European Central Bank

Europe bank union threatens London

Britain's decision to stay out of European moves to banking union poses a serious threat to the future and long-term status of its financial hub

PUBLISHED : Friday, 02 November, 2012, 12:00am
UPDATED : Friday, 02 November, 2012, 5:30am


Related topics

London's attempt to maintain its financial muscle while boycotting Europe's move towards a banking union threatens to isolate the city from its major trading partners and undermine its status as the world's top money-trading centre.

European leaders agreed last month that the European Central Bank (ECB) would become the main regulator for the biggest banks in the 17-nation euro region as early as January 1 next year, the first step towards a banking union. Britain refuses to take part and is now negotiating to retain influence within the single financial market.

The danger of a banking union that does not include Britain is that London's voice in setting the rule-making agenda will be weakened as the ECB gains new powers, bankers say.

Trading in euros, which is now centred in London, could shift to Frankfurt or Paris and be regulated by the ECB, says Thomas Huertas, a former British representative on the European Banking Authority, which drafts financial rules for the 27-nation European Union.

"If there is a European banking union and a notable missing member of that is [Britain], then that will be likely to hurt London as a major financial market," says Jay Ralph, the board member responsible for asset management at Munich-based Allianz, Europe's largest insurer with €1.75 trillion (HK$17.59 trillion) under management.

"A strong pan-European banking union, ex the UK, will have negative implications for Europe and the UK."

London, the world's biggest centre for foreign-exchange trading, cross-border bank lending and interest-rate derivatives, has 251 foreign banks and more international firms than any other financial centre, according to TheCityUK, a bank lobbying group.

The London financial district is home to three-quarters of the EU's foreign-exchange trading, including 42 per cent of euro trades. Banks located there conduct about 62 per cent of trading in euro-denominated, over-the- counter, interest-rate derivatives, the group says.

A European banking union that gives the ECB new supervisory powers will create an "inner core" of euro-region nations that sidelines the rest of Europe, including Britain, says Huertas, who now works for Ernst & Young in London. Two sets of regulations for "inner and outer" Europe mean British banks would not have as easy access to European markets, he says.

"Most dollar capital-market business and most dollar business for the domestic United States market occurs inside the US," Huertas says. "It's entirely possible that euro business moves from London to {Europe]."

The concern for British banks is that "you end up with a policy-weighting toward the euro-zone banks because they are, in aggregate, bigger and that could damage the single market", says Douglas Flint, chairman of London-based HSBC, Europe's largest bank. A banking union "has to be done in a way that preserves the integrity of the single market in financial services so that banks within Europe but not within the banking union are not disadvantaged".

David Walker, chairman of London-based Barclays, Britain's second-largest lender by assets, echoed Flint.

"Because we are not in the euro area, their shaping of the union and equipping the European Banking Authority will be less sensitive to our concerns," Walker told a British Bankers' Association conference in London. "We will see some undermining of the single market, some protectionism of the financial-services sector."

Much of the structure and timing of a banking union remains to be negotiated, and that is adding to uncertainty in Britain, according to senior executives at US and European banks in London.

In addition to common supervision, a banking union could mean that governments share the costs of winding down failed lenders and guarantee deposits, or leave that to national regulators.

In the meantime, a central supervisory authority could allow the region's bailout fund, the €500 billion European Stability Mechanism, to directly recapitalise firms, breaking the link between sovereigns and their lenders.

Britain does not want to be part of a banking union because it does not want to be responsible for paying for failed banks in Spain and elsewhere in the euro area, according to top government officials.

Britain should stay outside because the plan is designed to address the "vicious circle" between sovereign debt and banks in those countries, British deputy prime minister Nick Clegg said last month.