Banks Prep For Brexit-Induced Corporate Loan Defaults

U.K. banks are looking to prepare business clients ahead of Brexit in anticipation for tightened access to financing, Reuters reported on Tuesday (Nov. 27).

Reports said U.K.-based financial institutions (FIs) are growing increasingly concerned that Brexit will lead to an increase in bad loans to corporate borrowers, with possible defaults resulting from delays in cross-border trade shipments or payments. Sterling value volatility could also heighten defaults, according to reports.

In anticipation, banks have reportedly extended credit to corporate clients early and have begun to sell insurance to mitigate the risk of foreign exchange (FX) volatility.

Reports pointed to the Royal Bank of Scotland (RBS), which has tripled its small business “growth fund” from £1 billion ($1.27 million USD) to £3 billion. The extra financing was built up to address the risks of Brexit, the bank said.

“To a large extent, it depends on the type of Brexit we get,” said RBS Head of Capital Management Mike Slevin in response to questions about whether the bank will add more to its growth fund.

RBS has already identified nearly 2,000 businesses considered “at risk” and exposed to negative effects of Brexit. Those risks include an over-reliance on supply chains across borders or on those that are particularly vulnerable to economic volatility. RBS is hoping to prepare these businesses by extending import and export financing, as well as other trade finance products, and broadening working capital lines for companies to manage day-to-day expenses.

Yet, according to Slevin, while FIs are bracing for significant effects, the corporates themselves haven’t taken up financing in preparation with the same urgency.

“Many want to hold back from increasing lines until a little closer to the time because of the cost,” he said. “So, it’s a slow burn.”

Virgin Money owner CYBG has also been extending financing to its business clients in anticipation of Brexit, particularly to U.K. farmers who have historically relied heavily on European Union (EU) financing. U.S.-based Silicon Valley Bank, meanwhile, has been targeting U.K.-based startups with currency hedging solutions to mitigate FX volatility risk resulting from Brexit, reports said.