Global banks based in the City of London will likely retain limited access to the European Union’s single market after Brexit even if they lose full passporting rights, according to Moody’s Investors Service.
That’s because most EU financial-services laws recognize that some non-EU countries’ rules and oversight of specific business lines are as tough as its own, the credit-ratings company said in a report Monday. While the U.K. leaving the single market would increase costs for the banks, it would likely be “manageable,” Moody’s said.
“In particular, we consider that the third-country equivalence provisions contained within the incoming MiFID II EU directive may provide firms with an alternative means of accessing the single market,” said Simon Ainsworth, senior vice president at Moody’s. “The complexity of (quickly) unwinding the status quo and a desire to minimize the initial impact on European domiciled banks will likely lead to the preservation of most cross-border rights to undertake business.”
Chancellor of the Exchequer Philip Hammond is said to be prepared to accept that Britain may have to give up membership of the single market to achieve the immigration restrictions that voters have demanded. Banks are pressing him to strike an interim agreement with the EU that would preserve their ability to provide services on broadly similar terms to now beyond the end of the official two-year negotiation period.
“The uncertainty around the outcome of any new arrangements mean that it is likely that some banks may choose to move some U.K.-based activities to the EU before the U.K.’s withdrawal negotiations are complete,” Ainsworth said.
London’s position as a financial hub in Europe may be threatened if the U.K. leaves the single market, Bundesbank President Jens Weidmann told the Guardian newspaper. A “hard Brexit” could strip banks of their ability to do business across the EU and open the door for Frankfurt, Weidmann said in an interview.