Don’t underestimate the toll that the post-Brexit bank equity rout can take on the euro-area economy.
Initial calculations of the effect of the U.K. referendum on the region’s recovery have suggested that the blow will be relatively mild, with European Central Bank President Mario Draghi telling European Union leaders that the impact from direct trade could add up to 0.5 percentage point over three years.
But such scenarios don’t take into account the consequence of the 23 percent decline in bank stocks since the Brexit vote. Historically, bank equities have correlated strongly with bank lending, with about a year’s lag, as the chart below shows…
If Bank Stocks Are Linked to Bank Lending, Europe Should Worry
