The Brexit fallout…….It was reported today that many Institute of Directors (board director) members were feeling “anxious” so what does that imply for board directors at banks? They should be scared.
Whilst almost all banks have higher levels of risk capital than in the recent past, and bank regulators are more sophisticated, larger banks today are likely to be less diversified and earning lower returns and smaller banks are likely to have greater real estate value related activity (mortgages and secured lending) and earnings dependence.
In the pre and post crisis years bank shares were largely about two times as volatile as the market and more recently had become somewhat less volatile, say 1.5x market volatility. Well, I wouldn’t necessarily say that 1.5x ‘anxious’ equals scared. But perhaps more to the point, up until a few days ago questions of asset quality in banks outside of Southern Europe were few and far between, with the prospect of market upheaval, asset quality questions have quickly moved up the priority list. Credit risk, like the UK’s sovereign risk has just declined almost across the board.
Perhaps the Brexit optimists will deliver more growth over the long-term, but risk has suddenly increased and losses will accelerate as a result. For example, sudden potential redundancies in the UK effect mortgage delinquencies, while UK SMEs that with an import focus may suddenly face insurmountable cost increases.
But perhaps more to the point, eight to nine years after the last crisis most board directors at banks that experienced that crisis and its steep economic drop are gone with their replacements largely overseeing benign restructuring and conduct issues. We may soon find out how much they know about credit risk. I’d be scared.
Professor Hahn is a former Senior Corporate Finance Officer at Citigroup and has been a Senior Advisor at The Bank of England. He now holds the Henry Grunfield Chair in Banking at The London Institute of Banking and Finance.