“In the grip of the City of London? What is the UK doing to strengthen financial market regulation at national and EU level?”
Good morning, it’s a pleasure to be speaking here today, and thank you Andrew for the introduction.
From the discussions I’ve had since my arrival in Berlin yesterday it’s clear that the title of my speech is highly appropriate, that there is a widely held belief that the UK is indeed “in the grip of the City of London”.
I’d like today to tackle this misunderstanding.
The UK Government is in fact at the forefront of international efforts to remedy the failures of regulation, both in the UK and around the world, that led to the worst financial crisis in almost one hundred years.
We are committed to regulation that builds on the strengths of the EU financial services industry, delivering a stable and sustainable financial services sector that supports economic growth.
Strengths of EU financial services sector
And it is worth remembering the value of financial services to the European economy.
The EU is already the world’s leading exporter of financial services, with extra EU exports of €60bn accounting for about a quarter of financial services exports worldwide. And within the Single Market, cross-border trade is even higher at €72bn.
The sector also accounts for almost 6 per cent of total EU economic output, and employs close to 10 million people in financial and professional services, including almost 2 million people here in Germany - broadly the same as in the UK.
But of course the importance of financial services to the EU economy goes far beyond this direct contribution to trade and employment.
I strongly believe that the EU financial services sector 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.
A successful European financial services sector is in all our vital interests.
Germany and the UK included.
UK and German financial services sector
Our respective financial sectors are important engines of growth in both our economies, intimately tied to each other and the wider European economy.
For instance, Deutsche Bank employs over 8,000 people across the UK, and provides corporate services to over one fifth of the FTSE 100 companies.
Germany itself is home to the world’s largest insurer Allianz, and re-insurer in Munich-re, providing vital protection to consumers across the EU.
And Germany is home to Eurex, the biggest derivatives central counterparty in Europe, allowing world leading German manufacturers to hedge currency and commodities risk.
These are essential services the financial sector provides to the wider economy. Underpinning growth and prosperity across all sectors of the European economy, and across all regions of the EU.
It’s for those reasons that it’s in our interests to support a successful financial services sector.
Need for regulatory reform
But at the same time, it is equally vital that we learn the lessons of the crisis to fundamentally reform the sector.
A crisis that exposed collective and global failures of regulation and supervision of the financial system.
2008 wasn’t an Anglo-Saxon crisis, it was a universal crisis that has come at great cost to us all with both Germany and the UK rescuing failed banks and providing hundreds of billions of Euros in guarantees and other support.
These are costs that we simply cannot repeat.
We cannot allow financial sector success to come at a cost to economic stability.
But as we pursue reform, we have a delicate balance to achieve.
How can we create a successful but stable financial services sector across Europe?
How can we preserve the innovation that fuels the sector’s success without putting the wider economy at risk?
It’s a difficult line to tread, but if we need guidance, where better to look than the great German sociologist Max Weber.
In his words, “three pre-eminent qualities are decisive for the politician: passion, a feeling of responsibility, and a sense of proportion.”
Given the severity of the crisis and the detrimental consequences for taxpayers across the EU, there’s certainly passion.
And there’s equal responsibility felt by us all, the UK included, to learn from the failures of the past, implement reform now, in order to prepare the crisis of the future.
But it is vital that we approach that reform with a sense of proportion.
It is only through strong and proportionate regulation that we can build a platform for a successful European financial system, sustainable growth, and international investment.
Disproportionate regulation merely stifles growth, restricts investment, lowers business returns, and imposes higher costs on investors and consumers alike.
In a global financial market, where capital is highly mobile, disproportionate and poor regulation will simply drive good capital to other destinations outside of Europe to the cost of European savers, investors and businesses.
But proportionate regulation does not mean weak regulation. Let me be clear and answer the question about our attitude to regulation and supervision at home and abroad. Some argue that the UK supports a soft regulatory regime for the City, that its interests are paramount, that the Government is in the grip of the City.
Take, for example, this from a recent article in Handelsblatt:
“The UK [has] departed from the objectives agreed by the international community in 2009, that no product should remain unregulated and no banks should blackmail the state”.
Nothing could be further from the truth. We have repeatedly demonstrated our commitment to tougher regulation and supervision. Indeed one of the safeguards we called for in Brussels last year was the right to go further, to impose higher capital requirements on UK firms.
That approach characterises our robust attitude to regulatory reform both at home and abroad.
In the UK we have already set in motion an ambitious agenda for tough, proportionate, domestic regulatory reform.
First and foremost, we are overhauling and strengthening our supervisory regime. Putting the Bank of England in charge of both micro and, learning from the lessons of the crisis, macro prudential regulation.
It’s clear now, that we were all dangerously naive about the risks that built in the financial sector at the system level.
That’s why a new Financial Policy Committee, the macroprudential regulator within the Bank of England, will monitor and address those risks. 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.
At the same time it will also take into consideration the impact on economic growth when pursuing stability…not neglecting the fact that stability is itself a vital precondition of growth.
It is not only the structure of supervision that we are changing, we are also changing the approach - bringing judgement and foresight to the task of supervision.
Of course, the rulebooks our supervisors use are being shaped at the international and, in particular, the European level.
And just as we are doing domestically, in Europe we have to ensure that we implement tough reform in a consistent, non-discriminatory and proportionate manner.
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.
Reform should not erect barriers either within or around Europe.
To allow that to happen would be to diminish the opportunities available to businesses and consumers alike.
That is why we are vigorously guarding against any retreat behind national or European borders.
