Brexit barriers cut UK banking trade with EEA by 45 percent
A Bank of England working paper finds that UK-resident banks significantly reduced cross-border lending and deposit-taking with the European Economic Area after Brexit. This reduction was primarily driven by new regulatory barriers, with some effects observed immediately after the referendum.
Passporting loss hits cross-border lending
Banks that lost passporting rights saw a 40-50% additional fall in loans and deposits with EEA non-financial sectors, relative to banks unaffected by passporting changes and non-EEA activities.
This substantial decline highlights the critical role of regulatory access.
Furthermore, banks with higher pre-referendum exposure to the EEA reduced their lending and deposit-taking by approximately 30% more after the referendum.
This suggests an anticipation of rising frictions, leading banks to scale back activity rather than maintain market access.
The study, using confidential bank-level data from the Bank of England spanning 2014 to mid-2024, provides new evidence on the effect of regulations on banking services trade.
It exploits the UK's departure from the EEA to estimate how these barriers affect cross-border intermediation, confirming a significant negative impact.
Affiliates fail to bridge the gap
Services trade, particularly in banking, faces significant non-tariff regulatory barriers.
Banking is crucial for cross-border financing and payments, so disruptions have broad economic ripple effects.
The paper found limited evidence that multinational banks successfully circumvented new barriers by shifting activity to foreign affiliates.
Despite an increase in foreign affiliates in the EEA for affected banking groups, these entities did not show a corresponding rise in lending or deposit-taking.
This indicates affiliates have limited ability to bypass regulatory hurdles, and an established financial sector is not easily substitutable.
A stark warning for market fragmentation
This study provides compelling evidence that regulatory barriers, often underestimated, can severely disrupt established financial flows.
The magnitude of the observed decline in UK banking activity with the EEA underscores the real economic cost of market fragmentation.
While the findings are specific to Brexit, they offer a stark warning for any region considering similar trade restrictions on services.