AFME, The Boston Consulting Group (BCG) and Clifford Chance have today published a new report, “Bridging to Brexit: Insights from European SMEs, Corporates and Investors” examining the impact of Brexit on SMEs, corporates and investors, in particular, on their use of wholesale banking and capital markets services.To assess the potential effects, BCG interviewed end-users of wholesale banking services, including 62 CEOs and treasurers of SMEs, large corporates and investors, along with 10 industry associations representing a wide range of companies and sectors in multiple geographies, including a significant portion of SMEs, EU and UK equity market capitalisation, and assets under management. To illustrate the potential impact on businesses, the report also includes real life case studies and quotes from the interviews conducted.Simon Lewis, Chief Executive at AFME, said: “The clear message from our report is that our interviewees, especially small firms with customers or suppliers cross-border, believe that a hard Brexit could impact their business and growth. Large corporates, in particular, are concerned about loss of efficiency and fragmentation in conducting cross-border business. Both SMEs and large corporates also face potential disruption in the provision of wholesale financial services which in turn will lead to a higher cost of capital for businesses. That is why above all else business would like the status quo preserved.”Philippe Morel, Senior Partner at BCG, said: “This is a unique study providing the end-user view for the first time. We interviewed businesses across the EU-27 and UK – across all sizes, sectors and segments, providing a strong representation across SMEs, large corporates and large investors. Their message was clear: they hope that the impact on their procurement of financial services is minimal. At the same time, we looked behind the front office curtain – what do banks have to do to maintain the same levels of service post-Brexit as they currently provide? We found that in aggregate the cost, in the event passporting is lost, would be significant, both in terms of transferring bank operations and capital to new entities, as well as re-structuring costs, and ongoing higher capital needs. Specifics will vary depending on individual business models.”The overarching findings are that:
Other key findings:
BCG’s “supply side” analysis found that Brexit could lead to reduced capacity and more restricted access to wholesale banking services than our interviewees expect, with SMEs potentially hardest hit. The cost and impact of making adjustments, such as forming new banking relationships, could also be significant for SMEs. Approximately 55% of our SME participants said they had made no plans so far for Brexit, compared with only 27% who have carried out some internal planning and around 18% who have executed plans.
BCG’s “supply side” analysis suggests that businesses may underestimate the banking-related effects of a hard Brexit. In aggregate, approximately €1,280 billion of bank assets (loans, securities and derivatives) may need to be re-booked from UK to EU27 following a hard Brexit, unless alternative arrangements can be agreed. These assets are supported by €70 billion or approximately 9% of the (Tier 1) eqity capital of the banks affected.
Securities and derivatives trading has largest potential for disruption - trades with EU27 clients now booked in the UK are estimated to amount to €380 billion in risk-weighted assets (or €1,100 billion in trading assets) representing approximately 68% of UK-booked business to EU28 clients. This business is supported by €57 billion of bank equity capital which may need to be re-booked to the EU27 following Brexit.
Bank lending may also be affected, though to a lesser extent. The total loan exposure of UK-incorporated banks to EU27 SME and large corporate clients is estimated to be €180 billion (4% of total loans outstanding to EU27 large corporates & SMEs). This lending is supported by about €13 billion of equity bank capital currently domiciled in the UK.
BCG estimates that the long-term inefficiencies of Brexit-related fragmentation could require banks to hold as much as €20 billion of additional equity capital.
Chris Bates, Partner at Clifford Chance, said: “Much has been said about the challenges of a hard Brexit for banks, but that only tells half the story. The truth is that from SMEs to international businesses, companies that rely on those services are equally at risk. This research shines a light on some of the challenges that a hard Brexit would present business users of banking services, and how it would affect the real economy in both the UK and EU27. Measures to smooth the transition are critical. The costs of the cliff edge have never been so clear."
Filip Geerts, Director General at CECIMO, a European machine tool industry association interviewed for the report, said: “Our SME machine tool builders are focused on their businesses and do not want to lose time or resources on any possible political or institutional driven Brexit related obstacles. We would like to see uninterrupted lending and risk management services.”
ConclusionsThe report concludes with some key recommendations from interviewees, including:
And most critically:
– Ends –
Click here to download the report
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