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The Loan Market Association (LMA) has published a paper on the consequences of a no deal Brexit on the European loan market. This news analysis summarises the key concerns highlighted by the paper.
The LMA has published a paper on the consequences of a no deal Brexit on the European loan market in response to concerns by its members that the UK may withdraw from the EU without a deal being agreed. The paper focuses on the impact of a no deal Brexit on UK lenders lending to borrowers in EU27 jurisdictions (ie outbound lending). The impact on EU27 lenders lending into the UK (ie inbound lending) is expected to be minimised by the government's proposed temporary permissions and recognition regime which will allow EU27 institutions to continue their financial services activities in the UK for a limited time post Brexit.
The paper highlights the high risk of significant market disruption and loss of liquidity detrimental to both the UK and the EU 27 in the event of a no deal Brexit due to:
The paper highlights the following as key areas of concern in a no deal Brexit scenario:
The paper explains that regulation of cross-border lending by non-EU entities varies across the Member States, with some not imposing any licensing requirements while others require entities providing deposit taking, credit, payment and foreign exchange services to obtain a local licence (if they don't have a passport). Such restrictions will prevent UK banks from seeking new business from local customers, significantly disrupting their business.
In relation to existing business, the paper notes that it is unclear what happens when the lender ceases to be authorised during the life of a loan. In jurisdictions where authorisation is required to lend, a no deal Brexit may leave the loan legally vulnerable or subject to repayment under existing illegality provisions.
The paper also highlights that the Capital Requirements Regulation, Regulation (EU) 575/2013, (CRR) prevents EU investors from investing in Collateralised Loan Obligations (CLOs) without a minimum risk retention by the sponsor, originator or original lender of the assets. As the risk has to be retained by a MiFID authorised entity, this raises the question of whether EU investors will need to divest themselves of such assets if the sponsor, lender or originator is a UK firm that ceases to be MiFID authorised by reason of Brexit.
The LMA notes that steps are being taken in some Member States to support some continuity of access for UK firms post-Brexit, and to permit UK firms to continue to provide regulated services under agreements entered into prior to Brexit. It urges the European Commission and Supervisory Authorities to seek to coordinate these efforts.
A no deal Brexit will have implications for lenders beyond the issue of licensing. The paper identifies the following as issues of concern:
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