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Newsroom & speeches
05 March 2010
Thank you for the invitation to speak. I am honoured to be joining you here in Hong Kong .
Today I would like to offer a UK perspective on the future of the global financial services industry.
In particular, on how we can build a stronger and more resilient financial system for the
future – taking on board the lessons of a crisis that brought the world’s banking system to the verge of collapse.
It is difficult to overstate how profoundly the failures in our financial system have impacted on the global economy.
The global downturn saw world trade contract for the first time since the Second World War, with some of the largest economies hit hardest - Japanese output fell by 8%, German by 6.7% and the UK by 6.2%.
Hong Kong's financial sector made a quick recovery following the crisis - helped by an already risk averse system. But, like so many countries, the global scale of the crisis has hit the real economy - with a contraction of GDP growth in 2009 of around 2.7%.
At the same time, the crisis brought to the world’s attention the increasing importance and resilience of emerging markets, led by role-models such as Hong Kong.
Over the past twenty years, emerging markets have been transformed from being net importers of capital, to net exporters, providing essential investment funds throughout the world. In 2006, emerging markets accounted for over 23% of global GDP.
Asia now accounts for five out of the world’s top ten financial services centres.
Hong Kong itself has been a remarkable success story – and is today one of the most important financial centres in the world, and the key gateway to Asia ’s markets.
It is a significant development that Hong Kong can now settle trade in RMB, and is increasing RMB liquidity through offering RMB deposits, sovereign bonds and bank bonds.
The HKMA announcement of measures to expand the use of the Chinese RMB in Hong Kong - by enabling Hong Kong banks to open accounts for any HK or overseas company to settle trade in RMB, and firms to issue RMB corporate bonds in HK - is an important step.
I will be most interested to see how this market develops.
And with over a trillion pounds in investment flows between the UK and the region every year, our relationship with Hong Kong – and our desire to do business with you - has never been more important.
This strong and enduring relationship is something I hope to build upon during my visit here.
Like Hong Kong, the UK is committed to a strong and profitable financial services sector at the heart of the global economy.
Our priority – as is the priority for most countries around the world right now - is to ensure that we learn the lessons of the crisis and build a more resilient financial system for the future.
Properly supervised and regulated, an effective financial system remains the best mechanism for generating and sustaining wealth, jobs and prosperity in our economies.
There was a point in late 2008, when we feared we might see the collapse of the world's financial system.
Indeed, when I joined the Treasury in October of that year, the world’s financial system was in crisis. People were losing confidence.
Faced with the potential collapse of the banking system, the UK – along with other governments around the world - took unprecedented and exceptional action, including acquiring shares in some of our largest banks, providing extra liquidity and funding support, and standing behind troubled assets.
What is remarkable is that through the G20 process, we were able to take this action with a level of coordination never seen before, including:
Most commentators and economists now agree that these actions saved our financial system from collapse, and averted a severe recession turning into a depression.
And because of this extraordinary action, we’ve seen a remarkable return to strength in world markets.
But we cannot ignore the damage done to the real economy and ordinary people - through the loss of jobs, businesses and homes.
Since the onset of the crisis in 2007, the global unemployment rate has increased by around 1% to over 200 million – and has soared in some countries to as high as 20%.
Clearly we can never allow a situation to arise again where failures in our financial system expose taxpayers to such extraordinary costs.
We need to maintain momentum for global cooperation on the G20 reform agenda. Working together to secure delivery of a comprehensive and effective set of global standards.
Looking to the reform agenda, there are five key priorities for the financial services sector.
Firstly, all major economies are in agreement that we need a strengthened regime for capital and liquidity, with systemically important firms having to hold more and better capital.
This should be led through the Basel process - to ensure a consistent international approach, where one jurisdiction is not seen to outpace another.
Secondly, we need to deal with the ability of firms to resolve themselves in the event of failure without systemic consequences.
Here, recovery and resolution plans, or ‘Living Wills’ will be key. Living Wills should enable authorities to better understand the business and structure of individual institutions, and better judge the risk a firm poses to financial stability and the taxpayer in the event of failure.
The UK has built provisions for Living Wills into our Financial Services Bill, and is running a pilot programme with a number of large UK banks.
We also need to anticipate the cross border implications of bank failures - which is why international engagement is crucial - Hong Kong will play a valuable role on the Financial Stability Board and other regulatory work streams. And this is enormously important, given Hong Kong ’s large cross-border financial sector.
Thirdly - we need to improve the infrastructure of key markets, including insisting on much greater use of well-capitalised and properly regulated central counterparties in OTC derivative markets. We should have a natural inclination to promote standardisation and eschew unnecessary complexity.
Fourthly - we need to enhance the quality of management, governance and owner engagement. As the crisis has shown - bad management can burn through capital very quickly. The UK has led here with the work of Sir David Walker.
A central element of this must be efforts to address the risky remuneration practices that were undoubtedly a contributory factor to the financial crisis.
While this has been a highly charged issue in recent months, it is important to emphasise that the aim of the G20 reforms on pay - bonuses in shares, deferral and clawback - are to make remuneration practices more consistent with sound risk management.
And these reforms recognise that banks need to be profitable - in order to generate capital to support the future credit needs of customers, and pay effective producers for performance.
My fifth point is that – over time - we need to shift the balance of risk within the financial sector, away from the taxpayer.
Britain has been leading the debate on an internationally coordinated approach to this issue.
The Prime Minister put forward a compelling case in his speech at the G20 Finance Ministers’ meeting in St. Andrew's, and the Obama administration’s proposal for a systemic levy is an important contribution to the debate.
This is something I've also been personally involved in - chairing a workshop for international finance ministries and regulators at Downing Street on these and other proposals, including building on our pioneering work in the UK with new concepts of contingent capital.
I look forward to the IMF’s initial report on this issue. We would like to see ideas such as a systemic levy discussed further internationally, and the G20 - working with the FSB and IMF - need to press ahead with work to examine these proposals and agree an internationally coherent approach.
This work is also likely to highlight the need for more information gathering by international bodies to facilitate the development of macro-prudential engagement.
Under the UK presidency of the G20, countries have agreed a clear timetable for reform – and it is vital that we maintain momentum, with all countries moving together, and at the right pace.
For the avoidance of doubt – while leading the debate on reform - the UK recognises that we need to remain part of the convoy. Moving in step with both the international community and the world’s financial centres.
And we must at all times ensure that our approaches to regulation and supervision are consistent with allowing UK banks to be competitive, in terms of their profitability and their ability to generate capital.
There is no economic advantage to adopting an approach to regulation which burdens UK banks with uncompetitive costs of capital or constrains the availability or cost of credit.
And I repeat – the key to sound banking lies in the quality of management. And capital should never be regarded as a substitute for management inadequacy.
Clearly, regulators have a role to play in setting management standards – indeed in Britain, the FSA is doing this now through much more rigorous engagement with the vetting of senior candidates – but the real responsibility for ensuring sound management lies with shareholders.
Thank you again for inviting me here today, and I’d be delighted to take your questions.
