financial sector . It further examines the impact of capital markets while focusing on several commercial components. Such elements include the value chain of firms, operation costs, financial resource costs, servicing of sovereign debts, liquidity of dominated pound, the value of UK and EU currencies, and capitalization of financial institutions, among others. The study also evaluates if the absence of the new regulatory contributes to the financial crisis in the UK and the EU.
Effect of Brexit on the banking sector of UK and EU
The UK economy has a great influence on the entire EU economy. Therefore, the drift has far-reaching consequences on the economic status of both the UK and EU about the financial sector. Before the Brexit, the financial sector of the UK had been contributing over 10% of the GDP of the EU. Further, the UK accounted for over $ 10 trillion of the funds lend to the European Union. The Brexit is likely to pose a challenge to the trade between the UK and EU due to issues with the regional block. The pass porting process is also on the verge of being tampered with. This implies financial institutions will not be able to sell products to the rest of the EU. Banks have been frustrated since the UK financial companies struggle to operate in the EU after the Brexit. It has also lead to the decrease of in investor appetite for UK assets including a 30% decrease in sterling exchange rate index and interest rates of 4%
Effect of the absence of capital markets
Capital market refers to a market where buyers and sellers engage in buying and selling financial securities such as bonds and `stocks. Therefore, the absence of the capital market would have significant consequences on the value chain of UK and EU financial firms. One of the risks is that the financial risks will migrate from sell-side to post side market infrastructure. These risks can drive significant investments in risk management and compliance.
Moreover, the prices of operational costs will negatively be affected. The European Union is likely to suffer deficits in the financial sector because several companies will depend on UK financial services. As a result, commercial companies will incur increased operational costs. The absence of capital markets in the EU will attract a high operational price due to a lack of surplus finance. Brexit regulation will also limit the supply of services and goods by the UK to the EU. The ultimate impact of this limitation is the market size for the UK will decline.
Additionally, the liquidity and the dominated asset will decline in value since the value of the currency would have depreciated after the drift. The ability of the asset to settle liability will drastically decrease since the valuation of the asset will be done at a lower price as compared to long term liabilities. The solvency of the financial sector of the UK will run insolvent due to the loss of the pound dominated assets. These assets may be less than the liabilities because of the new currency value.