Moody's: Impact of losing 'passporting' rights under EU law would be manageable for rated banks

Release date- 19092016 – Moody’s: Impact of losing ‘passporting’ rights under EU law would be manageable for rated banks.

The impact of a formal withdrawal of the United Kingdom (UK) from the European Economic Area (EEA) — and the subsequent loss of passporting rights granted under European Union (EU) law-would likely be manageable for most UK-based financial firms (including branches and subsidiaries of non-EU firms), as well as for EU firms with a presence in London, says Moody’s Investors Service in a report published today.

‘Passporting’ applies to a wide range of permissions granted to banks, investment banks, asset managers and financial market infrastructure providers under a range of EU legislation, which allows them to carry out activities across the EEA.

Moody’s report, entitled ‘Banks-Europe: Impact on Financial Institutions’ ‘Passports’ following the UK’s exit from the EU,’ is available on www.moodys.com. Moody’s subscribers can access this report via the link provided at the end of this press release. The rating agency’s report is an update to the markets and does not constitute a rating action.

‘Should the UK leave the single market as well as the EU, UK-based financial firms (including branches and subsidiaries of non-EU firms) may lose their passporting rights,’ says Simon Ainsworth, Senior Vice President at Moody’s. ‘If this were the case, then firms would need to move sales, trading and middle office staff to the EU, along with capital, liquid assets and IT infrastructure.’

This outcome would be credit negative, as it will have costs and is likely to reduce profitability at least in the short term. The rating agency considers that moving operations would likely be manageable in terms of credit fundamentals, absent any other shocks.

But Moody’s considers it unlikely that all permissions granted to financial firms will be lost. This is because, even without a formal arrangement, EU law already provides for limited recognition of non-EU regulatory regimes for the purpose of undertaking investment and banking business.

‘In particular, we consider that the third country equivalence provisions contained within the incoming MIFID 2 EU directive may provide firms with an alternative means of accessing the single market. The complexity of (quickly) unwinding the status quo and a desire to minimise the initial impact on European domiciled banks will likely lead to the preservation of most cross-border rights to undertake business,’ explains Mr. Ainsworth.

However, third-country equivalence provides less certainty for firms than passporting, as it depends on an European Commission judgment-a political decision-which could take time to make, and withdrawn at a future date.

‘While bank that use the UK as an entry point for most EU operations should not suffer materially altered credit fundamentals if they lost their EU passports, the uncertainty around the outcome of any new arrangements mean that it is likely that some banks may choose to move some UK based activities to the EU before the UK’s withdrawal negotiations are complete.’ explains Mr. Ainsworth.

Subscribers can access the report at:

http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1036164

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: London +44-20-7772-5456, New York +1-212-553-0376, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, Sao Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Simon Ainsworth

Senior Vice President

Financial Institutions Group

Moody’s Investors Service Ltd.

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Canary Wharf

London E14 5FA

United Kingdom

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SUBSCRIBERS: 44 20 7772 5454

Mark Lamonte

MD-Ratings & Process Oversight

Financial Institutions Group

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Moody’s Investors Service Ltd.

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(c) 2016 Electronic News Publishing -, source ENP Newswire


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