Brexit and the banks

Barclays: down 60p to £1.25. RBS, down 75p to £1.75. Lloyds down a similar percentage to nearly 50p. No one in the City thought that the UK's banks were bullet-proof investments, but we were never expected to see these kinds of falls again. Institutions that were meant to be strong after years of regulator-driven rebuilding are crumbling. How can Brexit be so devastating to bank equity?

There are a few answers. First, a caveat that applies to every sharp move, particularly after unprecedented events: do not trust the market's first or even second reaction. Insofar as markets are a machine for processing information and also sentiment—two very different qualities—they often misfire at times like these. The pound has hit a low of $1.31 since the vote, and you would be brave to gamble on it not dropping further. To some degree, fear replaces calculation at times like this.

But reasons to be fearful come in battalions. Banks are geared bets on the underlying economy and its asset markets. Those banks mentioned above have an unavoidable, large and leveraged exposure to UK property and the general ability of British households and businesses to service debt. Bad debts are bound to rise, even if interest rates remain low. The sale value of assets will be lower.

Prospects for new business are not great either. Even where credit is available, many people will hold back from big purchases or new ventures and see how things pan out. This waiting itself can bring about the weaker market that it fears. Usually the government or central bank can step in to keep demand at a steady level, but both are constrained at present. Interest rates are near their all-time lows, and while the central bank could loosen policy further, the weakness of the pound (driven by those doubts about the economy) may bind the Bank's hands. Though it might not—the governor Mark Carney could choose to let it drop to whatever level necessary.

As for the government, its fiscal situation is bound to deteriorate, necessitating higher taxes or less spending, each of which may damage demand in the economy. A package of support—even one as small as the government managed in 2012—may not be available, particularly given the turmoil the Conservative party are in.

Yet another concern is the future shape of regulation. We have no idea how finance will be treated post-Brexit. At one extreme, the UK stays in the European Economic Area, receives pretty much the same regulatory treatment and, apart from losing much of its ability to lobby upstream, the City is as well off as it is now. At the other, no deal is struck, and the tiresome business of opening branches, seeking new licences and shifting operations has to begin. Even that may not be enough; European regulators may just prefer their existing, domestic banks. Either way, there is another cloud over the incomes that UK-based banks are used to making from the world's largest economic area.

So if you are looking for reasons behind the banks' recent collapse, there are plenty. Perhaps only few of these will actually arise—but given the uncertainty hanging over almost everything right now, is that how you would want to bet?