Chapter 5: The Impact On The Uk And The
Single Market |
128. The impact of the banking union proposals
on the UK and the single market are profound. The Government's
decision to stand apart will have significant consequences for
the UK financial sector. There are also repercussions for the
UK's role within the EU, should the euro area (and potentially
other Member States) pursue deeper integration. Concerns have
also been expressed that deeper integration of an inner core of
Member States could lead to a fracturing of the wider single market.
The impact on the UK and its
129. The Government have repeatedly stated that
the UK will not participate in the banking union proposals, on
the grounds that the measures logically flow from monetary union
and are designed to secure the success of the single currency.
The Royal Bank of Scotland agreed with this approach.
On the other hand, given its position as a financial institution
active in a number of Member States both inside and outside the
euro area, Barclays perceived advantages (including a level playing
field for conducting business in the EU and less supervisory divergence)
and disadvantages in UK participation in banking union.
130. Many were concerned about the potential
impact of banking union on the UK financial sector. Mr Harding
saw a threat to the provision of cross-border services, which
was so fundamental to the success of the City.
Barclays warned that UK banks could be subject to deposit flight
if the SSM was viewed as a stronger mechanism than that operating
in the UK. Mr Persson
and HSBC feared that the City of London's success as an entry
point to the single market for non-European banks could be put
at risk. President
Van Rompuy was clear that there would be consequences for London,
although he did not specify what they would be.
131. On the other hand, Richard Kibble, Group
Director, Strategy and Corporate Finance, Royal Bank of Scotland,
and the ICFR pointed out that similar concerns were expressed
in 1999 at the time of the creation of the euro, but that no such
shift in financial activity had materialised.
Ambassador Boomgaarden told us that the UK was too big to be marginalised
and Mr Persson indicated that the risk of marginalisation
was more of a concern for a country such as Sweden than for the
132. The Government have stated that the UK financial
services industry "will remain an unparalleled global financial
centre outside the banking union. It will continue to offer strong
and well-respected regulation and supervision, as well as culture,
diversity and access to top quality services and skilled workforce
that is unmatched in other financial centres. Clustering effects
mean that there are national, regional and global services and
clients within close proximity. All of these advantages will remain
in place with a banking union across the euro area."
The Government must work to ensure that the UK retains such competitiveness
advantages, rather than assuming that they will always remain.
133. The UK's decision not to participate
in the banking union proposals could have significant consequences.
While the precise impact on the UK financial services industry
is difficult to predict, a degree of marginalisation will be inevitable
as the euro area (and possibly other Member States) take steps
towards deeper integration. We fear that the Government's assurances
that the pre-eminence of the UK financial sector will persist
may prove misplaced. We urge them to do everything necessary to
ensure that London's leading position is not imperilled by the
move towards a banking union.
The impact on the single market
134. In the various documents relating to the
banking union proposals there is a repeated explicit commitment
to preserve the "integrity of the Single Market".
This in itself hints at the nervousness of EU leaders about the
potential impact of these proposals. Mr Pisani-Ferry highlighted
the concern that the euro area would begin to speak with one voice
on single market issues.
Professor Lastra told us that there would not be an easy
co-existence between the single market and banking union.
In her view, issues of jurisdictional domain haunted the proposals.
135. On the other hand, Mr Constâncio
argued that "the emergence or appearance of a new supervisor
that in some way substitutes for several supervisors does not
change at all the concept of the single market".
Commissioner Barnier assured us that he was committed to finding
"the right methodology within the EBA" to address the
concerns over the voting mechanisms (as we explored in Chapter
3). We note the
view of Which? that it would be inevitable that participating
Member States would begin to develop common positions ahead of
136. On the other hand, some witnesses stressed
the risks to the single market of not taking action. The Association
for Financial Markets in Europe (AFME) highlighted the fragmentation
of banking sectors along national borders in the wake of the crisis.
The ICFR agreed that the crisis had thrown the process of financial
integration into reverse.
