Speech by the Financial Secretary to the Treasury.
Good morning and thank you for inviting me to speak here today. It’s a pleasure to speak with, and alongside, so many leading policy makers and industry leaders, and I’d like to thank CityUK for organising this debate.
At a time of such unprecedented change for the financial system, it is absolutely vital that Governments, regulators and companies continue to work together through these challenging times.
We face the substantial, long term task of strengthening the financial system for the future, learning the lessons from the recent years of financial and economic instability that have affected economies around the world.
It’s only by doing so that we can ensure we build a platform from which the UK can build on its world leading strengths in financial services.
Strengths which include London consistently ranking first in the Global Financial Centres Index.
Ranking as the most attractive destination in Europe for investment according to Ernst & Young.
A financial services sector that originates more cross-border bank lending than any other country, home to Europe’s largest Insurance and asset management industries, and the world’s largest foreign exchange market.
And a sector that is home to over 250 branches and subsidiaries of foreign banks, channelling more investment into the UK than any other sector.
We are committed to maintaining and strengthening the UK’s role as the leading global financial centre because we know the vital role the sector plays in our economy.
Contributing one in every seven pounds of GDP.
Employing over two million people in financial and related professional services firms across the UK.
And helping UK companies raise almost £450 billion in funding since 2005.
The strength of the UK’s financial sector and our dependence upon it presents us with a challenge which the Chancellor has called the British dilemma.
How can we create a successful but stable financial services sector? How can we preserve the innovation that fuels the sector’s success without putting the wider economy at risk?
Our answer to the British dilemma is to build a strong and proportionate regulatory regime.
Safeguarding the stability of our financial sector as a foundation for sustainable growth, and protecting the competition and innovation that drives its success.
I do not believe that strong and proportionate regulation is a hindrance to the success of financial services in the UK, rather I think it is an essential platform for a successful global financial centre, ensuring that the UK remains an attractive destination for international business, a place where businesses can trade with each other with confidence.
So we are pursuing an ambitious programme of reforms to address the lessons of the financial crisis to safeguard London as a global financial sector.
Central to this programme is reform of the regulatory architecture - abolishing the failed and discredited tripartite system of supervision.
In its place, a new Prudential Regulatory Authority, an independent subsidiary of the Bank, will take responsibility for micro-prudential regulation.
And a new Financial Policy Committee, sitting within the Bank, will monitor risks across the financial system. 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.
Together, these bodies will bring judgement and foresight to the task of supervision, rather than mere box ticking.
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.
The legislation to achieve this critical change in the way British banking operates had its second reading in the House of Lords yesterday and we hope to receive Royal Assent by the end of this year.
And as well as ensuring the UK’s regulatory institutions are fit for purpose, we are addressing the structural problems with the sector itself that caused so much trouble when the crisis hit. The UK is taking significant steps to improve bank resolvability and address the ‘too big to fail’ issue through the Independent Commission on Banking, reforms that are ambitious in their scope and proportionate in their impact.
We have already committed to implement the Commission’s recommendation to ring fence investment banking practices from retail banking. Ensuring that when a bank does fail, services that are vital to families, businesses and the whole economy continue without resorting to taxpayer money.
We have already committed to introduce additional loss absorbency requirements on ring fenced retail banks. Ensuring that large retail banks hold equity capital of at least 10 per cent, with minimum a loss absorbing capacity for the bigger banks of at least 17 per cent. To ensure that shareholders and bondholders bear the costs of failure, not taxpayers.
And later this week, the Government will publish its White Paper setting out its final proposals for further reforms to the UK banking sector, based on the ICB’s recommendations.
Of course, financial services are an international industry, and regulation has to reflect that reality.
So it is right that much of the debate on regulatory reform is being driven at the international level.
Against the backdrop of continuing instability in Europe, it is critical that we seek regulatory reform that ensures stability, creates opportunities for sustainable growth in the future, and removes the distorting effect of arbitrage.
Abroad, as at home, we need to tackle the issue of ‘too big to fail’ and the perceived implicit guarantee of financial institutions that continues to distort fair and open competition globally.
Through the G20, we have agreed that supervisors need to be able to go further to address the risks posed by the largest and most interconnected banks.
This means applying additional loss absorbency requirements to further reduce the risk that these high impact banks fail…
…developing internationally 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.
