He emphasized that the new Government sees the importance of financial services as part of a wider European and global sector. The new Government needs to get the regulatory framework right and supports common EU standards on supervision.
Speaking at Bruegel in Belgium Mark Hoban , Financial Secretary to the Treasury, said :
In the UK there is a tension between our domestic responsibilities and the global role that businesses in London play. Whilst geography might tell us that Britain is an island, in terms of financial services we are inseparably joined to world markets, not least to European markets. The UK has extensive experience of the benefits that opening up domestic markets to competition can bring. If you walk down a high street in Britain you are as likely to walk into your local branch of Santander as you are to walk into Lloyd’s or Barclays.
In the City, Deutsche Bank and BNP Paribas jostle for business alongside Barclays Capital, Citi, Nomura, JP Morgan and HSBC.
This is not new - Lombard Street in the heart of the City, traditionally where UK banks had their headquarters, is a reminder of the links with continental Europe going back to the 14th century.
But have been reminded throughout this crisis that banks are ‘global in life, but local in death’ a lesson we have learned the hard way in the UK.
Lessons from the crisis
The exposure to global financial markets meant that the economic crisis in the United Kingdom was severe. We were one of the first major economies to go into recession and the last G20 country to emerge. Having just experienced the longest and deepest recession since the 1930’s, the financial crisis has made us sit up and ask where we went wrong and what we need to change. The United Kingdom has to learn the lessons from the banking crisis.
They were expensive lessons for all of us, and we want to learn not only from our own experience, but from each other. That is why I am here today; not to defend the old way of doing things, but in the spirit of our new Coalition Government, to work together to engage, listen and contribute.
In a world where people, capital and businesses are highly mobile, we cannot pretend that either the United Kingdom or the European Union can tackle these problems in isolation. Decisions that we take will determine where international businesses locate - this debate is not about London, Paris or Frankfurt but about Europe, the US or Asia.
Some might say that the easy option is to force these businesses out of Europe, but the interconnectedness of financial services means that problems in one country or region ripple through others too.
So our practical response to the financial crisis is rooted in our understanding of the strengths and weaknesses of global markets; a recognition of the benefits of global and European co-operation but a realisation that the distinctive nature of the UK’s financial services sector presents a set of challenges which is the prime responsibility of our Government. The supervision of individual firms is intrinsically linked to, potentially large fiscal impacts for individual member states. Some decisions will always need to be taken by national authorities.
Informing the European response
The previous Government took three important steps with cross-party support to move towards this:
· Stress-testing bank balance sheets to improve market confidence and supporting G20 agreements to raise regulatory standards in the long-term;
· Leading the international debate on living wills, or recovery and resolution plans, so that we know what banks have to do in the event of a crisis; and
· Establishing new resolution tools when an institution has failed.
UK banks have been subjected to rigorous stress tests using transparent assumptions applied in a consistent manner. Now in any exercise such as this you have to be prepared for the fact that you might not like what you find, but in this instance ignorance is far from bliss. If problems exist they must be identified if they are to be solved. To push concerns to the back of your mind risks storing up bigger problems for later and a fundamental undermining of confidence.
It is clear that doubts remain over the solvency of some European banks. The extraordinary interventions we have seen in recent weeks by Governments and the ECB were in large part due to severe strains in the banking system. A genuine, rigorous stress testing exercise is urgently needed to answer questions around solvency in severe market conditions. The tests should be transparent both with respect to their results, but also the methods used. Urgent action should be taken with respect to any institution failing the stress test. Only this way can we restore true stability and confidence to this sector in the near-term.
Shaping the global response
As well as informing national level solutions, Britain will remain at the forefront of shaping international reforms.
In the G20, we need to avoid reforms that have a detrimental impact on competition through seeking agreement at a global level. Protectionism and closing our borders to free movement of capital will cost us more in the long-run; now is a time for Europe to look outwards and develop a plan for dealing with a globalised economy. A co-ordinated global response minimises the risk of regulatory arbitrage as businesses adjust their business models and location to get the best possible regulatory dividend.
The UK supports a bank levy but is concerned about the moral hazard implications of designated funds. Some argue that these concerns can be mitigated if a fund is not permitted to participate in bailouts. We are sceptical. It is hard to see how any tax legislation, European or otherwise, could be crafted which had a credible and legally watertight “no bailout clause” for banks. There would be a major time consistency issue. We want the focus of the discussion to be on the tools that enable institutions to fail in an orderly way.
Remuneration will also be central in this debate. The UK has already taken steps to implement the Financial Stability Board’s recommendations on remuneration into domestic law and regulatory policy. It would be beneficial if the same approach were adopted globally.
An active role in the EU response
As I said earlier, London is an open market place and we are strong believers in the European single market. Indeed, a recent report from our hosts’ honorary president, Mario Monti, highlights its importance in fostering healthy competition in all sectors to give consumers and businesses the best products and returns possible - a message we support.
So what does this mean in practice for the debate on regulation and supervision?
I welcome the work programme published this morning by Commissioner Barnier, charting a clear and ambitious set of priorities for financial services in the European Union. I also respect the efforts of many hard working parliamentarians in the European Parliament, particularly on the ECON Committee, many of whom I am meeting tomorrow.
I agree with Commissioner Barnier that connected markets need co-ordinated responses. Which is why we support common EU standards on supervision. In our view, the need is for European level bodies to oversee national regulators but not to replace them. I reiterate that day-to-day supervisory decisions have to remain local in nature.
Conclusion
There was a newspaper headline in the late 19th century that read “Fog in the Channel - Europe cut off”. Some of you might have hoped that this would characterise the approach of the new British Government to the debate on the reform of financial regulation in Europe. You will be disappointed.
We are here and we are here to stay. Not because we want to be difficult or awkward - which sometimes we will be - but because we see our vitally important financial services sector as part of a wider European and global sector. We need to get the regulatory framework right if we are to realise the sector’s full potential for the UK, European and global economy.
We won’t shirk from making difficult decisions, imposing additional regulations or challenging existing business models. But we do believe in making sure decisions are taken by the right authorities building on their strengths and recognising their limitations.
© HM Treasury
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