The U.K. vote to leave the European Union caught stock markets off guard. U.S. stocks ran up all morning yesterday on the day of the vote after the last two polls showed a tiny margin favoring Remain. Doubts began to creep in around noon but stocks mostly held their gains. When the votes were counted late at night, though, it was a solid victory for Leave, so that today, stocks reversed not just yesterday’s gains but the year to date in one session. Bank stocks led the market lower with their worst day in decades. Among banks, European banks and international banks with a major presence in London fell the farthest, though financial stocks worldwide were affected. Currency markets were in turmoil almost as soon as the polls closed, with wild swings during the highest overnight volume ever. The weekend has arrived now, and it looks like the worst is over as far as the markets are concerned.
The stock markets might have been caught off guard by the so-called Brexit, but the banks themselves were not. They may have made a month’s worth of gains today during a volatile day of currency trading, but in London, that’s little consolation for a city that, as of Monday morning, is no longer a major European banking center. The British exit from the EU won’t happen instantly, but it won’t take years either, and international business customers will not wait until the move is official to reconsider their European banking patterns. By the time the EU change is official, London banking will have to be smaller. I expect to see head count in banking in London shrink at least 25 percent in a relatively short time. Executives huddled in their respective banks in London earlier this month to draw up plans to reshape their businesses, and those plans went into effect early this morning after the vote count was in. Banks are obliged to focus on stability and continuity today and Monday morning, but Tuesday is another matter — and actually, banks like Lloyds, HSBC, and RBS had already been making cuts all year. For those senior employees who make it to the end of the year, bonuses could all but disappear. None of this will surprise bankers in London. The expected blow to the banking business is one of the reasons the City of London was one of the most strongly pro-EU areas in early voting returns last night.
Some jobs that leave London will move to EU countries, with Ireland and Spain in the best position to pick up banking operations that move out of Britain. Czechia and Luxembourg are two other names that have come up, and a few jobs could move to Germany. However, with the banking sector needing to shrink in any case, no one should expect that any new facilities will be built to replace the old facilities closing in the south of England, that the number of jobs added will be similar to the number of jobs cut, or that the salaries of newly hired workers in Ireland or Spain will rival those of workers laid off in London.
Two banks in particular may face identity crises with Britain leaving the EU. Deutsche Bank has its headquarters in Germany but its core operations in London. That’s a geographical formula that no longer adds up, and it is hard to imagine a gentle way of resolving that tension. For similar reasons a planned merger of stock exchanges between Germany and England is being called into question. The same problem, if in a more ironic form, faces Royal Bank of Scotland (RBS), which is headquartered in London but has its most important customer base in Scotland. Scotland may now be seeking independence so that it can rejoin the EU. In this situation Scotland won’t accept for long the current pattern of going to England to do its banking. RBS might be forced to decide between spinning off its operations in Scotland and watching them fade away.
While today did not provide the chaos that had been widely predicted before the vote, there were problems. The most serious problems had to do with banking customers wanting to buy euros and U.S. dollars. Several British banks ran out of euros before the day was over and stopped converting currency for their customers. With the British pound declining to its lowest level in 30 years, it’s understandable that people would be looking for hard currency. But if this is an early sign of deposit flight, that’s a trend that could hasten the decline of the banking sector in London.