24 June 2016

VoxEU: On the financial market consequences of Brexit

The most likely outcome of Brexit is a fall in the quality of financial regulations, more inefficiency, more protectionism, and less protection. Systemic risk could increase, with a systemic vicious feedback loop a possibility.

In theory, the Brexit vote yesterday creates an opportunity for the UK to improve the resiliency, efficiency, and the quality of service of its financial markets. Unfortunately, it is more likely to induce regulatory paralysis due simply to the vast workload that has been created, so it is doubtful whether policymakers will be able to take this opportunity.

The likely scenario is for UK regulation to become more onerous, both due to what will effectively be dual regulation from both UK and EU, and also to the UK having to adopt much European regulation without the ability to influence it. 

The City of London may also see a substantial erosion of its place as a major international finance centre.

In a worst case scenario, a vicious systemic feedback loop for the UK could ensue.

Europe, with its most liberal large country gone, is likely to sharply increase its regulatory intensity, with the focus on politics and protectionism rather than efficiency, resulting in a more costly, more homogenous and consequently less safe financial system.

Full article on VoxEU

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