Brexit: ECB runs rule over Irish banks in readiness for exit

The European Central Bank is liaising with banks in Ireland to assess their readiness for a “Brexit” if Britain votes to leave the EU in June.

The ECB’s examination of Irish banks is part of a pan-euro zone exercise in which the institution is looking into the impact of a “Brexit” on lenders and banking systems with big exposure to the British market.

“ECB Banking Supervision is engaging with the relevant banks to ensure they are adequately assessing the risks and are prepared for all possible outcomes,” said an ECB spokesman in Frankfurt. Irish banks are coming under scrutiny in this process, as are banks in Spain, Germany, Italy, France and the Netherlands.

ECB data shows euro zone banks had a €1.1 trillion exposure to the British market in 2014, comprising 5 per cent of their assets.

Ignazio Angeloni, a member of the ECB supervisory board, said this month the banking systems and economies of the euro zone and Britain were so closely intertwined that they cannot easily be delinked from each other.

Exposures

“Most of the direct exposures to the UK are concentrated in banks domiciled in France and Germany (mainly derivatives) and in Spain (mainly retail loans); these banks together account for almost 80 per cent of all euro area significant institutions’ UK exposures,” he said.

“In relative terms, compared with the size of their balance sheets, Irish banks and some Spanish banks have higher exposures to the UK.”

The ECB’s preparations for the referendum follow earlier work by the Central Bank of Ireland, which warned three months ago that a “Brexit” could have a negative impact on Ireland’s growth, exports and financial sector.

“For the banking sector, the impact on profitability could occur as a result of any slowdown in the UK economy and/or property market; spillover effects to the Irish economy, particularly through reduced lending to corporate/SME exporters dependent on UK economic conditions; financial market effects; and/or restricted access to UK markets,” the Central Bank said in December.

Domestic risk

The ECB’s scrutiny comes as policymakers in the Bank of England warn that the referendum on June 23rd is now the biggest domestic risk to financial stability in Britain.

In a report yesterday, the BoE financial policy committee said a “Brexit” could push up credit costs and weaken sterling more.

As it took steps to bolster banks’ risk buffers and curtail buy-to-let mortgage lending, the committee said the outlook for financial stability had worsened since its last assessment in November.

“Any period of extended uncertainty following the vote could increase risks to financial stability,” it said.

“The Committee noted that the effect of uncertainty has been most marked in sterling spot and options markets.

“Looking ahead, heightened and prolonged uncertainty has the potential to increase the risk premia investors require on a wider range of UK assets, which could lead to a further depreciation of sterling and affect the cost and availability of financing for . . . UK borrowers.”