Abstract
This paper analyses the impact of Brexit on the European banking system and economy. Using an event-study and difference-in-differences analysis around the Referendum date, we find that the most affected banks are not only in the UK, but also in Southern Europe. Larger UK banks experience a lower reduction in stock returns right after the Leave vote, indicating the presence of a too-big-to-fail problem in the UK banking sector. We also identify trading activity as a major factor determining the negative effect of Brexit. Regarding the real economy effects, we find that trading banks reduce lending by more, compared to non-trading banks. Our results are robust to different specifications of the control and treatment group and have major implications for policymakers