Brexit causes funding headache for UK banks

Brexit, UK, European Union, EU

The lead up to Brexit has increased UK banks’ wholesale funding costs, according to a Moody’s report released this week.

The rating agency says muted credit growth in the lead up to the June referendum would be exacerbated if the UK voted for a Brexit.

Senior unsecure bond spreads are 30 basis points wider than the start of the year, according to a Bank of England survey. The average credit default swap (CDS) premium for large UK banks increased by 57 basis points in Q1 2016 compared to 35 basis points for their European peers.

In the case of a Brexit vote at the 23 June referendum, firms with large cross-border exposures are set to be most impacted, while retail banks would be less affected in the immediate aftermath since the negative effects of slower growth will take longer to filter through to households.

“A Brexit could initially challenge the current operational structures of some UK and international banks which do cross border business between the UK and the EU,” explains Carlos Suarez Duarte, vice president and senior analyst at Moody’s.

“This is due to the potential costs of relocating key personnel, creating new legal entities and operating model re-engineering to ensure access to the single market.”

US, Spanish and German banks have the highest amount of claims on UK assets, according to data from the Bank for International Settlements.