27 January 2016

Financial Times: Ireland fears ‘major impact’ from Britain’s EU exit

Ireland’s financial regulator has expressed concern about the “major impact” Britain’s exit from the EU could have for Ireland’s biggest banks and has asked them to spell out how they would handle the risks and challenges of Brexit.

News of Mr Roux’s fears for the banks come days after Ireland’s prime minister, Enda Kenny, warned of the strategic risks the country faces if one of its biggest trading partners votes in the summer to leave the EU. 

Mr Roux said Brexit could have a “very large impact on Bank of Ireland” because “all of a sudden half of its business is no longer conducted in the EU, but outside the EU”, said Mr Roux. “If I take another example . . . (Royal Bank of Scotland-owned) Ulster Bank would no longer be a subsidiary of a bank within the EU, it would be a subsidiary of a non-EU bank. So in both cases I think it would have major impact on these banks.”

The regulator said those large exposures had prompted his team to ask the banks to “look at the impact of Brexit on their businesses under a number of fronts” including “on their business model, on their governance, on their funding and liquidity, their capital adequacy, their legal arrangements”.

He would not say how long banks had to return their submissions, but said it was a “natural” part of normal supervision. Insurance companies will also be asked to examine how they would be affected, he added.

“Brexit is a risk that AIB monitors closely,” the bank said. About 17 per cent of its loan book is in AIB GB. Bank of Ireland, which has 44 per cent of its total assets in its UK retail bank, declined to comment, as did Ulster Bank.

A disorderly Brexit that hurt the Irish banks could make it harder for the Irish state to follow through with its promise to sell some AIB shares in the private market this year, and could also hit the value of the 15 per cent stake the state owns in Bank of Ireland.

Mr Roux said the central bank, which the financial regulator is part of, had done a far broader analysis on the economic repercussions of Brexit for Ireland.

“We have analysis done on the impact it could have on trade, the impact it would have on foreign direct investment, and the impact it would have on the labour market,” he said.

“And even doing that, I think we’re not looking at the whole picture because it’s not our business, but certainly you would still have to have it at the back of your mind what effect would it have on even, politically, on Northern Ireland, on the political future of the British Isles.”

Mr Roux said one difficulty in making any assessment was that an Out vote “opens the door to a range of scenarios” from a disorderly Brexit to an arrangement like Norway’s where it is outside the EU but still in the common market.

© Financial Times