Good evening and thank you for inviting me to speak tonight at your first annual dinner.
Let me congratulate City UK for the excellent work it has done since its inception under the leadership of Sir Win Bischoff and Chris Cummings.
It is fitting to hold your first dinner in this historic building at the heart of the City. The Lord Mayor has traditionally championed the City of London home and abroad and now he has been joined in this role by The City UK. An alliance between the ancient and modern which is a reminder of the City’s ability to adapt and innovate.
We too want to promote the financial sector; it is in the country’s interest to have a stable and sustainable financial sector which is an engine of growth for the wider economy.
We still live in the shadow of events that put at risk the stability of the financial sector and triggered the recession.
Indeed it’s almost three years to the day that the then Government had to take the unprecedented step of recapitalising both RBS and Lloyds Banking Group, with RBS ultimately requiring the biggest bailout in the world.
Three years on, what was once a crisis of private and banking sector debt has transformed into a crisis of sovereign debt. And that instability risks coming full circle as last week the Franco-Belgian bank Dexia again turned to the State for further support.
Of course the Eurozone is in the eye of the storm and the UK is buffeted by strong winds. We are in calmer waters because we have a credible plan to tackle our deficit and because our banks have recapitalised and hold more liquid assets.
While the eurozone has been the epicentre of this crisis, the UK is still directly impacted by the ongoing turbulence.
That said, we know that UK banks are in a strong position to resist this volatility, stronger than they were even a year ago. The big four UK banks all have CT1 ratios over 10% and they have almost tripled their holdings of highly liquid assets over the last two years to withstand any sudden liquidity shocks.
Last week Moody’s downgraded 12 UK banks, but at the same time they explicitly recognised that this had nothing to do with the financial strength of the banking system or the Government. Instead it was due to the success of the Government’s efforts to reform banking and remove the perceived taxpayer guarantee for banks deemed too big to fail.
However, there are those who would want to use the current uncertainty to pull the rug from under financial sector reform. Those that argue that reform would stifle growth at a time of economic recovery.
But I do not believe that these events diminish the case for financial sector reform.
Stability is in itself a vital precondition of growth. The last crisis exposed how deficient regulation had become in the face of rapidly changing markets…the answer is not to let bygones be bygones, nor is it to postpone for another day.
We have to reform the financial sector and regulation of the sector now to increase stability in a turbulent environment.
And I commend City UK for its leadership in this task. Because you understand that we have to reform the financial sector to entrench greater stability, re-build public confidence, and embed sustainable growth.
Rightly or wrongly, the financial sector still bears the brunt of public and political anger for the recent crisis, and ongoing turmoil.
The result is a torrent of speeches, articles, and proposals attacking the banks and finance, and more often than not, the City itself.
An effective response doesn’t come by denial, refusal, sticking our heads in the sand.
The right response, it’s to do what City UK is doing, and work with change. To present evidence and reasoned arguments to policy makers at home, in the EU, and internationally, to make sure that we get the reforms right, and to make sure they are consistent and proportionate.
Reforms that will strengthen the global financial system.
We should not see these reforms as a threat to the UK’s position as a global financial centre. They should provide an opportunity to build on our strengths.
Markets that have enabled UK companies to raise £445 billion in funds since 2005.
With financial and professional services firms that employ almost 2 million people across the UK, with more than two thirds employed outside of London.
As home to 230 foreign banks, channelling more FDI to the UK than any other sector.
We want the financial sector to be a critical part of our economic recovery. The UK has not become the world’s leading global financial centre by luck or fate, but instead through innovation and adaptation that has kept us ahead of the game.
At the same time we know that financial sector success cannot come at a cost to wider economic stability.
The question we have to answer is how do we create a successful but stable financial services sector? How do we preserve the innovation that fuels the sectors success without outing the wider economy at risk?
It is the question that we set the Independent Commission on Banking - how to remedy the threat posed to the UK economy by the structure of UK banks, whilst enabling them to compete internationally.
The report itself marks an important step towards a new banking sector. It recommends ring-fencing retail banking activities, an equity capital surcharge for the ring fenced part of large banks, and statutory powers for bail-in of private investors.
And it also contains recommendations to improve competition, firm in the belief, which we also subscribe to, that competition is essential to driving better consumer outcomes and delivering greater efficiency of pricing.
Of course, we are keen to minimise the uncertainty that the Report may create for the industry which is why we will provide our initial response to its proposals before the end of the year.
But we have not waited to fundamentally reform how we regulate the financial system itself. Correcting the failures of the Tripartite system.
Earlier this year we issued our White Paper on regulatory reform which revamps the system of domestic regulation. We are creating a permanent Financial Policy Committee within the Bank of England to monitor overall risks in the financial system, identify bubbles as they develop, spot dangerous inter-connections and stop excessive levels of leverage before it is too late.
We are abolishing the Financial Services Authority in its current form, and transferring its significant prudential functions to a new Prudential Regulatory Authority that will sit in the Bank of England. Together these two bodies will bring judgement and foresight to regulation rather than mere box ticking.
And we are also bringing a new approach to protecting consumers, to ensure that they are at the heart of the financial system.
A new Financial Conduct Authority will oversee the conduct of financial services firms, the operation of markets and the protection of consumers.
But financial services are a truly global industry, and regulation has to reflect that fact.
In the last year we have seen vast progress on the international stage to correct the failures of the last crisis.
