Brexit: Applying lessons the banking sector learned from the 2008 recession
Following last Friday’s result to exit the EU, many businesses would have assessed the risks and opportunities facing them by now.
With numerous reports looking bleak at present, businesses should keep abreast of the latest developments and take swift action to proactively and reactively mitigate business risks as and when they occur. Businesses in the banking sector can take heed of the lessons learned from the recession to ensure that economic uncertainty as a result of the Brexit is minimised.
As the banking sector often provides a gateway to developments across multiple industries, the impact that the Brexit decision is having on the sector, and in particular attitudes towards funding, is a crucial sign of how the economy is likely to be affected and how quickly it is expected to bounce back.
Although the Bank of England and regulators are already working hard to stabilise the unsteady economy, we are already seeing funders put some deals on hold as a direct result of market uncertainty. The early signs show that the Brexit vote is certainly impacting larger and more niche funders, who are often backed by foreign investors. Overseas financiers have been shocked by the recent currency drop which has stifled some funding plans that were previously in place. Some of which will be looking to recoup their investments by increasing their return from loans, perhaps with higher interest rates for customers or through cost savings such as reducing head count.
Since the 2008 recession the residential development market has taken some time to show signs of recovery and loans granted for residential property have only just started to be awarded again. However, as a result of the drop in share price – a direct consequence of the Brexit decision, it is likely that funders will be unwilling to lend to these companies once again, causing a further blow to the real estate market. Residential developers are likely to find funding more difficult to obtain in the short term, while rises in rates are expected in the longer term.
Lessons from the 2008 credit crunch have certainly taught British businesses a thing or two and have made the banking sector more stringent as a result. The previous economic downturn was in part caused by less robust banking practices than are in existence today. Such substandard customs have largely been eradicated and replaced by more rigorous processes that promote good banking practice, such as performing solid due diligence on customers, seeking counsel from advisers and taking the time to fully understand the deals that are on the funding table before any negotiations have taken place.
Funders, who are uncertain about how to act post-Brexit result, should adopt the key principles that were painfully derived post-2008 recession. With the FTSE 100 and the pound slowly creepy back up to pre-Referendum levels, funding confidence is likely to return in the near future. Until then, adopting the sound banking principles that were borne from the recession will help to keep businesses on an even footing and avoid risky transactions, while keeping business momentum going.