House of Lords - European Banking Union: Key issues and challenges

European Banking Union: Key issues and challenges - European Union Committee Contents

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 financial sector

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.[181] The Royal Bank of Scotland agreed with this approach.[182] 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.[183]

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.[184] 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.[185] 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.[186] President Van Rompuy was clear that there would be consequences for London, although he did not specify what they would be.[187]

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.[188] Ambassador Boomgaarden told us that the UK was too big to be marginalised[189] and Mr Persson indicated that the risk of marginalisation was more of a concern for a country such as Sweden than for the UK.[190]

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."[191] 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".[192] 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.[193] Professor Lastra told us that there would not be an easy co-existence between the single market and banking union.[194] In her view, issues of jurisdictional domain haunted the proposals.[195]

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".[196] 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).[197] We note the view of Which? that it would be inevitable that participating Member States would begin to develop common positions ahead of Council meetings.[198]

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.[199] The ICFR agreed that the crisis had thrown the process of financial integration into reverse.[200]

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 sees fit."[201]

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 EU

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".[202] 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."[203]

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.[204] 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.[205]

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.[206] 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 we are?"[207]

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:
http://www.parliament.uk/documents/lords-committees/eu-sub-com-a/EuroCrisis/31012EACGovResponse.pdf. Back

182 Royal Bank of Scotland. Back

183 Barclays. Back

184 Q 148. Back

185 Barclays. Back

186 Q 199, HSBC. Back

187 See Appendix 4. Back

188 Q 148, International Centre for Financial Regulation. Back

189 Q 192. Back

190 Q 199. Back

191 Letter from the Financial Secretary to the Treasury, 3 October 2012, op. cit. Back

192 October 2012 European Council Conclusions, op. cit. Back