Frontpage News 2016 The implications o...

The implications of Brexit for Danish banks

29 June 2016

The United Kingdom has voted for a withdrawal from the EU. This has sent violent tremors through the financial markets, including in Denmark. However, according to the Danish Bankers Association’s assessment, Danish banks are equipped to meet the challenges.
Danish banks’ lending to households and companies in the United Kingdom is at a low level. Therefore, the systemic risk to Danish banks is limited.
Danish banks’ direct exposure to British borrowers in relation to their equity has decreased and in 2016, it is at the lowest level since the European Central Bank started assessing the bilateral debt of respective countries’ banks to other EU countries in 2012. The different countries’ banking sectors that have the largest direct exposure to, amongst others, the United Kingdom, are shown in figure 1.
“Lending by Danish banks to the United Kingdom is not gigantic. Therefore, nothing suggests that there will be vast consequences for the financial sector in Denmark. However, Brexit has created a lot of uncertainty, both politically and financially” says the Danish Bankers Association’s Chief Economist, Niels Storm Stenbæk.
Figure 1: the banking sectors’ exposure at country level
Source: European Systemic Risk Board, ESRB risk dashboard.
Note: the exposure of the respective countries’ banking sectors to other countries is calculated as the exposure to the countries concerned in relation to the sector’s equity. Yellow arrow: 75-100%, black arrow: 100-200% and blue arrow: 200-300%. No arrow indicates that the exposure is less than 75%. Circles indicate EU debtors and lenders, triangles indicate non-EU countries. The differences in the size of the bubbles indicate how much of the amount of total foreign debt is made up of the country’s banking sector’s total equity.
The markets have reacted markedly from the early hours, even though shares and bond prices have already been subjected to severe movements due to the shifting signals from opinion polls.
“London’s financial environment has significant influence on Europe and the global economy. The result raises the issue of whether London will continue as a financial centre to the same extent and this doubt can lead to large exchange rate fluctuations on financial assets,” Niels Storm Stenbæk says.
In addition to the above, the issue of the impact on the real economy is also raised. The British farewell to the EU could also have consequences for the EU’s cohesive force, which again can have negative consequences in the long run.
The British economy is, however, already challenged with imbalances and Brexit will mean further uncertainly, both politically and financially. And that is in spite of the fact that the United Kingdom will presumably continue to be a member of the EU for the next two years. The increased uncertainty will most likely penetrate the financial markets, but it will also affect the British and European economy through i.e. lower investments in companies.
For further information please contact the Head of Media Relations at the Danish Bankers Association, Stine Luise Hansen, on tel.: +45 3016 1009

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