Brexit contagion poses risk to US, says Goldman Sachs

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Contagion from the U.K. financial sector poses a risk to the U.S. following Britain’s decision to quit the EU, Goldman Sachs said on Wednesday.

Contagion from the U.K. financial sector poses a risk to the U.S. following Britain's decision to quit the European Union (EU), Goldman Sachs said on Wednesday.

The investment bank said financial contagion was a greater threat to the U.S. than a hit to trade as a result of any falloff in British growth.

"Although a U.K. contraction would be unhelpful for the U.S., trade-related contagion should remain manageable ... The risk of financial spillovers is greater," Goldman said in a report circulated on Wednesday.

The U.K. and the U.S. are among the most financially interconnected countries in the world, according to the bank. It said the U.S. banking system's total exposure to the U.K. amounted to $919 billion — far exceeding its exposure to any other country.

U.K. banks hold an aggregate of $1.4 trillion of financial claims on U.S. borrowers, Goldman Sachs said, citing data from the Bank of International Settlements.

"The post-financial crisis central banking and regulatory regime should limit concerns over the banking sector," Goldman added.

Following Thursday's Brexit vote, Goldman cuts its growth forecast for the U.S. in the second half of 2016 to 2 percent annualized from 2.25 percent. It also warned the U.K. was likely to enter a " mild recession " by early 2017.

The bank said the Brexit shock had ruled out an interest rate hike by the U.S. Federal Reserve next month.

Fitch Ratings went further on Wednesday and forecast the Fed would delay hiking until December. The ratings agency also forecast the European Central Bank would continue with asset purchases beyond March 2017 — the earliest date at which the bank has said it will wind up the program — and the Bank of England would likely lower rates to 25 basis points later this year.

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