Keynote Speech to the Financial Services Lawyers Association, by Sharon Bowles MEP
Thank you for inviting me here; this is one of those gatherings where I know you know a lot. Perhaps I know a lot too but the area of overlap is uncertain so I will lay out some thoughts and perspectives and any greater detail can be thrashed out in questions.
The title of this discussion - A New Financial System for Europe, What Does It Mean for the City? - sparks two immediate thoughts: First, yes there are changes afoot that in some way or another will impact not just on the City but on the UK and its relationship with Europe, both real and imagined. Second, that the temperament of keep calm and carry on goes a long way because there are lots of opportunities for over-excitement and others will exploit over-reaction as a lack of confidence.
First, it is helpful to remind ourselves that we have had financial regulation from Europe for a long time. It has mainly been in the form of directives and then national implementation, so for many it has looked like it all came from the UK and FSA, and of course that is where the main engagement of industry is as far as compliance is concerned.
Since the financial crisis, the EU end has tightened up in several ways. There is regulation in previously unregulated, or only nationally regulated, markets areas - and in that phrase there is a lot of misunderstanding. In the UK we have often had some regulation, or at least observation and reporting, because of the size of market activity, but elsewhere in the EU there has been nothing. In EU terms this is perceived as no regulation so you can yell all you like that it IS regulated but it will not make a difference and just give the UK a bad name.
Post crisis, and following the G20 agreement, not only is there more EU legislation, it is generally more in the form of regulation - i.e. copy and paste into national law, not nationally implemented directives with lots of differing interpretation and gold plating.
We also have the European supervisory authorities like the EBA that are in charge of drafting the Level 2 measures - although these still go through the hands of the Commission, with either the Council or the Parliament being able to veto them. Recent experience with EMIR - because this is still a learning game - has shown that it is in fact easier for the Parliament to build a majority to stop something than the Council, as we work on simple majority. So the clue here is; do not just run to the Government. For what it is worth, that is a summary of a discussion I had with the French attaché.
Along with regulation rather than directive we have also got 'maximum harmonising' tendencies, although I have to say it is astonishing how many national variations and options there are in the supposedly maximum harmonising CRD4.
The directives regulations and Level 2 measures are commonly referred to as 'the single rulebook'. On top of the 'single rulebook' there are national handbooks and manuals, so we have not put the PRA and FCA out of business, and of course there is national supervision. There are embryonic EU 'single handbooks', not as detailed as national manuals. The UK should be trying to influence these rather than thwart them or push them off to Eurozone only for banking. That is a high risk strategy for isolation and loss of influence.
So that is the background onto which we now have the so-called banking union project, which in itself is part of completing the single currency, and as some call it a single financial system which extends onwards to common economic policy and some form of EU Treasury. That is well in the land of Treaty change but Banking Union does not necessarily need Treaty change.
Originally banking Union had three elements: supervision for the Eurozone banks by the ECB; a common deposit guarantee fund; and a common resolution mechanism. The latter two elements have been backed off from to a greater or lesser extent.
The Regulation giving the ECB supervision and consequential changes to the EBA voting arrangements have all been agreed and are just awaiting final sign-off by the German Parliament, following which they will formally pass in Council and Parliament, providing that the European Parliament has also successfully negotiated an agreement with the ECB over modalities of access to information and documents, and other accountability procedures.
In the ECB regulation we kept the scope tight - so there is no ECB supervision of any market infrastructure like CCPs, although last week in Committee ECB Vice President Vitor Constancio, while stating there were no supervisory powers in this area, noted that the ECB did have some general responsibility by virtue of their responsibility for payment and settlement systems.
The ECB was also given a strong mandate to preserve the Single Market. Indeed, we got stronger language in on this than I expected. Nevertheless, after the Cyprus 1 bailout attack on insured deposits one wonders whether there is any European institution prepared to stick their neck out on that. I still cannot believe that I was out there on my own for three days as the only EU institutional voice protesting the proposal. This was a serious breach and DGMarket seemed frightened to speak up - indeed, the secretariat of ECON has a long list of high-level officials who rang them and said: 'thank goodness your Chair said what she did'. Such is the power of a difficult-to-reach Eurozone-cum-Troika decision. Twenty veto rights, twenty red lines, a decision once made will tend to hold no matter how bad. This is a digression but it has significance in the tapestry of EU decision making in the future on economic matters and their spillover.
Going back to banking union, what should we be watching?
Infrastructure is defended for now, but this is an area where we have to defend constantly. Having structures that span the Euro in-out divide helps of course.
