Brexit and Trump elevate risks to banking sector

Global events including Brexit and Trump win exert pressure on banking sectorA memorable year

2016 has certainly been a year of surprises. After what seems like decades of ‘business as usual’ in Europe and the US, the steady march of globalisation and the apparently inexorable rise of liberalism, recent political and economic events have turned the old order upside down.

Donald Trump’s US election win coming hot on the heels of the UK’s vote for EU Brexit, coupled with a worrying slowdown in Chinese economic growth and historically low interest rates have not only created uncertainty on the global stage but are also creating significant risks for the global banking sector, according to leading ratings agency Standard & Poor.

Weaker prospects for 2017

In its global credit outlook for the banking sector in 2017, Standard & Poor pointed to these and other factors as potential obstacles for the banking industry’s creditworthiness over the next twelve months. It said that more than half of the largest global banking systems face negative pressure – especially banks in Latin America and Asia Pacific.

The report alluded to ‘weaker prospects for earnings growth globally, potential risks related to the UK’s referendum vote to leave the EU, and more generally increased political risks’ as constraining factors for bank ratings in 2017.

It added: ‘A key constraint in our global credit outlook for banks relates to the path of the global economy, which is marked by a sluggish global growth underpinned by China’s rebalancing, the adjustment of commodity exporters to new commodity prices, demographic factors inducing lower productivity growth and geopolitical and political uncertainty.’

A worrying trend

Of the 85 banking systems assessed by S&P, 42% faced negative trends. The ratings agency flagged signs of ‘renewed tremors’ from the UK’s decision to leave the EU following a referendum on the issue in June and warned of the potential political fallout from the election of Trump as US president. While the stock market is currently enjoying record highs – due in part to expectations of spending on the economy – the political risk from what many see as a ‘wildcard’ appointment remains significant.

‘The policies of President-elect Trump’s administration could represent the largest wildcard with the potential, at least over time, to meaningfully affect regulation, economic growth, interest rates, and ultimately bank performance,’ S&P said.

Change is in the air

Over in Europe, Italian voters have rejected Matteo Renzi’s proposals to restructure the country’s political framework, while France and Germany are holding elections in 2017 which could give voice to the rise of populism.

According to S&P: ‘Brexit may have energised broader, populist trends already pulsating through Europe. Citizens of other EU member states have expressed interest in holding referendums of their own to exit the union. Increasing populist sentiment, especially after the results of the US elections, also points to a shifting political landscape in the world’s largest economies.’

Germany’s Angela Merkel has staked her position in next year’s elections in a bid to run for a fourth term as Chancellor. France faces a stark choice between far-right Front National leader Marine Le Pen and one of the two centre-right candidates François Fillon and Alain Juppé in the run-up to the presidential elections in spring after former president Nicolas Sarkozy failed to make the cut.

Meanwhile, a populist trend towards anti-globalisation could, according to S&P affect growth prospects. It’s widely assumed that 2017 will see only sluggish growth across most developed and emerging markets. The European Central Bank may adopt a more relaxed approach to monetary policy while the US Federal Reserve is likely to start increasing rates by a quarter percentage point in December and possibly a half point in 2017.

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