It is not usual for the Governor of the Bank of England to ask permission to make a statement about a completely unrelated issue when giving evidence on inflation to the Treasury Select Committee. So we knew it was serious when Andrew Bailey yesterday told us his concerns about Brussels trying to force banks to relocate their euro clearing from London to the EU.
It is not a surprise that the EU wants to do this – France has been pushing for this for years before Brexit, leading to it losing a case to the UK at the European Court of Justice – but what is concerning is the desperate extremes the EU seems prepared to go. It was, Mr Bailey said, bordering on the illegal.
According to reports of its discussions with the industry, the EU is thinking either of extraterritorial legislation or using other powers granted for different reasons to force banks to clear their euro denominated derivatives within the geographic boundaries of the EU. This raises so many questions. Would it apply to EU headquartered institutions only or all international banks? How would it be enforced?
Ultimately it could end up with the EU effectively imposing sanctions on international banks that do certain aspects of their financial services in London. 'If you don’t do your euro clearing in the EU, you won’t be able to offer other services to European conglomerates' being the general gist of it. This is similar to the approach the US takes in its attempts to stop companies from other countries trading with Iran.
I warned when I was CEO of the British Bankers’ Association, and more recently here, that the main threat to London’s financial centre from Brexit wasn’t failing to get a deal with the EU, but the unleashing of the EU’s protectionist instincts. This could prompt Brussels to try to build as high walls as possible around its borders to keep out competition from UK-based financial service companies. This is what is happening now.
The EU has claimed in the past that it needs euro clearing to take place within its borders so it can have supervisory control, in order to ensure financial stability. I can understand the nervousness, but the argument has no merits in reality – there are sufficient safeguards in place. As the governor said yesterday when I quizzed him, there are no economic stability arguments for what the EU is doing.
This debate doesn’t augur well for the ongoing discussions about getting a memorandum of understanding between the UK and EU on financial services. The EU has already been notably hardball on granting equivalence, which would in any case hardly be a concession because clearly the UK’s regulation – which is the same as the EU’s is equivalent, and the equivalence regime is pretty weak. The reason London financial service companies aren’t panicking is that they have many other legal routes to serve customers in the EU, even without any agreement.
Whatever happens with euro-clearing, the EU will continue to attempt to build up walls to keep out London-based financial services companies. The underlying cause is a certain EU mindset that always frustrated me when I was on the board of the European Banking Federation. It is essentially an insecure protectionist instinct, that attempts to keep out international competition rather than compete internationally. If you can’t beat ‘em, shut ‘em out.
Although being in the EU brought many benefits to London as a European financial centre, it was also often uncomfortable for London as a global financial centre. When I negotiated with EU or French government officials and stressed the importance of EU regulation helping us to compete with New York or Singapore I got uncomprehending looks. The only prism they could see it through was competition between London, Paris and Frankfurt.
The EU trying to deliberately fragment financial markets will reduce the number of services that the EU’s companies have access to, and increase their costs. I know from my many discussions with them that this is a major concern to Europe’s business community. The sad fact is the ultimate losers in the EU’s drive for financial services protectionism is Europe’s workers and families.