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| Type | Bachelor's Thesis |
| Scope | Discipline-based scholarship |
| Title | The Value of the Bank Passport for Listed British Banks - An Empirical Investigation |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Number of Pages | 45 |
| Date | 2017 |
| Abstract Text | The United Kingdom is in the midst of change. When Great Britain decided to leave the European Union on June 24, 2016 there was great uncertainty about the consequences. The relationship of the United Kingdom with the EU had some starting difficulties. A globally oriented policy with an independent state has been essential for the United Kingdom until today. An increasingly Eurosceptic view established itself over the recent years and the pressure for a referendum on the EU membership was omnipresent. In this bachelor thesis the author sets the focus on the banking industry. It is the author’s objective to examine recent events leading up to the Brexit and defining its impact on the value of the so called passporting rights. The passporting rights allow every member of the European Economic Area (EEA) to establish a business or to provide services within this zone. This can be done easily and inexpensive. Therefore, being a member of the European Union is of great interest for companies inside this industry. However, with the opt-out of the European Union the passporting rights are jeopardized to be lost by many institutions. Appropriate alternatives have not been determined by now, but the final solution is expected to be much less efficient and practical. Furthermore, it is very likely that many countries will not be covered the same as in the past. Eleven British banks that are listed on the London Stock Exchange were considered in this study. Almost half of them have business in Europe, whereas the other half is focused in the UK. One bank, namely BGEO Group only operates in Georgia. We expect that Standard Chartered should be negatively affected by the UK referendum negotiations. The reason is that they have been using passports in the past but did not establish regular businesses in the European Union. Standard Chartered would face more challenges should the use of passports be limited in the future. HSBC should also be negatively affected as a result of having the biggest EU revenue of all the examined banks. We used the common event study methodology based on Delaloye, Habib and Ziegler [2005] to assess the value of the passporting rights. We evaluate the impact of 19 events preceding the UK referendum on bank stock prices. The 19 events happened over a period of 3 years, starting with the announcement of Prime Minister David Cameron to hold a referendum and to renegotiate UK membership terms in 2013. We use a market regression for every bank with a lagging, current and leading market index as well as a dummy variable which takes on the value 1 on event days. The lagging and leading market index shall prevent biases of nonsynchronous trading. This set of equations is estimated with a seemingly unrelated regression. The dummy variable gives us the abnormal return. Event 1, when the referendum result was announced, is highly significant for 10 of the 11 banks. This led to positive abnormal returns for HSBC and STAN, whereas negative abnormal returns were obtained for the other banks. The banks that have their business mainly in the UK were affected the most by the referendum result. Additionally, there were some other significant abnormal returns for HSBC and Standard Chartered. The effect overall events were not significant for any bank. We further analysed the cumulative abnormal return (CAR). They reflect the sum of the abnormal returns over all event days. These were considerable. The difference in the highest CAR and the lowest CAR should give us more insight. They reflect the range of the most optimistic view on the UK referendum of the market participants and the most negative view on the UK referendum of the market participants. This CAR difference was significant for the Bank of Ireland and Standard Chartered. There are various explanation for these results. Event one can be explained that the market did not see the result of the referendum coming and reacted very heavily. Especially banks that focus on the UK market were affected negatively, because of the uncertainty and possible downturn that the UK could experience. The exit of the European Union will change several things including the regulation, for better or for worse. The conclusion of our analysis is that the value of the bank passport for the listed British banks is limited. There is probably a value for Standard Chartered, because they had significant results in many statistics. The other banks are more affected by the consequences for the UK home market and not by the loss of the passporting rights. The following years will be critical for the financial sector. The upcoming negotiations will show, if the UK can profit from a deregulation and access to the EU or the hurdle for financial business will be bigger. |
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