British Withdrawal Tests American Banks

Britain’s decision to leave the European Union is the event that American regulators and bankers have been preparing for since the 2008 financial crisis.

A day after American banks took a victory lap after demonstrating to regulators they could survive a hypothetical economic and market shock, as part of the Federal Reserve’s annual stress test, the real test came on Friday.

The market shocks will allow regulators to see whether all the capital American banks have been required to stockpile since the crisis is truly enough to weather real world chaos.

The fallout from Brexit, as the British withdrawal is commonly known, is also likely to show whether new financial regulations have stopped banks from taking risks on proprietary trading — or using their own money to make big investments on assets like currencies and corporate loans.

“The whole purpose of the stress test is to see whether they can withstand a severely adverse situation,’’ said Brian Kleinhanzl, a banking analyst at Keefe Bruyette & Woods in New York. “This qualifies as a severely adverse situation.”

It could take days or weeks before the resilience of the American banks to the fallout from the British vote becomes clear. And there is a chance that some nasty surprises could emerge even further down the road. A large hedge fund client, for example, could suffer from an outsize bet and default on its bank loans.

On Friday, share prices of large American banks fell, although not nearly as much as the stock prices of their European counterparts. Bank of America shares fell more than 5 percent, Citigroup was down more than 7 percent at one point, and JPMorgan Chase fell more than 4 percent earlier in the day.

Those are big movements, but nothing to suggest that investors in banks fear anything close to cataclysmic.

The biggest downside for the American banks is the likelihood that volatile stock and credit markets will cut into the lifeblood of their investment banking operations: trading revenue and the fees they charge to advise on mergers and acquisitions or initial public offerings.

Investment banking revenue had already proved to be fickle for the banks, even before the referendum. And analysts expect Britain’s exit from the European Union to dampen deals and trading activity globally for the foreseeable future.

Michael Corkery, The New York Times 6/24/2016

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