In a sign that European authorities are fearful that Brexit might negatively affect the financial sector, the European Banking Authority is urging European banking regulators to clarify the deposit insurance status of European branches of UK banks. Currently it’s expected that those branches may not be covered under the UK’s deposit insurance scheme in the event that the UK leaves the EU.
Currently depositors in the EU benefit from up to €100,000 in deposit insurance on their bank accounts, or the equivalent in national currency for those countries such as Britain and Denmark that are not in the eurozone. That’s a relatively recent development for most countries, as most deposit insurance coverage was significantly lower until 2011. The United States had long had $100,000 in deposit insurance but permanently raised its limit to $250,000 in 2010.
While it’s not expected for banks in Europe to face financial difficulty, that could change once Brexit occurs, particularly if UK bank branches operating on the European continent are no longer covered by the UK’s deposit insurance scheme. That could lead to depositors pulling their funds from those branches. In the case of a large enough bank run it could destabilize those banks and potentially lead to a more widespread financial panic.
That’s obviously the last thing that anyone wants, especially as memories of Northern Rock’s bank run and subsequent nationalization are probably still fresh in many people’s minds. And with existing weakness in the Italian banking sector, along with the usual problems in other peripheral countries such as Spain and Greece, the last thing Europe can afford is a major banking crisis.
This makes it all the more clear that Brexit is a huge unknown. Yes, it shouldn’t be that big a deal for the UK to leave the EU, but no one knows just how smoothly or roughly it will go. Given the history of other countries that have seceded from their unions over the past several decades (USSR, Czechoslovakia, Yugoslavia), no one wants a worst-case scenario to occur.
This article was originally posted on Red Tea News.
