This Tuesday’s meeting of European Union finance ministers in Luxembourg will be a crucial step in the process of reforming and reshaping the system of financial regulation, both nationally and internationally. As with the reforms the UK is leading through the Group of 20 nations, our response must be credible and effective, showing we have learnt the hard lessons of the financial crisis and that we can protect taxpayers from future risks to financial stability.
Proposals put forward by the European Commission are a useful starting point. But while the UK government agrees with much of what the Commission is aiming to achieve, their proposals raise a number of fundamental concerns that must be resolved before these reforms can be taken forward.
First, in their current form it is not clear that all of the proposals would achieve their objective of strengthening stability. By proposing to move some financial supervision powers from national to European level, the Commission’s proposals risk undermining the ability of governments to confront future crises. At worst, they risk breaking the vital link between national supervision of banks and national crisis management. National supervision must be pre-eminent when the cost of the failure of an institution lies with the taxpayer.
The crisis has shown that having such powers at an EU level would not address failures in EU-wide regulation or crisis management. The recent collapse of Fortis – a bank spanning the Netherlands, Luxembourg and Belgium – is a case in point. Greater EU power, in the form of binding mediation between supervisors, would not have helped here and could have potentially undermined the ability of governments to respond in a crisis.
The issue arose when the three governments decided to provide fiscal support to the bank. But rather than supporting the group as a whole, each government provided public funds to the parts operating in their territory, splitting the group along national lines. An agreement between regulators ignores the fact that a government’s willingness to provide taxpayer funds is usually limited to their national boundaries.
The second concern relates to the Commission’s proposal for the creation of a European systemic risk council to act as an early warning system for the kinds of imbalances and risks that led to the current crisis. The financial crisis has shown that problems that occur in the financial system cannot always be confined to national borders. We need to be able to spot systemic risks early and be confident that every country is applying the same high standards.
But the suggestion that the president of the European Central Bank permanently chair the systemic risk council could severely limit the new body’s influence and scope.
The president of the ECB is chosen only by those countries within the eurozone, raising the question of whether he or she can effectively or credibly represent the whole of the EU. Particularly when this body would exclude non-eurozone countries, including the UK, from ever being able to act as chair. Non-eurozone central banks and regulators, such as the Financial Services Authority, must also be represented.
It is worth reiterating that there is much in the Commission’s proposals that we welcome, including greater co-ordination of rule-making and standards. If anything, we would go further and establish a single European rule-making body.
A key lesson from the crisis is that consumers need better safeguards when they put their money into branches of foreign banks. On this front we are proposing regular tough audits of all EU supervisors to ensure they are of sufficient quality.
We also need to look at what tools and safeguards there are to deal with cross-border banks, in particular branches. Without such protections we risk undermining the branch-based model and financial integration more widely – risks highlighted by the recent collapse of Icelandic banks.
The reality is that better regulation of financial institutions is needed. But no system will ever be free of risk. All EU member states must have certainty about their roles and responsibilities when and if problems arise. The Commission’s proposals need work, but the UK is confident that, with goodwill from all member states, practical solutions can be found.
Lord Myners is financial services secretary to the Treasury