Ladies and gentlemen, good afternoon.
It’s a pleasure to be here today at the Four Seasons just two days after the Chancellor delivered his Budget statement.
In it, he emphasised the importance of delivering sustainable growth across the British economy.
But the fact that we can now look ahead to a brighter future is only because of difficult decisions we’ve already had to take.
Decisions that have bought about economic stability.
Secured our international credit rating.
And set in place a credible plan to deal with our record borrowing, which has seen us avoid the sovereign debt storm that has engulfed our continent.
This action has enabled us to set out our long-term strategy for growth.
With cuts to corporation tax - to encourage greater enterprise.
Support for SME finance - to increase business investment.
Huge reductions in business regulation - to create jobs.
And measures to rebalance our economy - and drive higher exports.
Yet, as we have learnt to our cost in recent years, we also need a strong and stable financial system to support economic growth.
So I’d like to take this opportunity to discuss why international cooperation is so crucial to strengthening global financial markets.
And how the US and the EU - as world leaders in this field - have a vital role to play in making this a reality.
Now at the risk of offending our hosts, this building does not have the best track record for cooperation with its neighbours.
As legend would have it, the original owner of this house had the entire local village demolished - brick by brick - so he could get a better view of the lake from his bedroom window.
Well that’s certainly one highly uncooperative way to solve a problem.
But it’s not the approach we should be taking.
When it comes to strengthening the global financial sector, it’s important that we reach a solution that serves everyone’s interests… one that we’re all signed up to.
Because there’s no doubting that when times are good, all our countries are well-placed to reap the rewards of a more integrated, global financial system.
With free movement of capital.
And a wealth of investment opportunities.
But what the crisis has shown is that when things go wrong, when problems emerge, they can quickly spread across national boundaries, currencies, and jurisdictions.
So if we want sustainable growth across the developed world, then this is something we have to address.
But I’m also mindful that as the immediacy of the crisis fades, the case for reform has become harder to make.
Some would go as far to say that a robust regulatory system puts Western economies at a competitive disadvantage.
Strong regulation and effective supervision will not hinder financial firms operating in either the EU or the US.
On the contrary, it will create a more robust and more successful financial sector.
One that is better able to serve the global economy, without threatening overall stability.
In this respect, the G20 is the ideal forum for taking this work forward.
Already this collection of the world’s leading economies has reached agreements in areas as diverse as the clearing of derivatives; crisis management; and capital and liquidity standards.
But now it’s important that we implement these agreements fully, in a market-consistent way.
A key part of the international reform agenda is developing the tools to resolve failing financial institutions.
Globally, the Financial Stability Board is looking at the risks that cross-border financial institutions pose to the wider economy with a focus on Systemically Important Financial Institutions.
One of the first things we must develop is the right tools to resolve financial institutions easily.
Which is why the recent EU consultation on crisis management is so important.
As a Government, we fully support this work.
It should give the board members of banks a stronger incentive to ensure that their companies remain a going concern, whilst minimising the potential instability caused by failure. And it will see that shareholders take a keener interest in the sustainability of their investments.
Together we need these measures to reduce not just the impact but also the likelihood of another crisis.
Which is why I’d like to see more rigorous stress-testing applied across the world.
Now I know that Europe and the US have already started this process.
With last year’s exercise in Europe showing the benefits of more open analysis.
But I don’t think I’m alone in saying that these tests were insufficiently demanding.
For instance, they identified a capital shortfall of only 3.5 billion Euros for the Irish banks, yet less than 6 months later these same institutions required more than ten times that amount.
So it goes without saying that we need to go further.
That the next round of tests has to be implemented more rigorously.
To better capture funding risks.
And include a more granular breakdown of bank exposures - so that independent analysts can come to their own conclusions.
But equally I’d like to see Britain, the wider EU, and the US work together to develop stress tests are consistent across different jurisdictions.
And demonstrate a clear commitment to high, common standards across the global financial sector.
To support robust stress tests, we need to ensure that banks have sufficient capital and liquidity to survive a downturn.
Basel III has delivered the framework to support this, and is a clear example of what international coordination can achieve when central banks and supervisors put their minds to it.
These measures will help strengthen international capital and liquidity standards, and also improve the resilience of our financial institutions.
But having reached this agreement, we now need to see it through.
And with largest financial centres in the world, it’s our responsibility to show leadership in this area.
To ensure that Basel is implemented in full.
To avoid attempts that would weaken the overall ambition of these reforms.
And prevent any regulatory arbitrage, which would only fragment the world’s financial markets.
As from my own perspective - and I’m sure this is a view that we all share - it’s important that firms can compete on price and quality… not on the costs of regulation or an ability to bend the rules as they see fit.
The reforms to the global derivatives market - also agreed by the G20 - are another excellent example of the importance of global coordination.
Where there’s a general consensus that moving towards the central clearing of derivatives is desirable.
That it will help reduce systemic risk.
But there will also be an inevitable cost.
Participants in the derivatives market will, overall, need to post more collateral if they’re to make the system safer.
And these participants are almost always large, international, highly sophisticated financial firms operating across a large range of jurisdictions.
Which is why we need to think carefully about how best to implement central clearing.
Because if these new rules are not properly coordinated, if some products don’t need to be centrally cleared in one place, but do in another, there will be considerable repercussions.
Firms will use the regime with the most lenient clearing rules.
Markets will become unnaturally distorted.
And the original policy intention will be completely undermined.
Which is why we must work together to avoid arbitrage opportunities.
And ensure that as we develop our own regulatory frameworks, we do so in a market-consistent way.
Which is the message I want to leave you with.
That together, the EU and the US should use their standing as the world’s leading financial centres to better coordinate financial regulation.
That we should ensure that high and consistent standards are applied across the G20.
And we should work in unison to tackle sources of systemic risk; create robust resolution tools; and ensure that we have a financial system that serves the needs of the wider economy.
So I look forward to taking your questions.
And hearing your thoughts on subjects I’ve touched on today.
Your ideas for reform.
And your plans for the future.