The credit consequences of a “no-deal” Brexit for bank creditors are likely to be moderate, as authorities would take steps to avoid disruption to the financial sector, according to Moody's Investors Service.
In a recent report for its clients, the rating agency said for European Economic Area (EEA) banks, the main risk of a no-deal scenario would be the loss of access to the UK's derivative trading infrastructure, preventing their ability to trade and clear derivative transactions without disruption.
However, in a no-deal scenario Moody's expects that European Union authorities would take steps to ensure financial stability. The agency’s base case scenario remains that both sides will eventually reach an agreement to preserve many - but not all - of their current trading arrangements, before the UK's scheduled exit from the European Union on 29 March 2019.
Nonetheless, the probability of the UK and the EU being unable to reach a withdrawal agreement by the deadline has risen.
For UK banks, increased pressure on asset quality and profitability, due to the country's more abrupt economic adjustment, are the expected impacts in the event of a no-deal scenario. However, this would be mitigated by their strong fundamentals, such as strong capital, asset quality and liquidity.
"A no-deal Brexit will lead to weaker asset quality for UK banks but is unlikely to have dramatic implications for their creditworthiness, given today's favourable starting point," said Nick Hill, Managing Director at Moody's.
Given London's role as the pre-eminent financial centre within Europe, the UK regulatory authorities have announced their intention to put in place a "temporary permissions regime" if there is no deal.
If implemented, this should ensure the continuity of current authorisations for banks, investment firms, exchanges and central counterparties (CCPs) from 30 March 2019 for up to three years.
