Brexit Impact & Effect On Financial Markets

With Britain currently considering leaving the European Unions, global economists are carefully watching the debate and attempting to predict its impact on financial markets worldwide. With voters on both sides of the issue at a relative impasse, and anywhere between 10 to 15 percent of voters undecided, financial firms are eyeing either outcome wearily.

“The Brexit could have a very real, devastating impact on Britain’s economy.”

The loss of ‘passporting’ for fintech
“The people we deal with are petrified about Brexit,” said Mike Laven, chief executive officer of Currencycloud Ltd., a London-based firm that processes cross-border payments, told Bloomberg. Laven points to the fact that the Brexit might put the unique fintech business market in Britain in jeopardy through increased regulatory hurtles and loss of EU trade benefits.

Impact of Brexit On Financial Markets

This could have a very real, potentially devastating impact on Britain’s economy, Bloomberg reports, as investment in the British fintech firms rose 53 percent to 660 million pounds ($974 million) in 2015 – the peak of any EU member. These firms and companies have benefited from Britain’s membership in the EU via “passporting,” allowing companies licensed in one EU member country to trade across boarders with relative ease and few regulatory hassles. By removing itself from the EU, Britain stands to lose nearly $5 billion in investment over the next five years.

“Following Brexit, fintech startups may realize it makes more sense to set up an office within the EU, and existing companies may relocate some of their staff to the EU,” said Jan Hammer, a partner at Index Ventures in London.

“There’s no denying that a break from the EU would cause disruption to businesses – especially in the financial industry,” adds Laven.

“Regulators have ordered many of Britain’s banks to stockpile reserve funds.”

UK banks stockpiling
In response, regulators have ordered many of Britain’s High Street banks to stockpile reserve funds in case of the Brexit inspiring widespread withdrawals by British customers. With the specter of chaos and insufficient cash flow in countries like Greece casting a long shadow over the proceedings, according to Financial Times, major UK banks have been scrambling to assemble “war rooms” and “rapid response units” to deal with a potential influx of queries if the vote to withdraw from the EU is successful.

“The [24/7 Brexit rapid response unit] facility will be staffed from the opening of the polls for as long as necessary,” Malcolm Sweeting, senior partner at Clifford Chance, one of London’s top law firms, told Financial Times. Other financial entities and also responding through preparation: Financial Times reports that TransferWise, a local money transfer business, has also announced that it “will limit GBP transfers later in the week,” following the vote.

The U.S. market
While it may seem far away, U.S. financial investors are keeping a close eye on the Brexit vote as well. MarketWatch reports that stocks saw a near 5-day lull due to the investor apprehension over risk posed by the Brexit, and the impact could be even more dramatic if the vote goes through. The Guardian reports that a recent “stress-test” revealed that, following a successful Brexit vote, the S&P 500 would fall 5 percent and banking stocks would tumble 8 percent, with the broader stock market seeing a dramatic 40 percent rise in volatility – and all this would just be a start to the potential instability.

This would likely drive some U.S. investors out of British markets. Combined with possible relocation of the aforementioned fintech startups to the U.S. and the exit vote could create an vortex, driving down the value of British pound nearly 20 percent, according to Goldman Sachs.

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