DEUTSCHE BANK: Brexit could be the unlikely trigger of the next financial crisis

LONDON — There’s a small chance that Brexit could be the catalyst for the next global financial crisis if things don’t go as planned, according to a report by Deutsche Bank analysts.

The report looks at events and issues that could trigger that crisis include an excessively fast unwinding of the ultra-loose central bank policy that has characterised the post-crisis years, a crisis in China, and issues in the Italian political and economic landscape which could harm the wider EU.

Brexit, the issue that completely dominates virtually all discourse — both political and economic — in the UK right now, however, is a lesser examined risk.

It isn’t likely that Brexit will go so wrong that it triggers a new crisis, Jim Reid and his team said, but then neither was the Second World War, and there are some similarities between these two scenarios.

Here’s Deutsche Bank:

“Through most of history, we tend to think compromise is always the most likely outcome when such differences exist and where there is the chance of mutually assured destruction. The extreme example being World War II when no-one really expected war, weeks and months before it arrived. How spectacularly wrong that assumption was. So it’s worth highlighting how Brexit could go wrong and create a financial crisis.”

It seems as though virtually all people on all sides, as well as market participants, are expecting some form of reasonable Brexit deal to be struck — just as nearly all of those in the British and EU establishment thought that Brexit wouldn’t happen at all.

A chance remains, however, that negotiations break down completely, Reid’s team said.

“The real financial crisis could arise if the UK experiences a dramatic ‘hard’ Brexit with relations completely breaking down with the EU. This would not only have economic implications for the UK and the EU but also on geopolitics.”

“The UK’s vote to leave has introduced a major risk to economic activity, the financial architecture of Europe and perhaps more concerning, the geo-politics and security of the region. As such we need to continue to keep this on our radar,” they add, noting how key to the financial architecture of the whole bloc the City of London is.

“Although worst case scenario planning is under way for many of the major players, it would be naïve to imagine that all eventualities could be planned for in such a short space of time. At worst this could have major impacts on funding to both companies and banks and on market liquidity.”

“As such we need to continue to keep this on our radar.”

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.