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Is the city good for Europe?
Good afternoon, it’s a pleasure to be speaking here today, and thank you Louise for the introduction.
In the last few weeks, I’ve made a number of visits to various European capitals, and each and every time I’ve faced the same question we’re discussing today, ‘Is the city good for Europe?”.
It’s an important question, but it’s not just a question for the City of London. It’s a question that’s of great importance for financial markets in Frankfurt, Milan, Paris, Amsterdam. And for each and every financial centre, my answer is an emphatic yes.
Europe’s history and Europe’s success has long been tied our financial sector prowess.
From the Florentine House of Medici, to the Amsterdam stock exchange, to the Lloyds coffee house in London’s back streets, Europe has always been a driving force in the global financial market to the benefit of all our citizens.
And it’s the same story today.
Today, the European financial sector accounts for almost 6 per cent of total EU economic output, and employs close to 10 million people in financial and professional services.
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.
And the European financial market continues to underpin and 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.
Those European markets have helped European Governments raise almost €1 trillion in bond markets in 2010,
Helped European companies raise almost €3 trillion in funds since 2006,
And helped EU citizens save over €6 trillion in current and savings accounts.
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.
So yes, the City and financial services are good for Europe, and it’s for these reasons that it’s in our interests to support a successful 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 through rescuing failed banks and providing hundreds of billions of Euros in guarantees and other support.
These are costs that we simply cannot repeat.
That’s why the UK Government is at the forefront of international efforts to remedy the failures of regulation, both in the UK and around the world.
We are committed to implementing regulation that delivers a stable and sustainable financial services sector that supports economic growth.
But as we pursue reform, we have a delicate balance to achieve.
How can we create a stable and sustainable financial sector, one that supports rather than jeopardises the wider economy, without stifling the innovation that is critical to the sectors’ success?
My answer is that 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.
We are committed to robust regulatory reform both at home and abroad.
In the UK we have already set in motion an ambitious agenda of 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.
At the same time it will also bring judgement and foresight to the task of supervision, taking 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 vital that other regulators, at a national and European level, also develop tools of macroprudential policy to address emerging risks.
The experience of the last few years has vividly demonstrated how financial sector imbalances can quickly and easily build up not only in the UK, but within the Euro area as well.
Countries need the flexibility to address those imbalances, otherwise the fiscal risks will only build up not just for them, but for all Euro area taxpayers.
Because as we’ve learnt over recent years, the global financial system is more interconnected that we had ever imagined before the crisis.
Not merely interconnections between financial institutions, but as we see today, interconnections between sovereigns and banks, the so called implicit guarantee for the banking sector.
Tackling that implicit guarantee is not only necessary to secure financial stability, it’s also necessary to remove one of the largest distortions in the Single Market.
It’s why at the European level, as well as domestically, we have to ensure that we implement tough reform in a consistent, non-discriminatory and proportionate manner.
First and foremost, it’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 to fully implement the Basel III reforms.
Basel III is a striking example of the kind of ambitious reform that international cooperation can achieve.
And it 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.
That’s why at the G20 summit in Pittsburgh we were all able to say that, “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.
It’s why we fully support the ECB’s amendments to rectify the problems of double counting of insurance capital which as currently constructed, render the capital surcharge irrelevant for some of Europe’s largest banks.
We have all seen in recent months just how important sufficient capital and liquidity buffers are to ensuring that banks command the confidence of the markets and can continue to fund themselves and lend to the wider economy.
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.
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 (GSIFIs)
And it’s an argument we all supported at the G20.
Applying additional loss absorbency requirements is essential to reducing the costs to taxpayers 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.
Independent Commission on Banking
And it goes hand in hand with developing additional tools to enable orderly resolution of failing banks without recourse to taxpayer money.
The UK has been leading that agenda through the Vicker’s report.
Central to our 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, over and above the Basel requirements.
These are reforms that will strengthen the universal banking model which like elsewhere in Europe, is prevalent in the UK.
It will place universal banks on a more sustainable footing, and enable more rigorous scrutiny of investment banking activities that will no longer benefit from the implicit guarantee that comes from being funded by an insured depositor base.
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.
But as well as removing distortions to the Single Market in financial services, we have to actively pursue opportunities to promote it.
Across the array of financial market reforms, we are supporting the Commission, the European Systemic Risk Board and the ESAs in their duty to protect and promote the Single Market in financial services.
On EMIR we have worked hard with Commissioner Barnier 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.
But reform has to be considered and evidence based.
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.
Open third country access
But even as we take steps to promote the single market within Europe, we must not erect barriers outside it.
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.
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 if it’s not clear by now, let me reiterate that yes, the City is good for Europe.
In London, Frankfurt, Milan, Paris, and cities across Europe, financial services are an essential foundation to a prosperous and sustainable economy, and a vital driving force in our collective pursuit of growth.
Of course, it is essential that we implement ambitious and fundamental regulatory reform to underpin its stability, and the UK will continue to lead from the front.
Requiring banks to hold more capital and liquidity
… creating a more intrusive and proactive regulatory regime
… reforming the structure of UK banking
… honouring in full the G20 commitments on clearing derivatives
…and improving the functioning of markets through MiFID.
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 a strong, resilient financial services sector is an asset to our families, businesses and economies.