We fully welcome the new European Supervisory Authorities. A vital network to fundamentally improve the quality and consistency of supervision, to ensure more effective rule making and enforcement, and better identify risks in the system.
But it is still early days for this new architecture, and the coming months are critical to the credibility of the new ESAs as the Eurozone crisis continues to unfold.
And the Commission faces an equal challenge as it drives through a huge agenda for financial sector reform. Prioritization will be important.
Because we will all come under severe political pressure in the coming months to delay, obfuscate, and pander to vested interests in the EU…to fragment markets by geography, currency or firm.
So at the international level, as well as balancing the growth and stability imperatives, minimum regulatory standards must also be consistent. It’s only by applying minimum standards fully and consistently across jurisdictions that regulation can be credible, effective, and prevent the fragmentation of markets.
We will work with the Commission to enable it to meet its duty to protect and promote the Single Market in financial services…to meet its responsibility to secure robust and fair regulation in the interest of all its 27 members.
More than ever now, it is critical that Member States are able to have confidence and trust in EU institutions to stand up for the single market against protectionist pressures.
Economic difficulty is not a time to raise the barriers, to turn inwards or to protect national interests. A free and open Single Market has brought huge benefits to the EU, and it’s the most powerful tool we have to foster renewed growth as we recover from the financial crisis.
And in the last year, we have been championing that ambition.
On the AIFM directive we completely reversed the Council’s position to ensure that the directive is internationally consistent and non-discriminatory. It was an uphill struggle but single market arguments won through in the end.
We will follow a similar pro-single market approach in current and future EU negotiations.
We will challenge those who seek to undermine the Single Market.
At a time when the world is focused on the strength of bank balance sheets this is not the time to back track on the full implementation of Basel III. It might be convenient in the short term for some to argue for Basel III to be watered down for some banks but a weak European banking sector won’t be in a position to withstand another crisis.
I will work with the Commission to ensure that CRD4 reinforces rather than weakens the Single Market by having high, common, and consistently applied standards for capital.
But jurisdictions must retain the right to apply higher levels of regulation to ensure financial stability. As the IMF has said, and I quote: “UK financial stability will be weakened (with adverse spillovers) if EU rules constrain UK financial regulations at insufficiently ambitious levels or if they limit the ability to use macro-prudential instruments to address emerging risks”.
That is entirely consistent with the single market and single rulebook given the different fiscal positions of Member States in the EU and different economic circumstances. Indeed one of the biggest distortions to the single market is the persistence in some Member States of the perceived implicit guarantee of financial institutions.
It is also vital that EU markets regulation supports the single market. Only last week, at the latest ECOFIN in Luxembourg, we secured significant changes to EMIR to help protect a level playing field on derivatives trading.
We have been clear that clearing should not be fragmented by currency. Doing so merely risks imposing additional costs on businesses and investors, and breaking up global markets into currency blocs.
That’s why we pressed for clear recognition of the principle of non-discrimination in the Council position on EMIR, and why we have challenged the ECB’s location policy in the ECJ.
And importantly we have ensured that UK regulators can only be overruled on decisions to authorise a clearing house through unanimity of partner regulators in the college of supervisors. An important step to preventing an effective Eurozone veto on London based clearing houses.
With respect to the clearing obligation, the Commission has also made an important commitment to close loopholes and ensure fair and open access in future legislation. We now look forward to the Commission’s proposal in the MiFID Review by the end of the month.
In a post-crisis market where we have seen extensive consolidation across the board, we cannot afford to sit back and sacrifice competition and customer welfare.
It’s why we have consistently supported tough State aid rules throughout the crisis.
It’s why we accepted structural measures for RBS and Lloyds to remedy the distortion to competition from their rescues as behavioural measures were unlikely to deal fully with the competition issues that arose.
It’s why the Commission must stay on the front foot to protect competition in every sector of the EU financial market by behavioural measures for all players where necessary, and through structural measures in particularly significant cases.
Well thought through regulation of markets aids growth but ill-thought through regulation puts this at risk.
But it is not just ill-thought through regulation that we need to worry about. The same goes with respect to an EU wide Financial Transaction Tax. We have been adamant that we cannot support such a tax if it’s not going to be applied globally. Without global consistency, those transactions covered by the tax would merely relocate to countries not applying the tax.
The Commission’s own analysis recognises those risks and estimates that the potential costs could be up to €216 billion, or almost 1.8% of EU GDP. This is a huge cost to EU competitiveness at a time when we have to do everything we can to support growth.
Across the array of international financial sector reform, we have been leading the debate to ensure that reform is consistent, non-discriminatory and supports, not undermines growth; that it completes and not fragments the Single Market. We will work with the Commission and our allies to promote not diminish financial services.
But on all these fronts, we need the support and the evidence base of the industry. We need to hear your voices not just here in London, not only in Brussels, but right across the EU.
And City UK has the opportunity to lead industry from the front with the International Regulatory Strategy Group.
As an independent body that recognises the urgent need for reform and also the need for willing engagement from the industry, you are uniquely placed to steer a route to reform that balances regulation and competitiveness, stability and growth.
It’s no easy task in the current environment. As we all confront uniquely difficult economic times, when the spectre of protectionism and fragmented markets loom large.
But we have to work tirelessly to protect the Single Market, and continue to press the European Commission to resist vested interests that would seek to undermine it.
It is only by working together that we can embed reform that is credible, effective, and protects the open competition which has allowed financial services to support growth across all 27 members of the EU.
I look forward to working with you in that task in the months and years to come