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UK banks were hammered on the London markets for a second straight session yesterday after the fallout from the decision to leave the EU took hold. A string of high profile broker cuts did the damage amid fears that banks could lose access to the single market and be left in the precarious position of being unable to properly service their global clients. At the closing bell Royal Bank of Scotland was off 16 per cent, Barclays had lost 17 per cent and Lloyds was down 10 per cent, as investors chose instead to pile into safe haven assets. But it wasn’t just the global big guns that were hit. Shares have risen today after yesterday’s pain but there will be more volatility to come, so why have Britain’s banks been hit so hard by Brexit?
Can UK banks service their clients fully if they lose access to the single market and are cut off from Europe? The chief concern over Britain’s banks and Brexit stems from losing what is known in the industry as ‘passporting’ – something that helped turn London into the finance capital of the world in the last twenty years. Passporting is a major selling point as it allows financial institutions to sell their products throughout Europe, despite not being part of the single currency. Once banks in London have acquired the passport license it means they do not have to apply for authorisation in each separate country – they can simply trade across the bloc.
The system also allows banks to establish branches abroad and provide services across Europe while remaining in their home country. Banks can then chose to place their headquarters in the City while having all the benefits of being in the single market. The Brexit vote has triggered panic that this right could be lost and as the financial fallout unwinds, UK politicians are rushing to maintain this crucial system for the City of London. What is the EEA and could Britain join it?