Brexit and the Banking Sector: The Stock Market Reaction of UK and European Banks

We examine the impact of three events related to Brexit on stock prices of UK and European banks: i) the announcement of the referendum date, ii) the referendum result, and iii) the appointment of Theresa May as the British Prime Minister. Our results show that bank shareholders reacted positively to the announcement of the referendum date and to the election of Theresa May as Prime Minister, whereas their reaction to the referendum outcome was negative. The analysis also demonstrates that the impact of different stages of Brexit on the stock market is more dependent on geographical factors than on firm-specific characteristics. The only exception is bank size, which positively affects bank shareholder choices. Our results have important regulatory and managerial implications: new political risks should be appropriately included into scenario analysis and the ability to assess and manage this risk should be taken into account in strategic planning and risk management.