An awful lot of the banking union is actually here in London. I think that will be interesting to watch. London is still the Eurozone capital market and that means a working relationship between our markets supervisor and the ECB is essential. I can imagine the ECB might want the PRA to agree the usual kind of prudential authority hold-off on disclosure in emergency situations. I know the continental banks have beaten a path to the ECB on this already. So the notion that banking union and the UK have nothing to do with one another is misguided.
What it also means is that the ECB will become a member of many supervisory colleges alongside the PRA. I think this will be good for making the ECB look more outward to third countries, and engagement with the ECB on third country supervisory issues is obviously something for industry to consider.
The ECB is in fact on an enormous learning curve on supervision. Despite the fact that central banks are responsible for supervision in quite a few Member States, there is only Peter Praet on the Governing Council who has done supervision and he often seeks my assistance in trying to explain various things to the ECB. This learning curve is going to stay almost vertically upward for some time.
There are also political pressures attached to the ECB supervision in and around asset evaluation and recapitalisation. It really is hard to predict where this is going. Think tanks at the informal ECOFIN called for recapitalisation before the ECB takes over supervision. It was me that pointed out this is not the deadline in the legislation. However, the asset evaluation and subsequent actions will I am sure be closely watched and several Member States still expect some direct recapitalisation from the ESM. After all that is why they agreed to give up supervision.
I am wondering longer-term what will happen on the front of branches and subsidiaries. Some think that within the Eurozone it will all be branches. On the other hand, uncertainty over resolutions breeds a subsidiarisation push and we are some way off solving cross-border bankruptcies which I think may still be the fly in any attempt at a resolution authority.
Now we should recall that the banking union proposal was meant as a way to separate sovereigns and banks. I am somewhat sceptical that this is happening yet, we seem in fact to be further institutionalising it, and the specific bank-sovereign link seems to be forgotten with frequent but randomised calls for an insurance union and a markets union. I have to keep reminding that this exists and is called the Single Market. However, looking to the future and the move to try and get more lending into the economy from non-bank sources, and this is talked about as part of economic strategy at a Eurozone level, one can see that certain decisions and ways of thinking about markets are in danger of being discussed and decided in Eurozone circles unless the UK and other non-Eurozone countries are vigilant and also engage in more bilateral dialogues.
For example, I was in Lisbon on Monday and Tuesday this week with a Committee delegation for discussions with the Portuguese Finance and Economy ministers, Central Bank Governor, and others. What struck me was the similarity of the problems they face to those of the UK. Sure, they had more restrictive practices and a different economy, but they are doing the same as we are, looking for the same solutions to get funding to SMEs through a development bank, possibly through a guarantee on SME securitisations. They have bailout funds and a troika to deal with, the ECB which is pumping liquidity like no tomorrow and accepting ever lesser grade collateral. We may have the Bank of England, sterling, and a printing press, but that has not really made a great deal of difference other than we cannot pretend it is all the fault of someone else and blame a troika. And by the way, Portugal does more than the troika asks in some areas; they just use it as a way not to take the flack.
The Recovery and Resolution Directive will give us things to think about I am sure. Both Council and Parliament are struggling to reach their positions so the fun of trialogues is not yet upon me. The Cyprus debacle on insured deposits has concentrated minds on things like depositor preference but battles rage over how much flexibility there can be on the use of layers in the bail-in hierarchy.
The Commission intends to come out with the resolution authority proposal in June so it can be done this mandate. I can see ways in which it can be done, FDIC like, although the lack of common insolvency law will get in the way as I have said. It will also have to cope with differing Eurozone and non-Eurozone backstop arrangements. Lack of experience in bank resolutions is in fact a key problem.
So to finish - what does this mean?
For the Government, the Bank of England, the PRA, and the FCA it means do not stint on the time engaging around the European table. Input is valued, the discussions the night before or after at the dinner table count too. It may be hard to enthuse about all new regulations but getting in quick with 'how to' proposals still beats the pants off back peddling; 'we are not sure it is needed' etc.
The same applies to industry.
Look to the benefits of London, the UK legal system, the knowledge, the adaptability, the skills. They are all here because they are reinforcing.
It is true that Germans in particular have an aggressive campaign on trade in third countries, including referencing financial services, saying they are the heart of the EU, they are the Eurozone, they call the shots, so why bother with the uncertain place of the UK in the EU.
If the UK is positive about its place in the EU then these things are easily answered by the skillset of London. But if you go around trying to resist everything, looking like we worry too much and saying it is easier to turn our back, then being the capital market for the Eurozone is far more threatened.
ENDS