[...]Following last week’s European summit, the big beasts for and against Britain’s continued membership of the EU have emerged from the undergrowth. The boost given to the Vote Leave campaign by some prominent “Outers” hurt sterling on Monday. That in turn seemed to help equity markets because cheap pounds boost exports.
But do not be fooled. The two-month decline in the value of banks’ securities, precipitated by general market jitters, will worsen further. Autonomous, the independent research house, predicts that Brexit equates to a 20 per cent hit to the value of Britain’s banks. It expects bond coupons to become more expensive and UK growth to decline.
The broader City of London would also be hit by a retrenchment of foreign banks which use it as a principal springboard for pan-European operations. Some groups have been weighing contingency plans to move chunks of their activities to Frankfurt, Dublin and elsewhere.
Oddly Boris Johnson, London’s mayor, has come out as an “Outer”. His stance is surprising not only because he has previously flip-flopped on whether he is pro- or anti-EU (just last autumn he said it was “better for us to stay in . . . a reformed EU”), but because as mayor, he has normally aligned himself with the interests of the City. And the City is pretty pro-European. [...]
There are two case studies worth examining. Deutsche Bank is the bad one. Its shares have fallen 36 per cent so far this year. At the height of nervousness about its cocos — and the bank’s ability to service upcoming coupons — some traded on yields of close to 13 per cent. The market’s faith in most bank debt has been shaken. Even senior unsecured issuance has been scant. (Nordea and ING broke a drought last week.) There seems little prospect of anyone being able to issue cocos to meet incoming regulatory requirements any time soon. [...]
At times like these, any institution that finds sneaky routes to compliance with capital rules — or simply has less capital than anyone else — is likely to be picked on by market bears. The Catch-22 is that current market conditions block the obvious routes to stronger capital. If cocos look impossible to issue, so too does straight equity, other than at disastrously dilutive prices.
How, then, to calm bearish investors in the meantime? Many of the macro-causes of that bearishness are not in our control. But Brexit very much is. Anyone who cares about the City and its place in Europe — including the mayor of London — should be hoping for an In vote.
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