The Brexit Diary: Calm before the storm or calm before the calm?

25 July, 2016

This column has now transitioned from daily to weekly and actually that means quite a bit. Even those who made Brexit comparisons to the financial crash of 2008, when financial institutions were literally approaching the precipice daily, can now see that financial events are not moving with the same speed or visibility. It is important to note the differences and linkages between visibility and speed and this makes for an easy comparison to 2008 when loss of systemic confidence created an environment of continuing fear and daily questioning of ‘who’s next’ about what institution or asset value was going to fail or fall tomorrow. We had a taste of that sense of fear and desire for exit take hold in UK commercial real estate investment funds two weeks ago, and that may or may not be warranted, however, we haven’t seen any other big liquidity type problems follow. I won’t say ‘yet’ as that is part of my question for this week.  

The UK’s new PM and Germany’s PM have both called for reflection and consideration which, added to greater appreciation of central bank liquidity management and banks’ own liquidity and solvency improvements, have soothed investor anxieties. Global markets have also had time to better to manage their own surprise at the direction of the EU vote and assess to what degree UK changes might affect other markets – clearly this is most directed at the EU as the UK’s major trading partner. Here, generally, cool heads have prevailed and we have quite a bit of ‘calm’. This is very much the ‘speed’ issue and it appears to be currently manageable or being managed. 

Our challenge is the visibility issue and those involved in banking & finance need to be the most alert to this issue. Data, surveys, pronouncements, and indicators are likely to point in different directions over the coming months. We, at least I, hope these are positive, but banking & finance professionals need to be alert. Inevitably, we will hear more news about how unprepared the UK is (as would any nation in the same role) to undertake a possible decade’s long transition that was chosen in a day. I do not envy politicians that may have to explain to voters that billions of pounds of funding for health, education and infrastructure may need to be diverted to hiring extraordinarily expensive consultants to negotiate the details or perhaps simply how these politicians will explain these issues to voters in the next election. I’m lucky that I only have to explain thousand-page bank regulations in two minutes and that I do not have to explain revising forty years of laws that touch every part of society and the economy. 

But the real issue in banking & finance is to assess and judge what is going on economically and there is a lack of visibility whether positive or negative simply due to the fact that a fundamental event happened on June 23rd. We must recall that all data is historical and an imperative for those in banking & finance is to try and assess how ‘fresh’ the data is and is it supported by ‘money’ movements. For example, activity measured for the six months to 30th June only includes one week post the vote while surveys done since the vote are sentiment and not money. Leading, lagging, emotional, wishful, disaffected, optimistic, pessimistic….it is still uncertainty that counts, uncertainty is risk.

If you’re working in banking & finance, these are challenging times. I find that I’m having to go back to what I learnt a long time ago and refresh and update my understanding and ability to judge what I am seeing and think about what I should be asking. We have more calm than last week, but those involved in risk management, advice and investment need to hone their skills to assess whether it is more calm or if the storm is coming.

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.