The effect of Brexit on the treasury landscape so far

By Madhvi Mavadiya | 4 August 2016

The end of June saw the UK vote to leave the European Union and it would be an understatement to say that a lot has changed since then in the financial industry and within the UK government. The pound dropped to its lowest level since the 1980s after the voting was split 52% to 48%, David Cameron announced his resignation and Theresa May has now become Prime Minister.

Thoughts and Predictions

President of the European Council, Donald Tusk, warned after the decision to leave that this is not the time for irrational decisions. “There is no hiding the fact that we wanted a different outcome of yesterday’s referendum. There is no way of predicting all the political consequences of this event - especially for the UK. It is a historic moment, but not a moment for hysterical reactions,” Tusk said.

Alongside this, director-general of the Confederation of British Industry (CBI) highlighted that important steps will need to be taken, which have been in some respects. “Many businesses will be concerned and need time to assess the implications. But they are used to dealing with challenge and change and we should be confident they will adapt. The urgent priority now is to reassure the markets. We need strong and calm leadership from the government, working with the BoE, to shore up confidence and stability in the economy.

Bank of England governor Mark Carney highlighted that the capital requirements for big traditional banks are now 10 times higher than during the financial crisis. “The BoE has stress-tested those banks against scenarios far more severe than our country currently faces. As a result of these actions UK banks have raised over a £130 billion of new capital and now have more than £600 billion of high quality liquid assets.

That substantial capital and huge liquidity gives banks the flexibility they need to continue to lend to UK businesses and households even during challenging times,” Carney said. In addition to this, Michael Henderson, lead economist at Verisk Maplecroft believed that this could mean a major hit to UK business and trade with London’s position as a financial centre being uncertain.

Much uncertainty prevails over the longer term outlook for UK trade with the world. The country will have to negotiate not only its divorce from the EU and a new trading relationship with the remaining 27 member states but also its terms for World Trade Organisation (WTO) membership on an individual basis. In addition to this comes the need to negotiate trade agreements with other countries outside of the EU,” Henderson said.

At GTNews’ Treasury Innovation Forum (TIF), John Stepek, editor of MoneyWeek magazine reassured people to not expect another financial crisis. “If things threaten to turn pear-shaped, the Bank of England and other central banks can always turn the printing presses back on. Indeed it’s likely Mark Carney is secretly pleased that sterling has come down.”

Unprepared United Kingdom?

According to Brickendon, financial services management company and technology consultancy, the UK is unprepared to deal with what will come with the UK’s exit from the EU. The Fundamental Review of the Trading Book (FRTB) will raise costs by 200% to 400% when implemented in 2019 and this will be followed by a systematic modernisation of internal systems if costs are to be manageable.

Chris Burke, CEO of Brickendon Consulting said that compliance costs must be managed effectively. “As the UK takes its first steps into an uncertain future, one thing we can be sure of is that effective management of compliance costs will be essential to the future success of our financial sector – and significant efficiency gains can be made through the modernisation and optimisation of internal business and IT ecosystems.

By replacing inefficient IT architecture and introducing systems better-designed to handle a constantly evolving regulatory landscape, the financial services can reduce operational costs and re-attribute resources to developing long-term growth strategies,” Burke said. A survey by research firm East & Partners found that larger British firms had all used foreign exchange options in order to protect themselves against currency volatility, which proved effective post-EU Referendum.

Head of European client services, Simon Kleine told Reuters that that was an increase in a move to hedging and the referendum was a key player in this. “What this survey says is that UK small business really needs to wake up now and be a lot smarter about how it manages its FX needs,” said Kleine. “You are getting those who are thinking about it, but if you look nationally, you are still seeing a lot who are completely exposed.

Despite this, Deloitte highlighted in a recent survey that UK CFOs are more pessimistic about this in comparison to the events of 2008. 82% of CFOs said that their company planned to reduce capital spending over the next 12 months, against 34% in a similar survey at the start of 2016. The percentage expecting a drop in hiring jumped from 29% to 83%.

Chief economist at Deloitte, Ian Stewart, said that there “has been a marked shift to more defensive balance sheet strategies in the wake of the referendum, with a focus on reducing costs, building up cash flows and caution on all forms of spending.” He continued to say that the “Brexit vote is a major political shock but not, in the first instance, an economic or financial shock on the scale of the Lehman’s collapse.

Future for Treasury

According to the Association of Corporate Treasurers Brexit 2016 Briefing Note, treasurers will need to think about how to move forward, especially when it comes to cash management. “Treasurers will need to ensure their relationship managers are aware that they need to be informed promptly of on any planned changes to cash management systems and processes. As precedent, after 2008 some banks were required to withdraw from certain markets and only six weeks’ notice was given to some customers to set up new banking arrangements.