[Photo Credit: Becky McCray]
The head of the Bank of England, the British equivalent of the US Federal Reserve, told parliament today that a potential Brexit was the “biggest domestic risk to financial stability” for the UK.
BoE Governor Mark Carney elaborated on the risk by saying that he was unable to “provide a blanket assurance that there would not be issues in the short term with respect to financial stability and that potential reduction in financial stability could be associated […] with poor economic outcomes…”.
In light of the remarks by Governor Carney, we believe it’s worth revisiting BlackRock’s analysis of the potential impact of a Brexit on British financial services.
In case you skimmed BlackRock’s fifteen page report, you may have missed the report’s ‘Financial Industry’ section, which is located on the last two pages.
The most salient facts about the British financial industry are it’s sheer scope and its great importance to the British economy.
According to the BlackRock report:
- The financial industry represented a total of 11.8% of British GDP in 2013.
- The British financial services sector paid an estimated £66.5 billion (nearly $100 billion) in taxes in fiscal 2015.
- The financial industry accounted for 11.0% of total UK Government tax receipts in 2015.
BlackRock sums up the data, with considerable understatement:
“A Brexit would be challenging to the financial services industry – and hurt its outsized contribution to the UK’s economy and trade balance, we believe. The country runs a deep deficit with the EU in goods trade, partially offset by a services surplus that is led by the financial sector. […] The £18.5 billion surplus in financial, insurance and pension services would likely shrink.”
Carrying forward that analysis, BlackRock goes on to estimate size the impact of a Brexit:
“This adds up to some £27,300 per person. Suppose 10% of these workers lost their jobs after a Brexit? This could cost the government up to £3 billion in annual employment taxes alone – especially if higher-paid workers bore the brunt…”
Finally, the scale and weight of the British financial industry may combine with regulatory uncertainty in an especially pernicious fashion — best summed up under the rubric of “passporting” risk.
The report summarizes the potential multiplier effects of this risk:
“The sector’s influence goes beyond fiscal policy and the balance of payments. Financial and related services made up 11.8% of GDP in 2013, according to a March 2015 TheCityUK report. Much of the industry’s surplus with the EU is dependent on unfettered access to the single market. This is known as ‘passporting,’ the right of a company registered in the European Economic Area (EEA) to do business in another EEA state. Leaving the EU would curtail the industry’s market access – and reduce the surplus on the UK’s capital account.”
Taken all in all, BlackRock’s analysis of Brexit’s potential financial industry impact is consistent with Mark Carney’s grim assessment.