UK banks face 'messy and inefficient' conundrum after Brexit vote

The City could suffer from a "messy and inefficient" breakdown, should European banks opt to deal with the Brexit aftermath by adopting a similar system to the one currently in place for European lenders in the US.

The European banking passport system allows banks and other financial institutions authorised to operate in an EU country, or a state member of the European Economic Area (EEA), to conduct business across the union. However, that could be about to change should Britain fail to retain access to the passport system as part of the post-Brexit vote negotiations.

Once the UK leaves the EU, UK banks may have to deal with the rest of the EU as if it were the USA, if Britain fails to negotiate a deal that allows its lenders to operate across the union as it has been the case since Britain joined the EU.

"It could get very messy and inefficient," Pete Hahn, former senior corporate finance officer at Citigroup and former senior advisor at the Bank of England, told IBTimes UK.

"Substantial European banks effectively have to set up entirely US banks to do business in the US – a similar model for the EU would hurt the City."

Whatever agreement European and British authorities reach, lenders on both sides of the Channel are bracing themselves for potentially momentous changes. Last week, HSBC said that the re-aligning its business once the future of the UK's current "passporting" arrangements for financial services is clarified will add to the heavy workload already in place.

Hahn added the banks' task was made even more complicated by the lack of knowledge over what might and might not have to change.

"At the moment, banks don't know what might have to be re-designed or not," he said.

"Clearly, no bank today will have chosen an inefficient delivery model so any adjustment will add cost and inefficiency."

The picture could become even more complex when one considers the government's Independent Commission on Banking recommends the concept of ring-fencing retail businesses from other banking businesses.

The ring-fence requirements allowed the UK banks to let certain retail-related EU businesses be part of their separately capitalised ring-fence banks, Hahn explained. However, such EU businesses of UK banks may now fall victim of both UK rules limiting non-UK activities in ring-fenced banks and, potentially, EU constraints on foreign banks in a post-Brexit Britain.

That could, however, require the separate capitalisation of these businesses which could, in turn, see UK banks suffer inefficiencies and profitability constraints.

Hahn explained that: "UK banks have argued that ring-fencing brings many inefficiencies in the UK, further separately capitalised units only brings greater inefficiencies."

"In some ways, the future of many parts of international banking is through separately capitalised vehicles but Brexit may add to these economic disorganisation."

Hahn, who currently holds the Henry Grunfield Chair in Banking at The London Institute of Banking and Finance, highlighted governments had an important role to play to keep the banking sector ticking along.

"In the long-run, governments should worry about adding unnecessary costs to banking and limiting competition in the banking system, both are long term drags to the economy and employment," he said.