Brexit poses risk for non-U.K. Euro bonds: Moody’s

The U.K.’s exit from the EU would increase resolution risks for non-British European covered bonds, Moody’s says.

Bank resolution measures, or measures to deal with a bank failure or bailout, could be challenged in post-Brexit EU, putting at risk non-British European covered bonds that are governed by English law, the firm says in a report on Thursday.

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“Unless the U.K. and the EU enter into new arrangements for reciprocal recognition, Brexit will place the U.K. outside the EU’s BRRD [Bank Recovery and Resolution Directive] framework for automatic cross-border recognition of resolution measures,” Moody’s says. “As such, U.K. courts may not recognize resolution measures taken in the post-Brexit EU, where the measures apply to covered bonds governed by English law.”

The report says many European covered bond programs with no U.K. assets still have a “U.K. dimension,” with bonds and swaps governed by English law.

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John Hogan, Moody’s analyst, says in a statement the lack of legal certainty “undermines resolution, and that is credit-negative for covered bonds.”

A new recognition framework is likely to be put in place, Moody’s says, though it may offer less certainty than the current system.

Staff

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