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UK banks face increased funding costs and challenges to operating models amid uncertainty around Brexit vote 

May 5, 2016

Moody's Investor Service

Banks operating in the UK face moderate short-term risks as the country approaches the June 23 Brexit referendum, says Moody's Investors Service in a report published today. In addition, in the event of a Brexit, banks will likely face more durable but moderate challenges.

"Uncertainty before the referendum, which would be exacerbated in the event of a vote to leave the EU, has contributed to an increase in UK banks' wholesale funding costs" says Carlos Suarez Duarte, a Vice President-Senior Analyst at Moody's.

UK banks' wholesale funding spreads increased in Q1 2016, with senior unsecured bond spreads 30 basis points wider than at the start of the year, according to a Bank of England survey. In addition, the average credit default swap (CDS) premium for large UK banks increased by about 57 basis points in Q1 2016 compared to 35 basis points for European peers.

The rating agency also expects more muted credit growth in the run up to the vote, particularly if polls indicate that the vote will be close. Although credit demand has so far been steady in Q1 2016, since the announcement on February 20, 2016 of the June 23 referendum date, industry surveys show increased risk aversion among UK businesses. Read more

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