How Brexit’s hurting European banks

It’s still “too early to come up with a final verdict on the Brexit impact,” says Luc de la Durantaye.

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But, so far, the most significant ramifications of the surprise U.K. vote are being felt in the U.K. and Europe, rather than by the global economy as a whole, he adds. De la Durantaye, first vice-president of Global Asset Allocation and Currency Management at CIBC Asset Management, manages the Renaissance Optimal Inflation Opportunities Portfolio.

He predicts corporations in the Eurozone will be more likely to postpone investment decisions, and consumers will spend and borrow less.

Read: U.K. businesses in limbo due to Brexit

“The European economy was already growing at a fairly slow speed, [so] this complicates the environment for the banking system in Europe,” particularly for Italian banks. “And, because of negative interest rates, we’re starting to see [a] slack yield curve in Europe.”

Read: Too early to measure Brexit’s impact on Germany, says chief economist

Going forward, says de la Durantaye, “[This] compromises economic activity because banks in Europe are not likely to lend as much. That’s the main impact on the global economy; it’s directly on the U.K. and indirectly on the European economy, [and] much less on the economies in Asia or the U.S.”

What’s alarming, he adds, “We’re starting to see cracks in the European growth model. Non-performing loans in some areas are relatively high and they will have to be dealt with, but there’s no quick solution to absorb [such] loans.”

These challenges will also nullify the European Central Bank’s stimulus efforts—which have included the introduction of negative interest rates and quantitative easing. “If the European banking system [continues to] have issues, they’re not likely to be a risk taker. This means they’re not likely to accelerate lending growth to the degree that may be required.”

Read: U.K. central bank sees economic risks crystalizing

Until the full impact of Brexit becomes clear, de la Durantaye will monitor lending growth in Europe and how exit negotiations evolve.

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