19 September 2016

Financial Times: Loss of passporting rights ‘manageable’ for the City – Moody’s

In the wake of debate about the prospect of City firms losing their ability to operate in the continent, the rating agency said any disruption generated from leaving the EU would prove to be “manageable” for most of the companies in its ratings universe, writes Mehreen Khan. [...]

But Moody’s said the impact would be varied across different firms, while the notion of “equivalence” (where market access can be retained through existing compliance with EU regulation) could allow many large investment banks to continue their European operations in areas such as investment advice, currencies trading and underwriting activities.

“These provisions should also ensure that EU banks can operate in international capital, and money markets which are largely based in London”, said Moody’s.

“However, equivalence provides less certainty than passporting, as it depends on a European Commission determination, which is a political decision that can therefore take time and be withdrawn at a future date.”

Moody’s added that the equivalence measures are still “untested”. It also highlighted asset management as the sector most vulnerable to a potential exit from the single market as it holds “explicit location requirements” for fund managers.

The ratings agency said it expected the loss of passporting will force many banks to restructure their operations, including in the business of euro clearing and settlement, which the EU has threatened to redomicile to the eurozone in the wake of the Brexit vote. 

Still, any decision to withdraw from the single market through membership of the European Economic Area will have a “limited” impact for most rated UK banks, said Simon Ainswoth at Moody’s, adding:

We consider that the equivalence provisions within MIFID 2, the complexity of (quickly) unwinding the status quo and the desire to minimise the initial impact on European domiciled banks will lead to the preservation of most cross-border rights to undertake business.

Other critical factors such as capital and liquidity, which are largely determined by global standards, are unlikely to face material changes due to Brexit per se. [...]

 

Responding to Moody’s findings, Mark Boleat at the City of London Corporation said securing passporting rights remained “a real problem for some businesses”, adding:

In the City many firms are still analysing what impact the loss of passporting will have on them. For some retail banks it is of almost no real importance.

But for the whole of international investment banking and an institution such as Lloyds of London it is an absolute necessity. We are making this point clear to policymakers in our ongoing discussions.

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