Speech by the Financial Secretary to the Treasury.
Good afternoon and thank you for inviting me to speak here today.
It’s a pleasure to speak to such a cross section of the financial sector…not just the banks, but also the companies that rely on those banks.
At a time when Governments across the world are focused on tackling global economic uncertainty, not least here in Europe, we cannot lose sight of the crucial importance of lending to support the economy, and the challenge that some businesses face accessing credit.
We have not been complacent in the face of that challenge.
Instead, we have taken decisive action to improve the flow of credit to those innovative and ambitious companies that will drive our recovery.
Whilst banks have been deleveraging, it is important to send a signal that banks do have the capacity to lend to businesses looking for finance.
That’s why we secured an agreement with the big UK banks to provide £190bn of new lending to UK companies in 2011, £11bn more than the previous year.
And it’s also why in our Autumn Statement we announced two new credit easing initiatives, to release as much as £21bn of new lending to the economy.
Through the Business Finance Partnership, we are providing £1bn to co-invest in loan funds that can lend directly to mid-sized businesses and SMEs.
Taken together with private sector investment, the Partnership has the potential to provide at least £2bn of new finance for UK businesses.
Secondly, through a new National Loan Guarantee Scheme we are providing up to £20bn of guarantees for bank funding to help lower the cost of lending to businesses across the UK.
This is a vital step to mitigate the impact of ongoing Euro area uncertainty on the costs of funding for UK banks, and will help our record low gilt yields feed through to low and stable market rates for consumers across the UK.
Taken together the Business Finance Partnership and the National Loan Guarantee Scheme will help smaller and medium sized businesses access lending in the short term, but also increase and diversify their supply of credit in the longer term.
But as well as taking steps to stimulate credit in the here and now, we have to ensure we secure a stable financial sector capable of providing sustainable credit in the future.
The financial crisis has undermined confidence in all our markets and all our economies, with our financial sectors in particular under intense scrutiny.
This is why we need to address the failures of financial regulation that have been exposed by the financial crisis.
It’s only by doing so that we can underpin a stable and sustainable financial sector, here and across Europe. A financial sector that is capable of extending lending and supporting a recovery right across the economy.
There are some who argue that tough regulatory reform undermines our ambitions for growth.
That tough capital and liquidity requirements will choke off lending to the real economy, and suffocate the recovery.
I disagree entirely. Ineffective regulation and supervision of banking, and a banking system that pumped the economy full of cheap money, is the very reason we were confronted by a massive contraction in our economy.
It is only through reform that we can ensure the stability of the financial sector, as a foundation for the sustainable flow of lending to households and businesses across the economy.
It’s the kind of stability that we have brought to the financial sector by ensuring that our banks build their capital and liquidity reserves and lead efforts for greater transparency in the financial system, and through this Government’s commitment to fundamental regulatory reform.
It is that stability, and the confidence it brings, that allows UK banks to continue to lend to the real economy.
We only need to look at events in the Euro area to see how damaging instability in the financial sector can be for the real economy.
That is why the UK has been at the vanguard of regulatory and banking reform.
Last week we published legislation to implement an entirely new regulatory regime to replace the discredited and dysfunctional tripartite system.
In its place we are creating a new regime that brings the foresight and judgement that we were so desperately lacking in the previous system.
First and foremost, we are putting responsibility for protecting and enhancing financial stability firmly in the hands of the Bank of England.
A new Financial Policy Committee, sitting within the Bank, will monitor risks across the financial system, identify bubbles as they develop, spot dangerous inter-connections and stop excessive levels of leverage before it is too late.
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.
And a new Prudential Regulatory Authority, an independent subsidiary of the Bank, will take on responsibility for micro-prudential regulation.
We are bringing the FPC and the PRA, macro and micro prudential regulation under one roof.
Ensuring that the Bank has the tools, capacity and responsibility to monitor overall and total risk in the financial system.
But as well as reforming our means of regulation and supervision, we are also learning the lessons of the crisis to implement radical reform to the structure of the banking system itself.
On the basis of recommendations from the Independent Commission on Banking, we have committed to implement changes to create a successful but stable financial services sector.
Recommendations that seek to preserve the innovation that fuels the sector’s success without putting the wider economy at risk.
As the Chancellor set out last year, we will separate retail and investment banking through a ring fence so that services that are vital to families, businesses and the whole economy can continue without resort to taxpayer money.
We will also require banks to have bigger cushions to absorb losses without recourse to the taxpayer.
That means requiring ring fenced retail banks to 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%.
But just as we are working domestically to tackle the failures of the last decade, we will also continue to work with the European Commission to remedy those weaknesses at the international level.
First and foremost that means the full and consistent implementation of Basel III.
In many ways, Basel III rightly seizes the headlines when it comes to the debate on regulatory reform in the financial sector. It has provided a striking example of the kind of ambitious reform that international cooperation can achieve.
At the G20, the Basel agreement was described as a ‘landmark’ achievement, one that provided agreement on details and not just principles. Details which include some of the biggest changes to bank capital and liquidity requirements that we have ever seen.
Consensus on that scale of ambition is no mean feat, and as we and the other G20 countries all agree, and I quote, “We are committed to adopt and implement fully these standards.”
Through the Capital Requirements Directive, we must resist any attempts to unpick this agreement in Europe.
It is vital that CRD 4 embeds high, common and consistently applied standards for capital, liquidity and leverage. It is vital to stability, to reducing fiscal risk, and it is vital to protecting a single, un-fragmented, EU market in financial services.
But at the same time, jurisdictions must retain the right to apply higher levels of regulation to ensure financial stability in their own markets.
It’s an argument that the ECB, European Systemic Risk Board, and the IMF agree with.
Indeed, as the IMF said last year: “UK financial stability will be weakened (with adverse spillovers) if EU rules constrain UK financial regulations at insufficiently ambitious levels or if they limit the ability to use macro-prudential instruments to address emerging risks.”
This is entirely consistent with the single market, and the single rule book.
Indeed, the persistence in some Member States of the perceived implicit guarantee of financial institutions is one of the biggest distortions in the Single Market.
Through our ICB, supervisory and crisis management reforms, we are tackling that distortion here in the UK.
The rest of EU must do the same, and full and consistent implementation of Basel III as a minimum, not a maximum, basis is critical to that ambition.
We face a substantial challenge to remedy the failures and the weaknesses that have undermined our economy over the last decade, but this Government has not shied away from the task.
We are committed to supporting our businesses through these tough times, and committed to improving access to the lending and the finance they need to invest and grow.
At the same time, we have not shirked our responsibility to entrench a stable banking system for the longer term. One that can provide sustainable lending to underpin economic growth.
The UK has been, and will continue to be at the vanguard of regulatory reform. Ensuring that reform is ambitious, based on rigorous economic analysis, consistent and non-discriminatory.
But on all these fronts, we need the support and the evidence base of the industry. We need to hear your voices not just here in London, not only in Brussels, but right across the EU.
It is only by working with the likes of yourselves here today that we can embed reform that is credible, effective, and supports a strong and lasting recovery across the entire economy.
I look forward to working with you in that task in the months and years to come. Thank you.