Banking on Brexit: The Urgent Need to Address ‘De-Risking’

Three years ago, this author was sitting in a hotel meeting room in the Ethiopian capital, Addis Ababa. Surrounded by the presidents of over a dozen of the country’s banks, the importance of global financial connections was brought vividly to life.

One bank president had received a letter from a London-based international bank that talked of ‘risk appetite’ and provided a dry and technical rejection of his bank's request for correspondent banking services that would connect it to the international financial system. The president asked, 'How can we be expected to boost exports, finance imports and support the growth and diversification of our economy called for by the IMF if your international banks won't deal with us?'.

Fast forward to January 2017 and, standing behind a lectern proclaiming ‘A Global Britain’, Prime Minister Theresa May expressed her desire that Britain be ‘A great, global trading nation that is respected around the world’. Yet these aspirations are set against a background of an ever more fragmented financial system, a system focused on securing itself against money launderers, organised criminals and terrorist financiers rather than promoting global trade.

Actors in the financial system will have a critical role in the government’s aim to be a ‘successful trading nation in the future’, striking ‘the best trade deals around the world’. What is the government doing to ensure that this sector is in step with Westminster's aspirations? The evidence suggests that the financial system’s role in global trade has been entirely overlooked; indeed, the actions of banks suggest that the financial life blood required for the creation of such a great, global, trading nation is draining away.

The withdrawal of Barclays from Africa, the 'de-banking' of local banks in many countries by key global banks based in the UK and the lack of willingness shown by UK banks to re-engage in post-sanctions markets such as Myanmar and Iran raise questions about the UK's ability to use its financial power to support London’s post-Brexit trade and foreign policy strategy.

This is, of course, not just a problem for the UK. It is a global problem viewed as sufficiently serious for it to be prioritised by the G20. As noted by the Financial Stability Board – chaired by Bank of England Governor Mark Carney – ‘The ability to make and receive international payments via correspondent banking is vital for businesses and individuals, and for the G20’s goal of strong, sustainable, balanced growth’.

Thus, as the UK develops its post-Brexit trade strategy – and given the central role UK banks play in facilitating global trade by connecting both developed and developing markets, and providing trade finance – the British government urgently needs a well-articulated geo-financial strategy.

Such a strategy should aim to use the UK’s financial power in support of the country’s global trade ambition, to enhance the projection of UK soft power via the role of the UK banking sector in global trade and to ensure that UK prosperity benefits markets and nations around the world. At a time when the nation is so reliant on its banking system to support its international trade aspirations, the lack of a UK geo-financial strategy is striking.

With the Department for International Trade (DIT) headed by Liam Fox planning new trade deals, how can the UK prevent these from being stillborn, ensuring that financial institutions do not baulk at the risks they perceive exist in supporting the government's global trading strategy with anything but the most risk-free nations?

Banks have been rightly punished for failures to act responsibly: for facilitating sanctions evasion and for failings of controls that have led to the laundering of funds for drug cartels. The latest revelations connected with the alleged laundering through the UK of Russian and Moldovan money are a sharp reminder that banks must continually strive to ensure they facilitate and profit from only clean business and clients.

Furthermore, the OECD recently expressed concern that the Brexit vote might set back the UK’s fight against corruption and bribery as it seeks to attract business. Banks, held to the highest ethical standards, will inevitably operate with heightened sensitivity as the UK broadens its trading horizons with accompanying financial crime risks.

Addressing this weakness will require the UK to act differently and boldly. The Treasury and the DIT must embrace the banking sector as a potential force for good, rather than simply willing encouragement from the sidelines. This may make some uncomfortable given the opprobrium still heaped on banks by many politicians, but this will have to change. Senior banking executives should be appointed to a UK geo-financial strategic taskforce and the government itself must be willing to take greater financial risk.

The triggering of Article 50 presents the prime minister with a monumental challenge, a challenge that will be considerably exacerbated if the financial sector is not persuaded to support her global trading aspirations. The UK's major banks stride the globe and have the ability to underpin the global trade that the prime minister seeks to generate, but this will not occur without the urgent recognition of the critical reliance the nation will place on the banking industry as it seeks to position itself as a Global Britain.