Thank you for inviting me here today. Since the financial crisis started in 2008-9, there has been a drive to reform the regulation, culture and structure of banking to strengthen the stability and resilience of the sector. The deepening crisis in the Eurozone and scandals, whether the manipulation of LIBOR or rogue traders at Societe Generale and UBS, demonstrate the need to continue those reforms.
I want to talk today about how we work together to return stability and integrity to the banking sector.
There is international consensus that tougher financial regulation is essential to safeguard stability and end the problem of too big to fail. The UK has been at the forefront of these efforts.
But as we have seen, the implications for the Eurozone are even more profound. The interdependence of states and banks needs to tackled if we are to stabilise the Eurozone. Banking Union is the natural corollary of fiscal and monetary Union, and so the decision to proceed with this is a great step in addressing the crisis we face. Urgently turning this plan into action, finding answers to the difficult questions that will accompany doing so will be no easy task, but it is vital.
At the same time, we must work together to maintain the benefits to our economies that a well functioning sector can deliver -
Through preserving and deepening the single market
With a common core of minimum standards that neither allows for protectionism, nor invites a race to the bottom.
Fear of the destabilising effects of a banking crisis has linked banks and governments together.
Taxpayers across Europe provided around four and a half trillion Euros in capital support and guarantees before LTRO to stave off catastrophic collapse. And the sobering examples of Spain and Ireland show that there can come a point at which banks become so large that even Governments lack the capacity to stand behind them.
A stable, responsible sector will never exist in an environment in which banks enjoy gains when things go well, and taxpayers take the pain when they don’t.
So we need regulation which does not allow for banks to privatise gain and socialise loss.
And it is not just the structure of the sector that needs to change. The events we have seen -in the recent scandals that have rightly attracted so much scrutiny - show that the culture of the industry needs to change, and needs to change now.
The cynical attempts to manipulate financial benchmarks are sadly not the only example. We have also seen revelations of rogue traders at Societe Generale and UBS; pervasive failures in risk management, and a number of accusations of mis-selling of complex financial products.
This behaviour is not, and cannot be allowed to become, representative of the way business is done in London or in any other financial hub.
To address both the structural and the cultural failures in the sector, we must take action. And the UK is leading the way in putting right what has gone so wrong.
The UK Government has taken a tough approach to both supervision and regulation, reflecting the sheer scale of the sector relative to our economy.
To bring long-term stability to the sector, we are combining micro and macro prudential supervision within the Bank of England. So that the monitoring and response to the threats to financial stability posed either by the sector as a whole or by individual institutions are the responsibility of a single organisation.
To ensure that taxpayers are no longer perceived as liable for the risks taken by banks, we are implementing the Vickers report.
Ring fencing retail operations of investment banks to protect depositors; making creditors - not taxpayers - bear losses; and ensuring critical functions continue in any future crisis.
We are balancing tougher regulation and supervision with the need to maintain a competitive, efficient sector.
And to ensure appropriate standards of conduct, we are creating a separate, independent, market and conduct of business regulator with tougher powers to uphold integrity in markets and give appropriate protection to consumers.
From the moment we came into office, we demonstrated a commitment to reform the financial sector. And we are taking a further action to respond to the attempted manipulation of LIBOR to stamp out and punish bad behaviour.
There will be a full Parliamentary inquiry into the lessons to be learned on transparency, conflicts of interest, and the professional standard of the banking industry.
There will also need to be changes so that in future Libor is properly regulated and attempts to manipulate it thwarted. We will act quickly to restore any loss of confidence in its integrity, transparency and utility. We have already established a review into what reforms are required to the current framework for setting and governing Libor, headed by the incoming CEO of our new Financial Conduct Authority. And that inquiry will identify new criminal sanctions we can put into law.
Indeed, we will need to go further now and work with the Commission to extend the market abuse regime to cover attempted manipulation of benchmarks.
Regulators need full access to telephone records, including those with retail clients. Retail customers can be responsible for market abuse, as well as victims of it. And as the investigation of the fixing of LIBOR and other rates demonstrated in the 21st Century, written records simply won’t suffice. This will complement essential provisions in the commission’s MiFid proposal to ensure benchmarks are transparent and operated fairly - helping to enhance surveillance and the ability of supervisors to detect manipulation .
But the scandal over financial benchmarks also shows us how internationalised the market has become - alleged manipulation of Libor set in London, Euribor set in Brussels, and other leading benchmark rates, being investigated by competition authorities and regulators in America, Japan, and across Europe.
Indeed, Japan has already settled with Citi for alleged manipulation of TIBOR.
Together, we will deal with the culture that flourished in the age of irresponsibility and hold those who allowed it to do so to account.
But it is not just here that we need to work together. Our work is a combination of programmes of national reforms and collective efforts at a European and global level.
Member states building a set of European Union wide reforms but having the flexibility to go further to be tougher to reflect their national circumstances.
So the UK has led the debate here as well.
Higher capital and liquidity standards in Basel.
Moving all standardised derivative trades into central clearing.
Creating a comprehensive set of tools for recovery and resolution of financial firms.
Ending the perceived implicit taxpayer guarantee.
Once implemented, our global and local banks will be stronger in life and easier to deal with in death.
I am encouraged by the progress that we have made through working together on this with other European nations, and nations beyond the EU’s borders.
