Mario Draghi, President of the European Central Bank, has suggested that financial stability is a ‘common responsibility in a monetary union’ and ‘ensuring a well-functioning Economic and Monetary Union implies strengthening banking supervision and resolution at European level.’
Yet, member countries of the EU have developed their own regulatory agencies and laws. It’s only recently, since the 2007 crises, that policymakers have attempted to coordinate regulations across financial markets. Unfortunately, many believe a clash still exists between regulations, and regulatory philosophy between the UK and the continent.
There are two narratives when considering UK banking regulation. The first suggests that Anglo Saxon financial centers are not regulated properly. According to this account, the Anglo Saxon model, which rests on deregulated capital markets and corporate governance reforms created by internal managers, led to the 2007 financial crises. As such, further regulation is required.
The second perspective suggests that EU and UK regulations are already fairly coordinated. Philip Whyte, Research Fellow at the Centre for European Reform, suggests that there is a significant overlap in European regulations as the UK typically implements regulations earlier and more stringently than other Eurozone countries. As such, the financial regulations currently being introduced should not impact the City too negatively. CRD4 and Vickers certainly suggest the second perspective has some validity, while the financial crises itself recommends the first interpretation.
Perhaps the solution to global financial stability, as Draghi conveyed, is not just further regulation but a banking union. At last week’s Demos Finance APPG event, Mathew Hancock MP argued that further institutionalisation is required to maintain the Eurozone, including a banking, fiscal, and monetary union. Considering that financial regulations currently being implemented, like Solvency II, seek to coordinate EU regulations, is further synchronisation an absurd idea?
Many have already spoken in favour of further financial union. André Sapir, member of the European Systematic Risk Board (ESRB) has stated there ‘needs to be some element of a banking union, with common supervision, deposit insurance and resolution regimes’ in order to ‘break the kind of vicious circle between sovereign debt and bank problems that we saw in 2011’. ECB executive board member Jörg Asmussen has similarly argued that without further integration, a system to monitor financial systems will have to be created externally. Christine Lagarde, Managing Director of the International Monetary Fund (IMF), suggests ‘we need more risk-sharing across borders in the banking system… monetary union needs to be supported by stronger financial integration, which our analysis suggests should be in the form of unified supervision, a single bank resolution authority with a common backstop, and a single deposit insurance fund’.
A banking union will be discussed at the 28-29 June EU summit. Already a draft has been created to turn the Eurozone into a political federation, which will include a European Banking Union under the supervision of the European Central Bank (ECB).
As one could expect, a banking union is an area of contention between the UK and EU. While the UK continues to back elements of EU regulatory changes, West the minster has been hesitant to give up power or support EU bailout funds. Britain is opposed to joining a banking union which would place the City under the authority of ECB. If Cameron vetoes the banking union it may result in a union that excludes the UK. However, if Cameron does sign the treaty, it’s possible that Britain will gain some of the influence lost in December. However, signing could result in British tax payers ‘propping up’ European banks.
In the context of regulatory changes, increasing international integration, and positive sentiment towards banking union, how should UK politicians act? What is necessary for European financial stability, and what role should the UK have in creating this stability?
Demos Finance, which launches today at an afternoon conference with the FT, will be discussing these questions through seminars, discussions and research papers. Watch this space.