This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Speech by the Financial Secretary to the Treasury.
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Pleasure to be here today
And it’s a pleasure to be speaking here just a few weeks before Cyprus assumes Presidency of the Council of the European Union.
You don’t need me to tell you these are extremely challenging times for the EU…and the Cypriot Government will have a huge role to play in helping steer all of us through the ongoing Eurozone crisis.
Growth and financial services
But I want to speak today about the longer term, though equally demanding challenges facing the European Union.
The challenge to rehabilitate, regulate and reform our financial services..
And the challenge to see how financial services can restore sustainable growth across Europe.
The two go hand in hand.
A secure and successful financial services sector is critical to underpinning sustainable growth in the rest of the economy…
Ensuring that across Europe we can channel savings into investment…helping businesses to secure the financing they need to grow and create new jobs.
Serving the needs of entrepreneurs, SMEs and multinationals to create new jobs across Europe.
It’s why in the UK, we support a strong City, and a strong financial services sector. A sector that provided £75bn of lending to SMEs in 2011.
The City is a UK national asset, but it is also a European and global asset.
Businesses and of families across Europe use the City for its foreign exchange and commodity markets, for maritime finance, fund management services, insurance and reinsurance capability, trade finance, public private finance expertise, provision of bank and non-bank finance. The list is endless.
Governments use it for sovereign debt. That cluster of financial and professional services in turn complements other financial centres in Europe and beyond. The links between Cyprus and London are one such example.
But we know that if financial services are to continue supporting growth in the wider economy, then we have to remedy the regulatory failures of the past.
2008 wasn’t an Anglo-Saxon crisis, it was a universal crisis that has come at great cost to us all through rescuing failed banks and providing hundreds of billions of Euros in guarantees and other support.
These are costs that neither we nor the rest of Europe can repeat.
That’s why the UK is at the forefront of international efforts to reform regulation, and entrench a more stable and resilient financial sectors.
It’s vital that banks hold more, higher and liquid capital…
It’s vital that banks and markets are more transparent, allowing for closer monitoring and informed decision making.
And it’s vital that we tackle the complexity of the banking system to ensure that banks can be resolved without taxpayer support…
But at the same time we cannot allow regulatory reform to suffocate the innovation and competition that is critical to the success of the financial sector and the wider economy.
That’s why we have to ensure that regulation is proportionate and evidenced based.
And we have to ensure that regulation preserves and indeed enhances free and open competition.
Poorly thought through regulation merely stifles growth, restricts investment, lowers business returns, and imposes higher costs on investors and consumers alike.
But this is not just about what happens within Europe’s borders, both Cyprus and the United Kingdom thrive through openness to investment from abroad and it’s in both our interests to keep the door firmly open.
Even as we reform our financial services sector, not only should we not fragment the Single Market, but just as importantly, we must not raise the barriers to third country investment.
Reforms to financial regulation are vital to entrench stability in Europe but go hand in hand with economic growth
With the Presidency of the Council of the European Union, Cyprus will be responsible for driving forward regulatory reform and whilst you will have to deal with a wide range of dossiers - running through each are the twin goals of stability and growth
Of course, without any doubt, the starting point for the debate on stability and growth must be the banking system.
Europe needs stable banks that command confidence in markets and can lend and we should see Basel 3 and CRD4 through that same prism
Capital Requirements Directive (CRD) 4
Strong capital and liquidity positions are essential to ensuring that banks can command the confidence of the markets…
In the UK, by ensuring that our 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.
Can continue to secure funding, and can continue to lend to the wider economy.
A stable and resilient banking system is a vital precondition, to sustainable and strong growth.
The Basel package of reforms are critical to entrenching financial sector stability, and help ensure the sector underpins sustainable growth.
They represent some of the most ambitious reforms of the financial sector for a generation.
Securing international agreement was no small feat.
It’s a striking example of the kind of ambitious reform that international cooperation can achieve.
And it is through cooperation and consultation that we have reached agreement in Council on a package that fully address European specific concerns.
It is vital now that we resist any attempt to unpick that agreement any further through CRD 4 through the trialogues where Cyprus will play a key role as President.
The UK will continue to beat the drum for full and consistent global implementation of Basel 3.
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.
In some of the more misleading media commentary, the UK has been painted as wanting to seek exemptions from implementation.
This couldn’t be further from the truth.
We are insisting that all of us across Europe meet the same global standards in full.
It’s what we’ve demanded of UK banks, and it’s what we are asking of others.
Helping secure their stability and helping underpin sustainable lending.
