It’s a great pleasure to be here in Budapest, and to have this opportunity to speak alongside Roland Natran on the subject of financial regulation.
I come here today on the eve of Hungary taking on the mantle of the EU Presidency.
The Presidency presents you with a unique opportunity to shape the European Union’s thinking, and its plans for the future.
No doubt you’ll be receiving countless visits from Finance Ministers over upcoming months.
And in the first six months of next year you’ll oversee some of the most important decisions the EU has ever had to make.
Under your Presidency, Europe will undergo a revolutionary period of regulatory change.
Member States, still recovering from the effects of the financial crisis, will be looking to Hungary for leadership over the next six months.
And as recent events have indicated, we still have some way to go if we’re to restore stability across the European Union.
From my own perspective, there are some important questions that will need to be answered…
…questions like how should we regulate; what’s the right balance between national discretion and European supervision; how can we restore Europe’s reputation as a place to do business; and - perhaps most importantly - how can we build a strong financial system that helps support growth across the EU?
There are no easy answers… but by working together I’m sure we will make the right decisions. That under your guidance, Member States will pull together to create a more stable, secure and successful Single Market.
Because while there are many challenges ahead, the legislation that will be taken forward next year has the potential to create a more prosperous EU. One that’s built on the back of shared ambition, greater economic ties, and more open markets.
So this morning I’d like to discuss Britain’s approach to financial regulation - both at home and abroad - and how this fits with Europe’s own regulatory agenda.
As home to one of the global financial centres, we recognise that our own regulatory framework will be shaped by the international debate.
We need to look at how the British programme for reform ties in with the measures being debated in Europe and in the G20. The two are intrinsically linked - inseparable in fact - and if we’re to remain successful it’s important they line up.
The UK Government believes that a strong Europe is in all our interests. We fully support proposals that promote confidence; transparency and competition across the European markets. That’s why we worked closely with the Belgian presidency to achieve a good outcome for European Supervision and the Alternative Investment Fund Manager Directive. And why we look forward to working closely with your Presidency in the next six months.
But standing here in Budapest, and flying to Warsaw this evening, I’m reminded that that Europe is, in fact, a diverse collection of nations; each with their own rich heritage; and, in many instances, vastly different economies. New regulation should build on what we share as common interests and values, while recognising where we differ.
History has shown the power of free markets in serving the real economy, but it has also revealed the self-serving nature of these markets. When left to its own devices, as we have seen in the crisis, the market can leave households and businesses bearing the costs of high-risk strategies.
While hindsight shows us that the previous system of financial regulation was skewed in favour of excessive risk-taking. Where the immediate returns appeared substantial, but were ultimately unsustainable.
So with this in mind, the first challenge we face is to strike the right balance in Europe’s regulatory response.
The question now is how we create a financial system in Europe that better suits the needs of consumers and businesses - the very people these markets were originally designed to serve.
And we must remain mindful that we’ll be doing the real economy no service whatsoever if we stifle innovation and lending through overly prescriptive measures.
Disproportionate or overbearing regulation imposes costs on firms that are passed through to users, either through higher charges and lower returns, or a reduction in choice and competition. This is a delicate balance, but one we are committed to getting right both at home and abroad.
Domestically, we have implemented sweeping reforms of our financial regulatory structure. We need tougher, smarter and more effective domestic financial regulation
So we will create a single, dedicated, macro-prudential supervisor. One that will ensure that any risks developing across the economy are identified and dealt with.
This supervisor will be the Financial Policy Committee - who will have chief responsibility for maintaining financial stability.
At a more micro level, we’re setting up the Prudential Regulatory Authority with responsibility for regulation of individual deposit takers and insurers.
By bringing together micro and macro-prudential regulation within the Bank we will improve the coordination and coherence of financial stability.
And the final piece of the puzzle is the new Consumer Protection and Markets Authority - CPMA for short - who will look at the behaviour of all authorised firms. The CPMA will be, in effect, a champion for the consumer, with the primary objective of “ensuring confidence in financial services”.
In turn, this will ensure that growth is sustainable, and not built on the back of assets that can barely hold their own weight, let along the weight of the economy
Yet while geography might tell us that we’re an island, in terms of financial services we’re inseparably linked to world markets, not least those in Europe. And as Europe’s financial capital, London’s success is important to the region as a whole.
For Hungary, London can help support growth, provide finance, improve overall prosperity and insure against risk. But equally, a successful Hungary - and a stable European Union - strengthens confidence in markets and creates new opportunities.
The two are mutually reinforcing.
In the last year alone, trade between our two countries has grown by almost a third. And this is a trend I’d like to see continue.
As it’s Britain’s relationship with the other nations of Europe that has underwritten much of our success over the last decade.
This is why it’s important we agree common regulatory standards across the Union, to strengthen our ties, and build on the progress we’ve already made.
We need regulatory frameworks at European, regional and national levels that respond to the challenges that interconnected economies present. And only through working together, in partnership with other Member States, can we achieve this.
So I’d like no-one to be in any doubt about the importance Britain places on the EU’s new regulatory architecture; the benefits a common set of rules could have for all our economies; or the need to pursue higher standards.
Lessons from the crisis
Having experienced the longest and deepest recession since the 1930’s, the financial crisis has made Britain sit up and ask where it all went wrong, and what do we need to change.
