Finance skills may be of help to the UK Brexit team sooner than you think… keep those CVs close by.
The Bank of England’s growing role in steering the UK’s economy post-Brexit has been highlighted in all forms of media this week. One stream of thought has suggested that with weakening investor, market, business, and consumer confidence, the Bank of England must be prepared to buy or invest in corporate bonds in the coming months to assure business credit. This is a somewhat stretched argument on the reality side, with perhaps a couple of hundred of the UK’s millions of businesses even able to issue some form of tradeable indebtedness, i.e. bonds, and the other ninety-nine percent dependent on banks and a small number of alternative providers. It is more stretched when considering that a significant amount of bonds are issued by businesses restructuring their balance sheets.
Think about whether the BoE should be buying a bond issued by a private equity owned company that used the proceeds to pay a dividend, leveraging its capital structure for higher returns but not providing any new investment or job creation. Carry this one step further and think about whether the BoE even has a corporate credit department – why would it to date? – that can assess corporate risks at all. Virtually all corporate bonds are unsecured, often subordinated to bank obligations and often structurally subordinated as holding versus operating company liabilities. Their ratings are an indication of default probability, and not the risk of return of principal. A vast extension of typical central bank lending against government securities or prime mortgage collateral (backed by real tangible houses) that is usually backed by commercial banks. Wow! So, if you have a lot of corporate risk experience, you might consider getting your CV ready for your central bank… but don’t rush.
Another application of banking skills on the horizon, is the UK – EU negotiation. In many ways, this has a sense of project finance in banking. For those not familiar with project finance, think of financing the building of a dam, port or energy project in a faraway place with the only source of repayment being the success of that project. Bankers have to think well beyond a set of projected cash flow numbers and perceive of vast arrange of risks. What happens if this or that? It is about using skills to estimate risks that are not only present but that could arise in the future. The UK might negotiate an acceptable deal with the EU about securities trading, but what about some form of digital banking information sharing that might not be feasible for now. Project Finance skills may be of help to the UK Brexit team sooner than you know… keep those CVs close by.
Dr Peter Hahn is the Henry Grunfeld Professor of Banking at ifs. You can read his entire series on Brexit and it's implications here.