December 4, 2012 6:28 pm

City banks fret over being on the margins

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Nerves are fraying at Britain’s banks and foreign institutions with a big presence in the UK over the impending introduction of a banking union in the eurozone.

As the biggest financial centre in Europe, the City of London is desperate that the EU’s single market does not fracture, with the eurozone in effect replacing it as the harmonised economic region.

“The potential disadvantages for Barclays mirror quite closely those for the UK as a whole,” the bank said in a submission to a Lords inquiry. “There is the potential for diminished opportunity for involvement in the EU rulemaking process and a general marginalisation from the centre of influence”.

It is a year since UK Prime Minister David Cameron wielded a veto over a relatively minor disagreement with EU leaders. He cited a need to defend City interests but in fact did the reverse in the eyes of most UK financial institutions.

“We want the UK to be engaged in EU decision-making, not isolated from it,” says Anthony Browne, chief executive of the British Bankers' Association.

The reasons are threefold. The most basic is that operating across borders from a UK platform risks becoming more difficult and costly without an effective single market.

For this reason, banks want Britain to maintain its clout in EU shaping rules. The aim is to keep UK bank regulation in touch with the broader European norm, ensuring competitiveness and avoiding the excessive capital requirements that some banks fear would come if there were no single-market standard.

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European banking union

Analysis of the politics of a proposed bank union in Europe and the entrenched interests from London to Berlin

A related concern is that the European Banking Authority – currently the umbrella bank supervisor across the EU – would be emasculated by the power of the European Central Bank. That could in turn sideline the power of non-eurozone countries such as the UK.

Finally, there is the question of the implications of a full and successful banking union. Barclays warns that “UK banks could be at risk from deposit flight” and “higher funding costs” if the union’s rules are seen as being stronger than the Bank of England’s.

HSBC, meanwhile, argues that London would be likely to lose its importance as an entry point to the EU market “given the larger pool of capital at the ECB supporting the eurozone financial system”.

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