Dombret: no new post-Brexit banking crisis

According to Bundesbank Executive Board member Andreas Dombret, the UK vote to leave the EU is not likely to cause any major turbulence in the financial sector. At a discussion hosted by the Center for Financial Studies in Frankfurt am Main, he said that, "I do not see Brexit triggering a new banking crisis".

With the pound sterling and UK bank stocks and real estate funds having come under at times intense pressure following the referendum, Dombret believed that further movements in prices or shifts of funds from one asset class to another were possible. "A panic reaction to Brexit is rather unlikely at present," he noted.

Dombret emphasised that most banks had taken the possibility of Brexit sufficiently seriously and therefore made careful preparations. He added that the Bank of England had also taken a professional approach before and after the referendum. It, as well as the European Central Bank and other central banks, stood ready to supply liquidity where necessary. Dombret said that all these measures had helped to ward off stronger financial market reactions.

Do not soften liability rules for banks

Since the referendum, share price valuations of many financial institutions have still remained significantly lower than share prices of non-financial sectors – not just in the UK but also in the rest of the euro area. Dombret saw this as a "sign that other, more deeply rooted structural problems prevail in the European banking sector".

In this context, the Bundesbank Executive Board member stressed the significance of the "bail-in" mechanism, by means of which, in the event of bank distress, the bank’s investors are first in line to assume liability. He added that the persistent state of uncertainty on the financial markets must not be used as a pretext for softening the existing bail-in rules for banks. "If we allow states to provide discretionary aid to their banks, this impedes a core element of the bail-in regime, namely its credibility," Dombret said. This would rob the markets of their disciplinary function.

Dombret noted that the logical and necessary consequence would be for supervisors to raise capital requirements for banks so as to compensate for the lack of market discipline. Also speaking at this event, Ignazio Angeloni, one of the members of the ECB’s Supervisory Board and responsible for banking supervision, emphasised that the EU banking union’s rules should not be rescinded or abandoned despite the current state of Italy’s banking system. According to the liability rules within the framework of the European banking union, in force since the beginning of the year, banks’ shareholders and creditors are the first in line to cover the costs of rescuing a bank, followed only then by central government – and ultimately the taxpayer.

Resolve uncertainty quickly

Dombret came out in favour of beginning the Brexit negotiation process swiftly. "For banks, as for the economy as a whole, any uncertainty should be kept to the very minimum," he noted. In his opinion, though, it was indisputably the United Kingdom that would largely have to bear the consequences of the referendum. Dombret pointed out that the Bank of England had already revised downwards its growth forecast for the United Kingdom as a result of the uncertainty.