U.K. Banks Prepare for 'Brexit' Ahead of EU Poll

By Max Colchester 

LONDON--As a U.K. referendum over whether to quit the European Union nears, British banks have battened down the hatches.

In the event of a "Brexit"--or a U.K. exit from the EU--bankers say frozen capital markets and sharp currency swings could make it harder for banks to fund their businesses.

To inoculate themselves ahead of the June 23 vote, British banks are maintaining extra stocks of assets that can easily be sold to fund their activities, tapping markets for funding earlier than planned and holding off issuing certain types of securities.

Lloyds Banking Group PLC has raised roughly GBP7 billion ($10.2 billion), or about half of its annual funding requirement in the first part of the year, according to a person familiar with the matter. "We went earlier than we were proposing to do," George Culmer, Lloyds's chief financial officer, said recently.

Barclays PLC is holding larger stocks of liquid assets than it would in normal circumstances, group finance director Tushar Morzaria told analysts last week.

Even deposit rich banks like HSBC Holdings PLC are stepping up preparations. "We're making sure that we're extremely liquid over the June/July period," HSBC Chief Executive Stuart Gulliver said on Tuesday.

Royal Bank of Scotland Group PLC has held off issuing GBP2 billion of convertible bonds until after the referendum, according to a person familiar with the matter. Investor appetite for the bonds, which switch into shares if the bank is in trouble, has dried up making any issuance expensive. RBS completed most of its planned annual debt issuance in the first part of the year.

In February the Bank of England began probing lenders' vulnerability to financial-market turbulence in the wake of an exit vote, in particular heavy swings in the value of the sterling. Bank officials say that 2014 balance sheet tests give them comfort that the British banking system would survive a major downturn. Nevertheless the central bank will hold three extra cash auctions in June to ensure lenders have access to liquidity ahead of the vote.

No bank wants to been seen tapping any Bank of England emergency funding after the vote. Hence the flurry of activity, says Chirantan Barua at Bernstein Research.

Unlike foreign banks based in the U.K., British lenders are less concerned about losing their right to "passport"--or sell their services across the EU. Most have already ratcheted back their European operations to refocus on their domestic market. Instead they worry about the impact of an economic slowdown in Britain hitting their balance sheets.

Economists warn that regardless of any potential long-term upsides of exiting the EU trading bloc, that there could be short term economic pain. Investment may dry up while the U.K. embarks on protracted negotiations over its future relationship with the EU. Housing prices could fall and economic growth could stall.

Market fears over Brexit have eased of late. Sterling has rallied in past weeks and there was strong international demand for U.K. government bonds at an auction late last month.

Nevertheless several British banks are dusting off contingency plans they prepared ahead of Scotland's independence referendum in 2014. "It is a case of preparing for the worst, and hoping for the best," said one British bank executive.

(END) Dow Jones Newswires

May 04, 2016 06:10 ET (10:10 GMT)

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