Wall Street’s Brexit Warning

Brexit and London

Ahead of the anticipated (feared?) Brexit vote later this week, a number of U.S. banks have sent a shot across the bow to regulators detailing how Britain’s decision to leave the European Union — if it happens — could impact those banks.

Of the 33 banks that gave light to their stress tests (conducted annually), Brexit was offered up as a scenario, even though not mandated as part of the stress test. The results will be released on Thursday (June 23) — the very day the referendum will be held.

Financial Times noted on Monday (June 20) that “concerns are mounting” over the potential for a Brexit and the impact it would have, as London remains a financial hub and an important part of financial life as an access point for U.S. banks. As has been reported, the five largest banks in the U.S. could see profits slashed by between 5 and 9 percent, said sell-side firm KBW. The culprits behind that hypothetical decline would be a slump in trading, mergers and acquisitions and also a boost in currency volatility, and firms would also opt to leave London, said FT. Morgan Stanley would see as much as 9 percent trimmed from earnings per share beginning in 2017 and, comparably, 8 percent at Goldman Sachs.

Under the stress tests, the most severe cases involve a series of draconian estimates, where stock prices slide 50 percent, with unemployment at 10 percent, and GDP slipping for five straight quarters. The Brexit testing was undertaken independently by the banks themselves.

And the identities of those banks remain thus far unknown and will not be known until Thursday when the stress test results are released.