And there is still work to do - on derivatives regulation in particular, there is a major loophole in the EU regime that allows derivatives traded electronically not to be cleared centrally, impeding our goal of reducing systemic risk.
Whilst that is a matter that must be tackled together, there is another which requires one group of member states to go further to reflect a set of circumstances that is common to them - the interdependence of banks and sovereigns in the Eurozone.
We welcome the decisions already taken by the Eurogroup and the European council to establish banking union.
The crisis has shown us why a banking union is a necessary part of monetary and fiscal union. One of the largest fiscal risks faced by a government is the contingent liability for its banking sector. When countries need to deliver core financial stability tasks, like protecting depositors, and are unable to, it may be necessary for other Member States in the currency union to work together to protect the currency as a whole.
As well as the mutual dependence of state and bank, we have also seen the enhanced interdependencies between banking systems within a single currency - as contagion has spread from Greece to Spain rather than to countries outside the euro area.
And we have seen how the single interest rate of the countries in the Euro Area can feed bubbles in one country whilst delivering excess liquidity in others. The impact of this on economic performance is of course a strong driver of risk in the banking sector.
For all these reasons, I see banking union as a necessary part of monetary and fiscal union.
A mutualised deposit insurance scheme for insured deposits - to ensure consumer confidence where states cannot stand behind failed banks.
A common fiscal backstop for crisis management.
And a Eurozone-level prudential supervisory authority - to align fiscal and supervisory responsibility.
So I strongly support the euro area’s decision to pool sovereignty and express solidarity through a banking union.
The UK has a vital interest in a fair, competitive and vibrant market. And we welcome the decisions that have so far been taken:
We welcome ensuring a key role for the ECB as supervisor - with the credibility and legal mandate it carries.
We welcome the identification of the ESM as a tool for banking interventions, with the capacity to recapitalise banks directly.
And we welcome the European Council’s statement that should Member States with a common currency wish to go further to coordinate and integrate their policies, they must respect fully the integrity of the single market and the EU as a whole.
There are now a number of design issues that need urgent attention:
- What will need to be done to directives on the Deposit Guarantee Schemes and Resolution and Recovery?
- What more needs to be done in CRD 4, particularly as flexibility in macroprudential supervision becomes even more important?
- What will be the scope of the banking union - how many banks will be supervised by the ECB ? This cannot be limited to the biggest banks only, since systemic risk comes from smaller institutions too.
- How will we ensure the EBA remains focussed on the internal market?
- Do we still need resolution funds, now that an ESM can be used?
- Who is in charge in a crisis? The euro area will need a credible resolution regime.
- What are the liabilities and risks already in the system?
These are just a few of the questions that spring to mind - I am sure there are more. We will work closely with our European colleagues to ensure that a strong solution can be found that benefits all.
In completing the design, we will need a system with strong supervisory foundations and practice, that maximises the benefits of the banking union, while mitigating the risks.
Maximising the benefits from common supervision and the mutualisation of risk - breaking the link between sovereign and bank. What President Hollande calls ‘integration solidaire’.
While minimising the risks of fragmenting the single market. Whilst supervision and resolution will be a matter for the 17, the single market and the single rule book will be a matter for all 27 member states. The EBA will need to continue to set core minimum standards for all member states, and the system will need checks and balances. This is a standard concept - included in the Lisbon Treaty, and reinforced by the European Council statement.
Banking union must be put in context. It is not a replacement for the single market in financial services - rather a specific set arrangement to support the single currency.
And so, before I end, I would like to ask one final question - of the utmost importance - how we are going to protect the single market?
The UK supports the treaty freedoms to non-discriminatory access and fair competition - freedoms that must be upheld, and which we will fight to maintain.
A banking union that erects barriers and looks inwards would not be in anyone’s long-term interests. To allow the protectionism to take hold and the single market to fragment will do nothing but shrink the global economy at a time when it desperately needs help to grow.
All EU member states require open capital markets to support our corporations. And ultimately, a global reserve currency like the Euro or Dollar can only maintain its international standing if it can freely be traded and cleared beyond the 17 Eurozone members, across the world.
The EU is lucky enough to enjoy so many world-leading financial hubs - in Luxembourg, in Frankfurt, in Dublin, in Paris, and, of course, in London.
London, and its partner hubs across Europe, mean that businesses can gain access to capital and savers can invest in products from outside their home country, without the need to impose products and services on all local markets.
And I strongly believe that those hubs should continue to serve the wider economy, channelling the funds of savers to investment opportunities, transforming our bank deposits into loans to our businesses and helping businesses and individuals manage risk.
Helping European Governments raise almost €1 trillion in bond markets in 2010;
Helping European companies raise almost €3 trillion in funds since 2006;
And helping EU citizens save over €6 trillion in current and savings accounts.
But for us all to continue to enjoy these benefits - not just the banks and the member states in which they locate - we must have proportionate regulation that supports free choice through promoting a vibrant single market.
The scale and complexity of the challenges faced by the financial services sector, and the global nature of the industry, mean we must work together to solve them.
And as we do so, we must ensure we preserve the rewards from allowing a well functioning global financial services sector to flourish, so that organisations in one part of the world can help the economy of another to grow.
Through working together - through international agreements, and through defending and advancing the Single Market as strongly as we can, we can meet the dual challenge - enjoying the greatest benefits of a thriving globalised financial services sector, while curbing its worst excesses.