If UK politicians can somehow bring themselves at the last minute to agree on a deal for the country to leave the EU, it will only be the start of the fun in the Brexit process.
The withdrawal agreement and the accompanying political declaration set the ball rolling on negotiations to deliver a full framework for new EU-UK economic and security relations by the end of 2020.
In other words, if securing a withdrawal agreement seemed arduous then just wait and see how tough it is to try put pen to paper on a proper, all-encompassing Brexit deal.
Unsurprisingly, this looks like bad news for the UK banking sector.
While the country’s largest financial institutions have shown that they can cope very well with the difficulties of operating in such an uncertain environment, the middle and lower tier banks and building societies are likely to have a much tougher time navigating the capital markets as the Brexit process heats up.
There have already been notable casualties over the past three years.
TSB Bank was forced to withdraw from selling its debut Sonia-linked covered bond in November 2018, for example, after a series of high profile government resignations sent UK banks spreads shooting wider.
And Clydesdale Bank’s owner, CYBG, caused a stir in December, when market participants feared that the group had been left with little option but to privately place a £250m tier two at a very expensive coupon rate of 7.875%.
CYBG then returned with a £250m 9.25% additional tier one last week, which again had market participants concerned about the bank’s cost of capital.
It seems likely that these sorts of financial institutions will continue to go without the luxury of being able to dictate when and at what price they raise capital and funding over the next few years.
The largest UK banks like Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland have been able to take their destinies into their own hands by upping their use of the dollar market, which boasts a deep and largely unflinching investor base.
But smaller lenders are mostly beholden to prevailing sentiment in the euro and sterling markets, where funds tend to be closer followers of the Brexit process.
The going is getting tough
Even less fortunate for the UK’s middle tier of banks and building societies is the fact that a wildly unsupportive domestic political backdrop comes at a crucial time in terms of their work in having to restructure their liabilities.
For one thing, the Bank of England has said that domestic systemically important banks will have to meet interim minimum requirements for own funds and eligible liabilities (MREL) by 2020 and final targets by 2022.
MREL dictates that banks have a bigger stock of debt on their balance sheets that is available to absorb financial losses should it prove to be necessary.
Because of the heightened risk that investors could lose their principal in MREL bonds, these securities tend to be more expensive and more difficult for issuers to place in the market.
Rating agencies say The Co-operative Bank and Clydesdale face the most significant shortfalls to their eventual MREL requirements.
The former has earmarked £400m of issuance this year — including £200m of tier two debt — while the latter is planning to raise £2.3bn-£2.8bn of senior bonds from its holding company over the next three years.
With Brexit negotiations either set to enter a new and politically treacherous phase, or be kicked a number of months down the road, it is difficult to see when these banks are going to be able to find perfect windows for issuance.
Unsurprisingly, then, they are already factoring in pressure on their net interest margins as a result of switching old debt into new MREL-eligible bonds.
And this comes at a time when UK lenders are also having to think about refinancing the cheap loans they borrowed from the Bank of England under its now expired Term Funding Scheme.
Brexit's legacy
Ian Smith, the chief financial officer at CYBG, was asked on an analyst call in February why the bank’s funding seemed to be so expensive.
“If I look at you versus some of the others you have a huge core tier one, your business mix is not particularly absurd relative to everybody else and yet if I look particularly at your bail-inable debt it’s yielding a pretty chunky yield,” noted Ed Firth, a managing director at Keefe, Bruyette & Woods.
Smith’s response wasn’t particularly convincing. “Markets are pretty skittish at the moment, both equity and debt,” he said. “It will come back over time,” he added later.
Really, having accessed the market in multiple different asset classes over the last three years, CYBG seems to be a clear and early example of a trend that is only likely to become increasingly obvious as Brexit rumbles on.
The large and international UK banks will continue to benefit from being connected to the rest of the world, while smaller and more domestic names will suffer in tandem with the fortunes of their home country.
UK market participants can look forward to having a banking sector as depressingly divided as the country's politics.