137. The UK has its own obligation to defend
the single market and the level playing field that it seeks to
create. We were therefore concerned when HM Treasury stated
that, while it was a key priority of the UK to ensure that any
single supervisory rulebook kept to the key design principles
of the single market, this was in order to "ensure that the
Bank of England remains free to supervise banks in the way it
138. While the banking union proposals are
essential to restore the credibility and integrity of the EU banking
sector, we are deeply concerned that closer integration of an
inner core of Member States could threaten the integrity of the
single market. It is inevitable that euro area countries and other
participating Member States will converge towards common positions
in a number of areas. This may place an EU-27 single market under
severe strain, in particular if a majority of non-euro Member
States choose to participate in banking union. The implications
for the UK's position within the EU are troubling. We urge the
Commission, as champion of the single market, to do all it can
to preserve this most fundamental element of the EU project. The
UK Government need to do likewise.
The UK's engagement with the
139. Given the UK's decision not to participate
in banking union, we have considered how the Government should
seek to engage in these issues. The Association of British Insurers
stressed the importance of the UK remaining at the "decision-making
table". Mr Persson
was not impressed with the Government's tone in negotiations,
"in particular when lecturing the Germans to press ahead
with a severe form of eurozone fiscal and banking union that Britain
itself ... wants absolutely nothing to do with."
140. The sensitivities of the UK's engagement
with the banking union proposals are compounded by the fragile
nature of the UK's relationship with the EU. The International
Centre for Financial Regulation indicated that the UK was struggling
to get its views heard in Brussels.
Mr Whyte pointed out that many European countries blamed
the financial crisis on "Anglo-Saxon capitalism". There
was also a perception that the Government had sought to exploit
the euro area crisis to get a better deal for the UK.
141. The Government assured us that the UK was
not becoming isolated nor losing influence within the EU, and
that they were fully engaged in the negotiation process, although
they were aware of the sensitivities in laying down demands to
which the UK will not be subject.
Yet the Government's negotiating position across a number of issues
has been contentious, including the veto of the fiscal pact last
December, the proposed repatriation of powers in relation to justice
and home affairs measures, as well as recent arguments over the
EU budget. These tensions have exacerbated the problems faced
by the UK in seeking to exert a positive influence on the banking
union proposals. Mr Whyte pointed out that "there is
a growing perception across Europe that the UK is on its way out
of the EU, so why bend over backwards to accommodate the UK if
142. Even though the UK is choosing not to
participate in the banking union proposals, the issues that we
have examined in this report will have a significant impact on
this country. The UK must retain an influential voice in discussions
of the future of the EU financial sector. This is necessary not
only for the financial health of the UK financial sector but,
given London's status as the world's leading financial centre,
for the EU as a whole. We urge the Government to ensure that the
UK is able to exert a positive influence on these discussions.
While we do not seek in this report to analyse the policies which
the Government should pursue to achieve these ends, we would emphasise
that it is our intention to report further on these matters and
other aspects of the future development of European banking union
during 2013. UK isolation in debates of fundamental importance
not only for the euro area, but for the single market and the
UK financial sector itself, would be disastrous.
181 Q 212; Letter from the Financial Secretary
to the Treasury to Lord Boswell, Chairman of the House of Lords
European Union Committee, 3 October 2012:
Royal Bank of Scotland. Back
Q 148. Back
Q 199, HSBC. Back
See Appendix 4. Back
Q 148, International Centre for Financial Regulation. Back
Q 192. Back
Q 199. Back
Letter from the Financial Secretary to the Treasury, 3 October
2012, op. cit. Back
October 2012 European Council Conclusions, op. cit. Back
Q 48. Back
Q 103. Back
Professor Lastra. Back
Q 156. Back
Q 102. Back
Association for Financial Markets in Europe (AFME). Back
HM Treasury, Supplementary Evidence. Back
Association of British Insurers. Back
Q 208. Back
Q 208. Back
Q 216; Letter from the Financial Secretary to the Treasury,
3 October 2012, op. cit. Back
Q 208. Back