Brexit: EU banks dramatically cut exposure to UK after vote

European banks have slashed their exposure to the UK since it voted to leave the European Union, removing €350 billion of UK-related assets from their balance sheets in just 12 months.

Banks across the rest of the 27 other EU countries have reduced their total assets tied to the UK from €1.94 trillion to €1.59 trillion between June 2016 and June 2017, according to official EU data. Banks' liabilities also decreased over the same period, dropping from €1.67 trillion to €1.34 trillion, the EBA said. The trend is expected to increase ahead of the March 2019 Brexit deadline.

The fresh details of how intertwined European banks are to the UK were included in a report on Friday by the European Banking Authority, the supervisor of supervisors across the EU, which earlier this week found out it was moving its headquarters from London to Paris because of Brexit.

The EBA conceded that the risk of a “cliff edge” Brexit was the main cloud hanging over all of Europe’s banking system - and not just over that of the UK. One third of banks the EBA polled for its annual risk-assessment exercise are concerned about the legal risks presented if the UK crashes out of the EU with no deal. That includes legal uncertainty around derivatives and other financial contracts, data protection and how court judgments might be enforced.

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Mitigating actions

“It is important that banks and their counterparties, as well as consumers and public authorities, consider appropriate mitigating actions and contingency plans to address these concerns,” the EBA said. “These risks may, in the short term, endanger the continuity of cross-border financial flows and services between financial service providers in the EU-27 and the UK.”

Banks slashed their holdings of derivatives with exposure to the UK by 35 per cent over the year since the Brexit vote, the biggest asset class to decrease, the EBA said.

Meanwhile, the EBA flagged that uncertainty over the future of monetary policy was also a concern in what was otherwise a picture of improving health at European banks, according to data that it gathered from 132 banks across the bloc.

The burden of non-performing loans eased after several banks sold big chunks of their bad debt portfolios, taking the ratio of NPLs to total loans down from 5.4 per cent to 4.5 per cent. However, the EBA said a third of EU banks have NPL ratios above 10 per cent.

– Copyright The Financial Times Limited 2017