Speech by the Financial Secretary to the Treasury.
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Good morning and thank you for inviting me to speak here today. It’s a pleasure to speak with, and alongside, so many leading international figures from the world of finance, and I’d like to thank City Week for organising this conference.
At a time of such unprecedented change for the financial system, it is absolutely vital that Governments, regulators and companies continue to work together through these challenging times.
Of course, the ongoing instability in the Euro area is of immediate concern to all of us here.
Today is in fact the twentieth anniversary of the signing of the Maastricht Treaty.
A treaty which set the stage for the single currency, but also embedded the flawed structures of fiscal governance that have led to today’s crisis.
As we have said before, a resolution to the crisis means resolving those fundamental flaws, and ultimately means the Euro area must follow the remorseless logic of monetary union to closer fiscal integration.
We are eager to support our Euro area counterparts to reach a comprehensive and lasting solution to that crisis, drawing a line under the uncertainty that undermines all our economies not just in Europe, but across the world.
Strength and importance of UK financial sector
Over the longer term we face the equally substantial task of strengthening the financial system for the future, learning the lessons from the recent years of financial and economic instability that have affected economies around the world.
It’s only by doing so that we can ensure we build a platform from which the UK can build on its world leading strengths.
Strengths which include London ranking first in every Global Financial Centres Index ever published.
Ranking as the most attractive destination in Europe for investment according to Ernst & Young.
A financial services sector that originates more cross-border bank lending than any other country, home to Europe’s largest Insurance industry, and the world’s largest foreign exchange market.
And a sector that is home to over 250 branches and subsidiaries of foreign banks, channelling more investment into the UK than any other sector.
We are committed to maintaining and strengthening the UK’s role as the leading global financial centre because we know the vital role the sector plays in our economy.
Contributing one in every seven ponds of GDP
Employing over two million people in financial and professional services firms.
And helping UK companies raise almost £450bn in funding since 2005.
And herein lies the challenge that we face. What the Chancellor has called the British dilemma.
How can we create a successful but stable financial services sector? How can we preserve the innovation that fuels the sector’s success without putting the wider economy at risk?
Our answer to the British dilemma is to build a strong and proportionate regulatory regime.
Safeguarding the stability of our financial sector as a foundation for sustainable growth, and protecting the competition and innovation that drives its success.
I do not believe that strong and proportionate regulation is a hindrance to the success of the City, rather I think it is an essential platform for a successful global financial centre, ensuring that the UK remains an attractive destination for international business.
That is why we are pursuing an ambitious programme of reforms to address the lessons of the financial crisis.
Reforms to the regulatory architecture
Central to this programme is reform of the regulatory architecture - abolishing the failed and discredited tripartite system of supervision.
In its place, a new Prudential Regulatory Authority, an independent subsidiary of the Bank, will take responsibility for micro-prudential regulation.
And a new Financial Policy Committee, sitting within the Bank, will monitor risks across the financial system. Its purpose will be to identify bubbles as they develop, spot dangerous interconnections across the system, and stop excessive levels of leverage before it’s too late.
Together, these bodies will bring judgement and foresight to the task of supervision, rather than mere box ticking.
At the same time it will also take into consideration the impact on economic growth when pursuing financial stability … not neglecting the fact that stability is itself a vital precondition of growth.
International regulation and open markets
Of course, financial services are an international industry, and regulation has to reflect that reality.
So it is right that much of the debate on regulatory reform is being driven at the international level.
Abroad, as at home, we have to be mindful of the impact that inconsistent, discriminatory and disproportionate regulation can have on growth… stifling growth, restricting investment, lowering business returns, imposing higher costs on investors.
That means ensuring that regulation is based on evidence and rigorous analysis.
Ensuring that internationally agreed regulatory standards are implemented fully and consistently at national level.
And ensuring that regulation protects the open and competitive markets that are critical to fostering renewed growth across all our economies.
That’s why we all, the UK and our European and international partners, have to live up to our commitments at the G20 summit in Pittsburgh.
Full, consistent and non-discriminatory implementation of these agreements is essential to ensure the stability of the international financial system, but also to protect free and open competition that allows all our sectors to thrive.
The Financial Stability Board, the European Supervisory Authorities, and the European Commission have a critical role to play in that ambition.
Basel III and CRD4
Nowhere is this more important than on Basel III, one of the most important reforms that the international financial system has seen.
It’s a striking example of the kind of ambitious reform that international cooperation can achieve.
As we all agreed at the G20, “we are committed to adopt and implement fully these standards”.
