What Brexit Means For The UK’s Small Banks

Britain’s small specialist lenders may have a hard time facing the fallout of Brexit, The New York Times reported on Sunday (July 3).

With a possible U.K. recession on the table, these small banks may suffer with the downturn as they rely primarily on the small and medium-sized business sector.

Many of these financial institutions, also known as challenger banks, are only a few years old and, according to NYT, could see their ability to provide better customer choice as an alternative to big banks threatened with Britain’s decision to leave the E.U. becoming a reality.

In order to take on lending giants like HSBC, Barclays, Lloyds Banking Group and Royal Bank of Scotland, challenger banks require healthy banking markets, a thriving U.K. economy and a high demand for loans to survive, all three of which could be significantly impacted due to Brexit.

According to economists and strategists surveyed by Reuters, there’s actually a good possibility the U.K. could end up going into a recession within the coming year.

“The challenger banks are almost exclusively U.K. only and are therefore insulated from the distractions that will inflict those operating cross border,” Secure Trust Bank Chief Executive Paul Lynam told NYT.

“Some banks may temper their lending appetite whilst they wait for clarity to emerge but in the long run Brexit presents more opportunity than threats to the smaller banks,” he added.

The impact of Brexit will have an outsized effect on banks, where as much as 32 billion euros could be erased from their bottom lines over the next two years, according to analysts at Goldman Sachs. That would represent a loss of roughly 11 percent of the bottom line projected through that period.

Bloomberg reported that, per Goldman’s estimates, and perhaps of no surprise, the U.K. banks would be hit the hardest, as the exit from the E.U. will lead to a 10 billion euro decline in profits for those firms. The least exposed would be those financial institutions operating in the Nordic and Benelux regions.