Brexit would increase resolution risks for European covered bonds

Bank resolution measures could be challenged in post-Brexit EU: The United Kingdom’s exit from the European Union would increase the resolution risks for non-UK European covered bonds governed by English law, said Moody’s Investors Service.

The rating agency says Brexit would raise the prospect that resolution measures for European covered bonds may be challenged. Unless the UK and the EU enter into new arrangements for reciprocal recognition, Brexit will place the UK outside the EU’s BRRD framework for automatic cross-border recognition of resolution measures. As such, UK courts may not recognise resolution measures taken in the post-Brexit EU, where the measures apply to covered bonds governed by English law. Many European covered bond programmes with no UK assets still have a UK dimension, with bonds and swaps governed by English law.

“A lack of legal certainty undermines resolution and that is credit negative for covered bonds. The risk that the courts might not recognise resolution measures could prevent resolution from working efficiently to benefit covered bonds as intended by the BRRD,” said John Hogan, an Analyst at Moody’s.

“Resolution relies on legal certainty and on resolution authorities’ ability to act quickly and decisively and on the basis that their decision will be effective,” added Hogan.

Moody’s says a new recognition framework would likely emerge but may offer less certainty than the current system: “It is likely that some form of reciprocal recognition will eventually be implemented to make resolution measures taken in EU member states effective in the UK post-Brexit,” said Jane Soldera, a Senior Credit Officer at Moody’s.

“However, uncertainty will persist until a new framework is implemented and, even when that happens, the new framework may not offer the same level of certainty as the current system,” said Soldera.