‘Brexit’ could leave European banks with EUR 100 billion to cover, says Bloomberg

Were a ‘Brexit’ to take place between the United Kingdom and the European Union, the UK could take a corner of the credit market with it, potentially leaving European banks to replace up to EUR 108 billion of securities, reported Bloomberg.

EU lenders that bought bonds backed by U.K. mortgages, bank loans and credit-card debt might get “caught up in the fallout of an eventual ‘Brexit’ because the debt might no longer count toward their emergency cash reserves,” said Bloomberg. Moreover, “banks could find themselves having a liquidity issue if these assets no longer count,” said Vincent Keaveny, partner at DLA Piper law firm, who specializes in structured credit, as cited by Bloomberg.

As stipulated the Basel Accords, a set of agreements by global regulators, a number of minimum standards meant to make banks more resilient to shocks after the financial crisis must be met. One of these standards, the Liquidity Coverage Ratio, requires that banks maintain “an adequate amount of high-quality assets that can be quickly converted to cash to meet liquidity needs for 30 days,” added Bloomberg.

Moreover, the standard says that “certain securitized notes are counted, but their underlying assets must originate from a member state,” meaning that some bonds backed by collateral from a Britain separated from the EU might be excluded, said Bloomberg. “Brexit could result in certain U.K ABS no longer qualifying as eligible assets for current LCR purposes,” said Angela Clist and Nicole Rhodes, London-based lawyers specializing in securitization at Allen & Overy LLP, in a note to clients in February, as cited by Bloomberg.

The senior portions of bonds secured by prime mortgages, auto loans or credit card debt represent a good proxy for the volume of outstanding asset-backed securities from the U.K., according to Manuel Trojovsky, Munic-based analyst at UniCredit Bank AG, as cited by Bloomberg. “The total currently outstanding is EUR 108,” he said.

The June 23 U.K. referendum is the latest challenge to Europe’s EUR 368 billion market, “in decline since 2007 when credit markets seized up and the securities were blamed for stoking a housing bubble and concealing risk,” says Bloomberg, adding that in the past two years the market has contracted by 26 percent, according to JPMorgan Chase & Co. data.

Andreea Tint