Professor Peter Hahn, Dean and Henry Grunfeld Professor at the London Institute of Banking & Finance, comments on the impact of Brexit on the financial services sector:
“The Bank of England is demanding Brexit Plans from banks, reportedly on the assumption of a ‘cold turkey’ exit from the European Union in March 2019. For months, we’ve been hearing about soft and hard Brexits – which sound more like choosing pillows to me than an event that will shape our economic future. ‘Cold turkey’ seems most appropriate for the sudden ending of process related to being part of EU governance and economics. I believe the term originates from the sudden withdrawal of regular drug use and immediate stark disruption to the body and many lessons from my banking career lead me question if that is where we’re headed. Indeed, I wonder if the BoE is demanding and preparing enough …
“Shortly after moving from corporate banking to investment banking, a former bank customer approached me with a classic cash flow problem and asked if I could locate a lender or temporary investor to help their organisation. A strategic investment hadn’t gone to plan and the business was going to run out of cash in six months before the problems were solved.
“Sadly, their problem was that anyone with a bit of financial depth could see the cliff they faced and when they would reach it. They may have only needed temporary funds, but the finance companies they would approach would all know the business had no negotiating leverage and its risk and with each passing day there would be more pressure for a deal. Perhaps most unfortunately, this was largely due to a poorly conceived business and cash flow plan at the outset. The owners had set their own cliff and speed of reaching it the day they went ahead. We couldn’t take on the advisory assignment but these were good people I wanted to help if I could. Almost every week the business owners called for some solace. Their lender wanted a higher and higher rate, but always offered to leave – though, they knew the business had no alternative. Eventually, the lender made the predicted move for a small minority equity interest in the business to compensate for their risk and it kept increasing. Of course, this is a regular event in the world of business recapitalisation, but for a business owners going through it the first time it was unbelievably distressing.
“However regrettable, we seem on the path of the business deal above. Britain will certainly not go into administration after Brexit if we end up without a deal, but as we approach the cliff we set, we’re rapidly running out of room to negotiate if we have anything to negotiate at all. Businesses and banks all pointed this risk ages ago and are now desperately calling for a transition plan. The business above created its own cliff long before it discovered the true cost of what it had done, but by that point it had no choice and had to swallow the consequences of its decision; we’re now at significant risk of seeing our relationship with the EU end up the same way. Like the finance company of the example, the EU will be focused on optimising its own risk and reward and knows time is on its side. Like the finance company, it can always offer to leave but knows the UK’s businesses have no alternative. The owners of the company in my example accepted the deal realising holding on to some of their company was better than none; this is a much more complex problem for an electorate.
“Banks must assume that no deal with the EU will be reached – they should know from business experience that agreements do not always happen. With that in mind, one can’t help but wonder if the Bank of England has gone far enough asking for Brexit Plans, perhaps it should be instructing banks to assume cold turkey and implement by March 2019? Thus far, we have no choice but to hope for the best but expect and be prepared for the very worst.”
For further commentary on financial current affairs from Professor Peter Hahn, download and listen to The London Institute of Banking & Finance podcast, here.