Garnet Capital Advisors Blog

With uncertainty over what will happen with Brexit, how will American financial institutions be affected? Read on to learn more.

Britain and the EU have yet to strike a deal, causing concern over how a potential "hard Brexit" may affect American banking and trade.

With the UK still solidifying a deal regarding its exit from the European Union, American financial institutions are bracing for negative implications that many believe will follow. The financial stability of U.S. banks should not be negatively affected by Brexit. That said, certain sectors will feel the brunt of the situation.

Americans doing business in London will find travel and dealings more difficult. Brexit will likely mark the end of "passporting" of bank businesses from Britain's capital.

"Passporting" lets companies who have been given regulatory permission to participate in specific activities in member states of the EU to conduct business in all other nations in the union. That means a financial company based in the U.S. could set up shop in London and be able to access all markets across the continent.

U.S. businesses typically use the UK as the predominant main gateway to dealings in Europe, and as such, the UK is the leading destination for American goods and services in the EU. Further, the UK is also the biggest investor in the U.S.

While bankers may have some disruptions to contend with, Brexit should not harm the stability of U.S. banks. 

With a "hard Brexit," however, that could all change. American banks with subsidiaries in the UK might require permission from regulators in each country in the EU that they have subsidiaries and dealings in.

As far as banks are concerned, preparations are still underway in order to be adequately prepared for what many are concerned will be a hard Brexit.

Coordination efforts and meetings with the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corp. (FDIC) and banks are being held to make sure the U.S. banking industry has a solid plan in the event that the UK exits the EU with no deal. This could impact deals between American and foreign companies.

The financial system in the U.S. is currently robust, and banks have healthy levels of capital. Banks have also benefited from the easing of the stringent Dodd-Frank Act's regulations that had previously placed downward pressure on community banks.

But although financial institutions are said to be adequately prepared for the worst, major interruptions in trade could still occur if no deal is reached between the UK and EU.

Britain had until April 12 to negotiate and make their move, but the EU extended the deadline an extra six months to the end of October as Prime Minister Theresa May struggles to build support in parliament for withdrawal terms agreed with the EU last year.

That means the concerns still loom about how or exactly when Britain will leave the EU, if it ever happens at all.

With no end to the issue in sight over the short term, U.S. banks and businesses continue to worry.

No matter what happens with Brexit, banks and lenders should always take precautions and ensure that their loan portfolios are robust and strong enough to withstand any potential disruptions in the economy, both domestically and globally.

Now is an excellent time to sell off longer-duration, potentially delinquent assets and replace them with high-performing, shorter-duration assets in an effort to take a defensive stance. And Garnet Capital can help your financial institution move through this process effectively.

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