In short, we need to learn the lessons of the banking crisis… and we want to learn not only from our own experience, but from the experiences of other nations as well.
That’s why I’m here today, and in Warsaw tomorrow… not to defend the old way of doing things, but to work together, engage, listen and help develop a stronger Europe that’s underpinned by a stable financial system.
Because in a world where people, capital and businesses are highly mobile, we can’t pretend that either Britain or the EU can tackle these problems in isolation.
The decisions we take must be agreed together. And at all times we need to be mindful that our choices will determine where international businesses locate; where growth will come from; and how successful we’ll be in the future.
We need a practical response… one that recognises the strengths and weaknesses of global markets; sees the benefits of European co-operation, but is also aware of the unique set of challenges faced by Member States… and takes account of their individual circumstances.
Shaping the European response
London has long been an open market and we’re strong believers in the single market. We fully support healthy competition in all sectors, as it’s competition that gives consumers and businesses the best products and the best returns possible.
But the question I’m often asked is what does this mean in practice? And how does this translate to the wider European debate on regulation and supervision?
Well, my response is that connected markets need a coordinated response… one that minimises the risk of regulatory arbitrage. This is why we support the common EU standards on regulation.
In our view, there is a real need for European bodies to oversee national regulators, but equally important is that they don’t replace them. So I was pleased with the agreement reached over the summer where day-to-day supervisory decisions will remain the responsibility of domestic authorities.
The new supervisory architecture - a network of local supervisors complimented by strong central bodies - is the right arrangement for the EU.
The new framework has the potential to fundamentally improve the quality and consistency of supervision.
As a Member of the British Government I know that if you’re host to an institution such as a bank or insurer that’s headquartered in another EU jurisdiction, you want to know that it’s effectively supervised. This is isn’t just my opinion, however, but the thinking of all Member States. It’s a question of confidence, as one institution’s failure can damage the host market just as seriously as the home one.
It’s in everyone’s interests, therefore, that we create a single market that works - with a common rulebook underpinning key elements of that market.
That’s why Britain has welcomed Europe’s call to see higher capital levels applied across financial institutions.
The work taking place in Basel and through the European Union has our full support… not just to restore confidence in the European financial system, but also to ensure that our institutions are better able to weather future financial storms.
But we do need to recognise that the challenges posed by the size and structure of individual banking sectors varies markedly across Member States.
Britain is a prime example of this.
While similar, the problems we face are not identical to the issues in Hungary, or any other nation for that matter. That’s why we need to be pragmatic about EU proposals, and how they’re applied. Domestic authorities need to preserve a degree of discretion if they’re to ensure that national stability is maintained. It’s not in anyone’s interests to tie the hands of Member States, and prevent them from taking action where it’s needed.
So while we support moves to improve regulation of banks’ capital, liquidity and leverage through Basel 3, CRD3 and CRD4, I’m of the firm opinion that Members States should have flexibility to go further if that’s what’s needed to maintain stability. As problems emerging in one nation can quickly spread across the whole of Europe.
And at no point should we advocate for allowing the overall ambition of these reforms to be diluted - where individual countries seek exceptions for their own institutions. Again, this wouldn’t be in anyone’s interests, and could undermine much of the progress we’ve made to date.
In Britain, like Hungary, we’ve a strong compliance culture, to the point where many firms within our borders call for similar standards to be applied elsewhere.
A single market means a level playing field not just in the setting of rules, but also in the adherence to them. That’s why we support strong ESA powers, to ensure EU law is being followed and - where necessary - to enforce it where compliance is found to be lacking.
With financial companies operating subsidiaries throughout Europe, effective supervision requires greater cooperation across the Union. The international nature of financial services means that transparency, and good information sharing arrangements, are needed across all Member States.
As economic partners, we need to know what’s happening across the Union if we’re to successfully protect the taxpayer. In saying that, Information must be proportionate to the risks we face- rather than being an unnecessary burden.
In Britain, we’re very aware this needs to be a two-way relationship… that as Europe’s largest financial centre we have a specific duty to openness and transparency.
We want to make this process work better, to develop closer ties with all our European neighbours, and build on the progress we’ve made so far.
Reforms along these lines will promote confidence in Europe’s financial services markets: where common rules - properly applied - not only to preserve stability, but also to inspire higher levels of investment, greater prosperity, and growth across all Member States. Europe again needs to be seen as a safe bet; a place where firms want to do business; and where our interdependencies are seen as an advantage, not a hindrance.
We need to get the regulatory framework right if we are to realise the financial sector’s full potential for the British, European and global economy.
But in achieving this, the EU can’t afford to shirk from making difficult decisions, imposing additional regulations, or challenging existing business models.
The Single Market has many benefits - it supports greater competition and transparency while allowing for an adequate level of flexibility. I want to see all future EU regulation support these ideals, as I’m sure you do as well.
As I said at the start, Hungary - in taking on the EU Presidency - has a vital role to play in making this happen. And Britain will fully support you in your efforts. We want your presidency to be a success- to demonstrate the leadership that Hungary and its neighbours can offer the EU.
We can only succeed in these endeavours by working closely together. The EU is very much a team effort - a joint enterprise.
So I look forward to next year.
To learning from Hungary’s own experiences of the crisis.
To hearing your ideas for reform.
And working with you in the months and years ahead to build a stronger European economy, a successful Single Market, and stable European Union.