Protecting and promoting the Single Market in financial services to the benefit of the EU as a whole.
So we sought a safeguard in December to prevent the fragmentation of the single market by currency or geography.
The European Supervisory Authorities (ESAs)
The European Systemic Risk Board, the European Supervisory Authorities and the European Commission also have a critical role to play in safeguarding the single market and promoting financial stability.
It is essential that the ESAs are given sufficient time and resource to ensure effective rule making and enforcement, and fulfil the significant and demanding requirements that they already have.
Likewise, the Commission faces a substantial challenge as it drives through a huge agenda for financial sector reform.
And we will work with the Commission to meet its responsibility to secure robust, consistent, and non-discriminatory regulation in the interest of all its 27 Members.
Basel III and Capital Requirements Directive (CRD) 4
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.”
Basel III was very much an agreement developed by European policymakers, with both Jean-Claude Trichet and Mario Draghi playing a leading role. European-specific concerns were fully addressed.
It is vital that we resist any attempts to unpick this agreement in Europe through the Capital Requirements Directive (CRD).
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.
By ensuring 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. And we continue to support the EBAs work to increase transparency in the European banking sector.
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.
Global Systemically Important Financial Institutions (GSIFI)
And it’s an argument we all supported at the G20, agreeing that supervisors need to be able to go further to address the risks posed by the largest and most interconnected banks.
Applying additional loss absorbency requirements is essential to reducing the costs of these high impact banks failing.
It is critical to tackling the perceived implicit guarantee of financial institutions that continues to distort fair and open competition not only in Europe, but globally.
And it goes hand in hand with 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.
Independent Commision on Banking
The UK has been leading the agenda to improve bank resolution and address the issue of too big to fail through the Vicker’s report.
Central to these reforms, we will implement Vicker’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%.
We are also leading the development of new resolution 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 to underpin a stable, fair and competitive European financial services sector.
International and European regulation
In the same spirit, across the array of financial market 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 should be cleared in any member state regardless of which currency they are denominated in. It is because of our commitment to this principle that we are challenging the ECB’s location policy in the ECJ.
EMIR partially meets our G20 commitments to clear derivatives but only deals with over the counter derivatives. So we welcome the Commission’s proposals in the review of the Markets in Financial Instruments Directive to complete this work.
Indeed, through MifID we have a huge opportunity to promote competition and the Single Market in financial services.
We have already seen the beneficial impact MiFID has had in lowering costs and spurring growth in equity markets, and it is right that we update the directive for the significant changes we’ve seen across the market in recent years.
High frequency trading
But at the same time reform has to be underpinned by evidence not political whim.
For instance, whilst it is clear that greater transparency has had a positive effect in equity markets, extreme care is needed to ensure that transparency requirements are carefully designed to work for other, less liquid, asset classes.
Similar care is needed in updating MiFID to reflect substantial changes in the market place in recent years such as high frequency trading.
For that reason, the UK is again leading the way through its Foresight project which is undertaking a detailed assessment of how computer trading may evolve and how this will affect market quality and stability.
The outcome of that study will help bolster the international evidence base before taking decisions that could inadvertently reduce trading options and damage liquid and effective markets not just in London, but around the world. Indeed, it is worth remembering that Deutsche Boerse is among the largest venues in the world for high frequency trading.
Furthermore, we continue to support the G20 and FSB work to assess the risks posed by the shadow banking sector.
Where this sector engages in bank like activities, then it is important that they are subject to scrutiny. Where they are shown to pose risks, then we should consider appropriate supervisory and regulatory solutions.
Indeed, domestically, we have tasked the Financial Policy Committee with monitoring and advising the Government on the perimeter of regulation to address changing risks, including with respect to the shadow banking sector if it deemed it necessary.
But these activities are, by their nature, particularly likely to cross borders. Any risks posed by these activities therefore require global solutions. This is why the G20 process is important.
But it is also important to realise that aspects of the shadow banking sector perform important functions on behalf of the real economy, getting funding to businesses and households in ways that may otherwise not be possible.
The fundamental point is that regulation has to be underpinned by robust evidence. Knee-jerk reactions will only serve to undermine open and competitive European markets and increase costs for European citizens in the long run.
Open third country access
As I said earlier, we need to protect free and open markets within the EU, but also to avoid erecting barriers to trade with markets outside the EU.
That’s why we are so concerned about the impact of provisions in MiFID requiring strict equivalence.
On the basis of the current proposals, it seems that no third country would meet the necessary standards.
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.
Again, in December we sought safeguards to maintain the flow of investment into and out of third countries.
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.
So are we in the grip of the City of London?
Our actions at home;
- requiring banks to hold more capital and liquidity;
- creating a more intrusive and proactive regulatory regime;
- and our commitment to reform the structure of UK banking;
- clearly demonstrate that we are taking the tough action needed to learn the lessons from the crisis.
Our support for Basel 3;
- for honouring in full the G20 commitments on clearing derivatives;
- and for improving the functioning of markets through MiFID;
- demonstrate a commitment to tougher European regulation.
But our tough approach goes hand in hand with evidence based, proportionate regulation that maintains open and competitive markets, promoting the growth that Europe so desperately needs.
The financial crisis was a rude awakening for all of us about the risks posed by inadequately regulated financial markets.
But we also all know that - whether it is Deutsche Boerse or the London Stock Exchange, Allianz or Aviva, Deutsche Bank or Barclays - a strong, resilient financial services sector is an asset to our families, businesses and economies.