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US banks have shed $64B in exposure to UK since Brexit vote

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US banks have shed $64B in exposure to UK since Brexit vote

Large U.S. banks have slashed their exposure to counterparties based in the United Kingdom following the June 2016 vote to exit the European Union.

In total, the eight large U.S. banks classified as global systemically important banks, or G-SIBs, reduced their exposure to the U.K. by $63.9 billion between the 2016 second quarter and the 2017 third quarter, the most recent filing available.

Most of the decline has come in the form of derivative products that involve a U.K.-based counterparty, which have declined by $48.63 billion among the eight banks. Bank of New York Mellon Corp. cut its U.K. derivative holdings most dramatically, reducing them by 94% since the Brexit vote. At the same time, other types of exposure, such as loans to U.K.-based banks, businesses and individuals, increased at some of the U.S. G-SIBs.

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While the U.K. electorate voted more than a year ago to leave the European Union, and the exit date is set for March 29, 2019, plenty of details have yet to be finalized. Some of those details involve the treatment of cross-border contracts, so banks appear to be exiting derivatives as a precautionary move in case the final details alter the value of their holdings. During the Bank of England's Nov. 22 and Nov. 27, 2017, meetings, members of the financial policy committee noted that Brexit could lead to a withdrawal of permissions to conduct cross-border business. The members noted that "the largest identified risks were around [over-the-counter] derivative and insurance contracts," according to minutes from the meetings.

"If you don't know how the structure of those contracts are going to work ... I'm sure they're thinking it's going to be easier to work with someone else where you have more certainty," said Marty Mosby, an analyst with Vining Sparks who covers many of the largest U.S. banks.

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While Bank of New York Mellon posted the largest percentage decline, the custody bank already had smaller holdings than other large U.S. banks. By volume, Citigroup Inc. reported the largest decline with its U.K.-linked derivative holdings down $29.26 billion since the Brexit vote. While the large banks have been shedding derivative holdings generally as part of a de-risking operation, the decline in U.K.-linked derivatives is outsized. At Citigroup, the bank reduced U.K. derivatives by 61% while overall derivatives have declined by just 0.6% over the same period. At JPMorgan Chase & Co., the bank slashed its U.K. derivatives by 26%, compared to a 5% drop in total derivatives.

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All eight U.S. G-SIBs have reduced their U.K.-linked derivative holdings since the Brexit vote, with JPMorgan's 26% decline being the smallest drop. In addition to Citigroup and Bank of New York Mellon, State Street Corp. and Wells Fargo & Co. also reported U.K.-linked derivative declines in excess of 60%.

However, some banks have increased their U.K. exposure in other areas, such as cross-border claims and foreign office liabilities — items which include any liabilities or claims to foreign banks, nonfinancial companies or individual residents. At Bank of New York Mellon and Goldman Sachs Group Inc., those liabilities and exposures increased enough to offset the declines in derivative holdings with U.K. counterparties. The data come from 009a filings, which U.S. banks have to submit to regulators for each country in which the institution has exposure that amounts to 1% of total assets or 20% of total capital, whichever is less.

Executives at the G-SIBs have indicated that the details of the U.K. exit will greatly determine how they approach their foreign offices. Liabilities booked at the banks' foreign offices accounted for the largest amount, by far, of total exposure to the U.K. Several banks have increased such liabilities since the Brexit vote, such as Goldman Sachs posting a 24% increase in foreign office liabilities to $61.90 billion in the 2017 third quarter. However, Goldman Sachs CEO Lloyd Blankfein warned in a Jan. 25 interview with the BBC while in Davos, Switzerland, that the bank has started to move some contracts to its Germany location and that some of those decisions will be irreversible.

The largest U.S. bank, JPMorgan, has reduced its foreign office liabilities and has shrunk its total exposure most dramatically among the U.S. G-SIBs since the Brexit vote. CEO Jamie Dimon also spoke with the BBC on Jan. 25, saying the bank could eliminate more than 4,000 jobs from the U.K. if the government failed to address numerous questions about exiting the EU.

"If they determine that you can't have, you know, reciprocal trade practices, reciprocal regulations, we would abandon those jobs," Dimon told the BBC. "It would be a lot. It would be more than 4,000."

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