The UK is leading the development of these new toolkits. On RRPs, we have already started a pilot project with the six of the largest UK banks, and we expect all banks to develop their own plans by the end of the year.
Reforms to tackle inter connectedness between banks are therefore vital. We only need to look across the channel to understand the magnitude of the inter connectedness not just between banks, but between banks and public finances and between public finances and monetary union.
The Eurozone crisis needs a response that deals with specific weaknesses in the governance of the single currency. We have, for some time, argued that the “remorseless logic” of monetary union requires closer fiscal integration in the eurozone.
As the Chancellor wrote this weekend, we chose not to join the euro precisely because we would lose national sovereignty and control of our monetary policy.
A banking union is a necessary part of the fiscal and monetary union that the Eurozone is committed to. That is why we will not be taking part in the banking union.
Britain’s place is in the internal market, not the Eurozone block. As the Eurozone integrates, so Europe will have to ensure that it does not do so at the expense of the single market - one of Europe’s greatest achievements.
A Europe that achieved Eurozone stability at the cost of the single market would undermine the benefits that have been achieved through a diverse and ever widening market that promotes competition, offers choice and provides opportunities for growth, investment and jobs
But abroad, as at home, we must also be mindful of the impact that inconsistent, discriminatory and disproportionate regulation can have: stifling growth, restricting investment, lowering business returns, imposing higher costs on investors.
That means ensuring that regulation is based on evidence and rigorous analysis.
Ensuring that internationally agreed regulatory standards are implemented fully and consistently at national level.
And ensuring that regulation protects the open and competitive markets that are critical to fostering renewed growth across all our economies and vital to London’s continuing success as a global financial centre.
That is why the UK is taking on a lead role on financial services internationally and in Europe.
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.
And it is not just here that we are safeguarding the Single Market. Through our negotiations on the array of European regulatory reforms, we are securing agreement and supporting the Commission in its duty to uphold single market principles that are vital to support growth.
For example, it is vital that derivatives in any currency can be cleared in any country so on EMIR we have worked hard to ensure a clear recognition of the principle of non-discrimination in the Council.
That is also why we are challenging the ECB’s location policy in the ECJ.
And on MiFID, we continue to make the case against unnecessary barriers to trade within the EU and between the EU and third countries. London thrives not just through trade within Europe’s borders, but also through trade outside those borders.
On the basis of the current proposals, it seems that no third country would meet EU rules, so 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. So we couldn’t trade with a new Japanese securities house; seek capital from China or invest in Africa.
It’s worth reminding ourselves that EU financial services are a powerful force in the international market, accounting for about a quarter of financial services exports worldwide, and responsible for managing just under half of global bank assets.
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.
Of course this works both ways. We have to resist proposals that seek to raise barriers to UK or European investment in the rest of the world.
Which is why we are concerned, along with many other countries, about the extra-territorial application of the Volcker Rule as currently drafted. There is a significant risk that the Rule will restrict US banks from trading in non-US sovereign debt, and a risk that non-US banks may be restricted in their ability to transact with US investors.
It is absolutely vital that, as we strengthen the global regulatory framework, we do so in a way that balances stability with the maintenance of global markets, sustaining economic growth.
And it is equally important that we protect UK financial services as we do so - protecting that pole position that I mentioned at the beginning of my speech.
Protecting the Businesses and families that rely on the vast range of services and expertise it provides: foreign exchange and commodity markets; maritime and trade finance; insurance and reinsurance; and many more besides.
And protecting UK financial services’ ability to access markets beyond Europe - when around half of the UK’s financial services trade is with countries outside Europe, we must ensure that European regulation does not risk the opportunities we enjoy from key international growth markets at a time when we so vitally need inward investment.
As I said at the outset, London is a leading global financial centre and we are committed to supporting and maintaining the UK’s position as the world’s leading financial services centre.
And we remain committed to attracting the world’s most ambitious and innovative financial services companies to the UK.
I believe that to achieve this it is essential that we reform regulation to remedy the failures of the last decade, safeguarding an innovative and successful financial services sector, without putting the wider economy at risk.
We will continue to work with all of you here today, to ensure that we realise that ambition, embedding proportionate, consistent and non-discriminatory regulation, to promote a competitive, stable and successful financial services sector.