CRD4 and lending
I don’t buy the argument that higher capital requirements necessarily means lower lending.
In the UK, even as our banks have built their capital positions, we have ensured, and they have continued, to provide finance to our most ambitious, innovative and successful businesses.
Yes they are deleveraging from the risky and toxic excesses of the last decade. Disposing of their so called non-core assets.
But in their core function, a stronger capital position is the necessary foundation for sustainable lending to consumers and businesses.
The UK experience is that even as they strengthen their balance sheets, and take the vital steps to meet a tougher regulatory horizon, lending is still possible and banks can still meet demand.
Consistent standards CRD4
There cannot be an excuse to pander to opt-outs or exemptions from high international capital and liquidity standards.
We know from the financial crisis just how quickly contagion can spread in an increasing interconnected and globalised financial system.
A financial crisis in the UK poses real threats to the financial sector here in Cyprus, and elsewhere in Europe.
And similarly, a crisis here, in Germany, in France, or in Italy, would have knock on consequences for the UK.
It’s right, and we would expect, jurisdictions in our neighbouring states to have, and to use macroprudential tools, which give countries flexibility to go above and beyond the high minimum standards set by the Directive when appropriate, just as we would.
So contrary to the popular rhetoric that the UK is seeking to weaken regulation, or undermine the Single Market, let me say categorically…
We are committed to high minimum regulatory standards…
And we want Member States to have the right to use macroprudential tools to protect their own and the European financial system..
Open third country access
But Europe’s future doesn’t just depend upon its banks and their ability to lend to the wider economy, Europe’s savers want to invest in the best businesses in the world and Europe’s businesses want to harness capital from across the world.
So as we increase our resilience against risk, then we must also keep ourselves open to, and actively pursue, new opportunities.
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.
During your Presidency, Cyprus will take forward MiFID, the Directive which will shape Europe’s financial markets.
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.
It would make it harder to invest in the world’s fastest growing economies in the Far East and Latin America and harder to attract investment from capital rich countries such as Russia and the Far East.
Restricting access to new markets and capital will harm growth.
Businesses across Europe rely on choice and liquidity in order to secure their financing needs, and that liquidity comes not just from within Europe, but from third countries.
I am pleased therefore that in the Council working group that there was wide support for deleting these provisions.
Of course, high standards to avoid market abuse and manipulation are essential..and London generally exceeds the existing minimum EU standards.
Likewise, high standards on transparency and disclosure are also important.
MiFID has already brought huge benefits through greater transparency in equities markets…lowering costs and spurring growth..
It worked with equity because there was sufficient liquidity to make the price information meaningful.
But different markets have different buyers.
Both bond and derivative markets are considerably less liquid than equity markets, and extreme care is needed to ensure that transparency requirements are carefully designed for each asset class.
The wrong solution will impose unnecessary costs on businesses and investors - reducing returns and harming growth.
There is no one size fits all.
Shadow banking/broader sources of finance
It’s exactly the same approach we need to take when it comes to debates over other sources of finance, notably the so called Shadow Banking sector
A sector that is in fact neither shadowy nor banking, but a vital source of non-bank financing for businesses.
At the same time, we are all agreed that we need to understand the risks better and it should not be used to allow banks to evade regulation.
But that does not mean pushing players to become banks.
Instead, we need to look precisely at the instruments or entities that could destabilise a bank…ensuring that we maintain a balance between proportionate regulation and maintaining choice.
It’s important that at times of stress, businesses have a wide array of options to secure the finance they need.
That’s why we need to have an informed debate about reactivating securitisation in a way that is not immune from risk but does not encourage irresponsible behaviour..
Likewise we need to look at money market funds in a way that maintains options for banks to secure finance..
Ensuring that we maintain a secure, stable and diverse supply of finance across the EU.
These are significant challenges for us all as we transform regulation of the European financial sector - entrenching stability and supporting growth
We need well capitalised banks. And that capital should be liquid.
Confidence in our banks promotes lending.
We need recovery and resolution tools. A bank must be able to fail without resort to taxpayer funding. Promoting innovation and competition without putting taxpayers at risk.
We need market regulation. Whilst applauding diversity benefitting investors and businesses.
And we need to keep Europe open for business. Not restricting third country investment.
We need to be wary of the risks in the shadow banking sector whilst promoting alternatives to bank finance.
This is a daunting agenda and Cyprus through its Presidency will take the lead on it, but by working together we can repair and reform the EU financial services sector…and help secure a market that provides sustainable growth, jobs and prosperity for us all.