It is vital that we resist any attempts to unpick this agreement in Europe through the Capital Requirements Directive.
CRD4 must embed high, common and consistently applied standards for capital, liquidity and leverage if it is to succeed in embedding greater stability, reducing fiscal risk and protecting a single, un-fragmented EU market in financial services.
We have seen in recent months the vital importance of capital and liquidity buffers to ensuring that banks command the confidence of the markets and can continue to fund themselves and lend to the wider economy.
Because the FSA has ensured that UK banks built their capital and liquidity buffers in recent years, all UK banks passed the EBA stress test, and continue to demonstrate their resilience to ongoing market turbulence.
At the same time, jurisdictions must retain the right to apply higher levels of regulation to ensure financial stability in their own markets. This is particularly important for countries like the UK that are home to large global financial centres.
It’s an argument that the ECB, European Systemic Risk Board, and the IMF all agree with.
Indeed, as the G20 has agreed, supervisors need to be able to go further to address the risks posed by the largest and most interconnected banks.
We need to tackle the issue of too big to fail and the perceived implicit guarantee of financial institutions that continues to distort fair and open competition not only in Europe, but globally.
This means applying additional loss absorbency requirements to further reduce the risk that these high impact banks fail…
…developing international consistent Recovery and Resolution Plans that will require firms to take early action to generate capital and liquidity in stress…
…and ensuring that supervisors have the tools and powers to intervene early and ensure an orderly resolution where a bank does fail.
The UK is leading the development of these new toolkits. On RRPs, we have already started a pilot project with the six largest UK banks, with the aim of requiring all UK banks to develop their own plans by June 2012.
And we are actively sharing our experience with partners at the Financial Stability Board and across the EU to develop a consistent EU framework for Crisis Management.
As well as supporting these international efforts, the UK has also taken steps to improve bank resolvability and address too big to fail through the Independent Commission on Banking.
Central to these reforms, we will implement the Commission’s recommendation to impose a ring fence, separating investment banking from retail banking, to ensure that when a bank does fail, services that are vital to families, businesses and the whole economy can continue without resort to taxpayer money.
And we will impose additional loss absorbency requirements on ring fenced retail banks. Ensuring that large ring fenced retail banks hold equity capital of at least 10%, more than required under the Basel III agreement, with minimum loss absorbing capacity for the bigger banks of at least 17%.
European directives and domestic reform will tackle the issue of too big to fail, removing the distortions that affect the proper functioning of the banking sector.
International and European regulation
The EU is of course the main vehicle through which the G20 commitments will be implemented in the UK. Across the array of European regulatory reforms, we are supporting the Commission in its duty to protect and promote the Single Market in financial services.
On EMIR we have worked hard to ensure a clear recognition of the principle of non-discrimination in the Council - derivatives, in any currency, can be cleared in any country.
That is also why we are challenging the ECB’s location policy in the ECJ.
And on MiFID, we continue to make the case against unnecessary barriers to trade within the EU and between the EU and third countries.
On the basis of the current proposals, it seems that no third country would meet EU rules, so from the moment that MiFID is passed and until equivalence decisions are taken, it would close the EU market entirely to any new third country firm, as well as choking off opportunities for our firms in some of the strongest and fastest growing emerging economies.
It’s worth reminding ourselves that EU financial services are a powerful force in the international market, accounting for about a quarter of financial services exports worldwide, and responsible for managing around 45% of global bank assets.
At a time when we have to do everything we can to attract investment to support the economic recovery we cannot cut ourselves off from the rest of the world.
Of course this works both ways. We have to resist proposals that seek to raise barriers to UK or European investment in the rest of the world.
Which is why we are concerned, along with many other countries, about the extra-territorial application of the Volcker Rule as currently drafted. There is a significant risk that the Rule will restrict US banks from trading in non-US sovereign debt, and a risk that non-US banks may be restricted in their ability to transact with US investors.
It is absolutely vital that, as we strengthen the global regulatory framework, we do so in a way that balances stability with the maintenance of global markets, sustaining economic growth.
This Government is committed to supporting and maintaining the UK’s position as the world’s leading financial services centre.
And we remain committed to attracting the world’s most ambitious and innovative financial services companies to the UK.
I believe that to achieve this it is essential that we reform regulation to remedy the failures of the last decade, safeguarding an innovative and successful financial services sector, without putting the wider economy at risk.
We will continue to work with all of you here today, to ensure that we realise that ambition, embedding proportionate, consistent and non-discriminatory regulation, to promote a competitive, stable and successful financial services sector.