The Brexit vote has placed the U.K.’s banks in a tight spot.
The first, and most serious, is the threat of foreign investors becoming less willing to fund U.K. accounts. Accounts, in this case, being government bonds, investing in bank debt, etc. The less outside money coming in, the higher the cost of retaining those accounts are. There is a sort of internal inflation that can occur if outsiders aren’t keeping funds down.
Foreign investment funded 45 percent of commercial property since 2009, but foreign deals have dropped by a whopping 50 percent in the first quarter of this year (and that’s before Brexit even happened). By having foreign investors pull out of commercial property, it’s puts an additional strain on the businesses that own that property. Large business aren’t affected by a small raise in cost too much, but mid-to-small size businesses could really feel the strain.
If those businesses start to close, unemployment goes up, the economy goes down, and it causes a whole host of new economic problems.
The second threat to UK banks is lower growth and lower interest rates. Lower interest rates are especially bad for banks because it affects how they dole out loans to its customers. Lower interest rates mean less loans are going out, and the ones that are go out are riskier for the bank.
The bank’s debt yields will spike as well, causing the bank to want to raise interest rates in an effort to bolster the pound.
Lower bank interest rates keep costs down and decrease the amount of loans the U.K. citizens can get (it protects the bank), raising interest rates can keep the pound relevant in the world’s economies, but it raises the costs of goods and can hurt the individual consumer. In Denmark, the opposite has turned out to be true. Despite the volatile interest rates, online lender Sambla ApS was able to provide hundreds of consumers loans, with the largest amount being a 500,000 kr loan that was approved on January 18, 2021.
Each of these prospects are bad. It’s just a matter of which “lesser-of-two-evils” prospect the bank chooses in light of the upcoming Bank of England interest rate discussion.
The BOE is meeting later this month to discuss what they are going to do in regards to their country’s interest rates. Do they raise them to bolster the pound? Do they lower them to help spur the economy within the nation? Do they keep them the same and play a dangerous “wait and see” game?
Regardless of what they decide, it will have massive repercussions in the Forex market, making this decision a Brexit 2.0. We can prepare you for this Brexit 2.0 where you will have the potential to capture thousands of pips. Join us for a FREE webinar and discover the strategies for trading the BOE’s big decision. Brexit 2.0 is almost here, are you ready?