§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. David Davis.]
§ 10 pm
§ Sir Thomas Arnold (Hazel Grove)
I am grateful for this opportunity to address the House on the future of the British banking industry within the European Community. I want to remind the House of remarks made by my right hon. Friend the Chancellor of the Exchequer on 21 May during our debate on the European Communities (Amendment) Bill when he dealt with the location of the European Monetary Institute and the central bank:The priority must be to decide on the location first of the EMI. The United Kingdom was the first to argue for the establishment in stage 2 of an institution like the EMI instead of having a central bank in stage 2. In our view, Britain therefore has undoubtedly a strong claim to be the seat of the EMI. It would be very much in the interests of the Community and the new institutions if they were based in the Community country with the leading financial centre in Europe. London is the leading player in the rapidly growing private ecu market. When the decision is taken to set up the central hank, we believe that Britain—not London alone but other centres—will be the strongest candidate."—[0fficia Report, 21 May 1992; Vol. 208, c. 591–2.]The City of London is a great national and European asset. It brings money into Europe from all over the world. The reasons why London can make that claim can be summarised as follows. London is the world's largest and thus Europe's largest foreign exchange centre. It is responsible for more than a quarter of the recorded global total.
London is the primary centre for ecu business, as my right hon. Friend the Chancellor of the Exchequer said on 21 May. London has more foreign banks than any other centre. Some 526 foreign banks from 72 different countries are represented in London and 152 stock exchange members are foreign-owned.
London is a major centre for the trading and distribution of domestic and international equities. Its total equity turnover of £322 billion puts it ahead of Frankfurt, with £153 billion, and Paris, with £65 billion. More than 550 foreign companies are listed in London, and that is well above the number for any other European exchange. London's daily turnover in foreign equities exceeds that of New York or Tokyo and activity in European stocks is substantial.
London's markets in short-term domestic instruments are unsurpassed in the rest of Europe. They include inter-hank deposits, certificates of deposit and eligible bank bills and Treasury bills. London's gilt-edged market is one of the largest Government debt markets in Europe, with £125 billion outstanding. The London market is among the most liquid in Europe, with a turnover averaging £4–4 billion a day.
Management and syndication of the majority of Eurodollar and Euroyen bonds is based in London. Around three quarters of the Eurobond secondary market activity is estimated to take place in London. London has substantial non-domestic short-term instrument markets. The majority of Eurocommercial paper-issuing and trading takes place in London. It also has the largest international insurance market, the largest gold market and a substantial fund management industry.
921 Without wishing to glide over the important: issues raised in the current bids for the Midland bank—reduced competition and possible redundancies among Midland employees, matters which are now rightly being considered by the Monopolies and Mergers Commission—it is worth noting that the Hongkong and Shanghai Banking Corporation offers the added dimension of invaluable experience and expertise gained in the world's fastest growing region—Asia. A merged Hongkong and Shanghai Banking Corporation and Midland group headquartered in London would be second only to the Deutschebank as one of the world's largest non-Japanese banks.
At this time of rapidly changing circumstances, and as we approach the decision on the location of the European Monetary Institute, can my hon. Friend the Economic Secretary confirm that a close dialogue is being maintained between the Government, the City and the regulators? Could he spell out some of the mechanisms by which that is being achieved? For example, has the dialogue included discussions about the appropriate structure for the British banking community within the European Community, or do the Government take the view that the shape of the industry in Europe should be left to itself and that Governments should concern themselves solely with regulation and competition? Can he assure the House that the Government will do their utmost to ensure a level playing field in these matters?
I was pleased to receive my hon. Friend's answer earlier today—to my question to the Chancellor of the Exchequer asking whether he would encourage British banks to compete within the EC—confirming that the United Kingdom has been in the forefront of those arguing in Brussels for measures that will create a single market in banking, that the Government expect the second banking directive to come into force in January 1993, and that that will result in the removal of barriers to cross-border expansion and will improve competitive opportunities for British banks wishing to do business throughout the Community.
Perhaps my hon. Friend the Economic Secretary could say some additional words about the directives on capital adequacy and investment services, which I understand are being argued over in the Economic and Finance Council.
Above all, can my hon. Friend confirm that the Government will do their utmost to ensure that the case for London, as the location for the European Monetary Institute, will be advanced with vigour and urgency among our European partners?
I remind the House that in the treaty on European union, in the protocol on the statute of the European Monetary Institute, Article 4, which sets out the primary tasks of the institute, says quite specifically that the EMI shall have a duty tohold consultations concerning issues falling within the competence of the national central banks and affecting the stability of financial institutions and markets;and tofacilitate the use of the ECU and oversee its development, including the smooth functioning of the ECU clearing system.The location of the European Monetary Institute could conceivably turn out to be the most important decision affecting London. as the pre-eminent European financial centre, for 50 years. I trust that the Government will energetically support the Lord Mayor's campaign.
922 I would not dream of tempting my hon. Friend to reveal the Government's negotiating stance on the issue, but could he provide the House with some sign of the timetable that the intergovernmental debate is likely to follow? Does he anticipate a decision at Lisbon. or later this year? Does he believe that there will be support for the choice of London from some other Community members?
From what I have already said this evening, it will be clear that I do not believe that the importance of the decision on the location of the European Monetary Institute can be overestimated. With that belief in mind, I have sought leave to address the House this evening.
§ 10.8 pm
§ The Economic Secretary to the Treasury (Mr. Anthony Nelson)
I sincerely thank my hon. Friend the Member for Hazel Grove (Sir T. Arnold) for raising a most important subject this evening—a subject of immense importance to the foreign earnings of this country, to the City of London, to the employment of many thousands of people in this country and elsewhere, and to the development of our role in Europe and the prosperity that we hope that it will generate.
The debate is timely and, on behalf of the Government, I am extremely grateful for my hon. Friend's thoughtful and helpful comments. He said that it would be one of the most important decisions for London in nearly 50 years, and I agree with him. It is a key issue and the Government hope to rise to the challenge of arguing the case for the European Monetary Institute and, later, the European central bank to come to London.
It is a very important subject, and I wholeheartedly endorse my hon. Friend's view of the importance of the City to the British economy. I entirely agree that it is of the first importance that British banks and financial institutions are able to make the most of competitive opportunities within the European Community.
My hon. Friend drew attention to the importance of a decision on the site of the new European Monetary Institute, which would be established by the Maastricht treaty and which would, under that treaty, be replaced by the European central bank. As my right hon. Friend the Prime Minister made clear this afternoon, although the vote in the Danish referendum made the immediate future with regard to that treaty somewhat cloudy, nevertheless the United Kingdom remains of the view that the treaty is good for Britain and good for Europe. It is therefore sensible that we should continue to discuss its effects.
I was a little bit worried at some stages today that my hon. Friend and I might be dressed up with nowhere to go. The issue that my hon. Friend has raised is of considerable substance and, as the debate evolves and we continue with deliberations on the European Communities (Amendment) Bill, I think that it will be central to the debate.
The treaty would provide for separate decisions on the site of the EMI and ECB by common accord at the level of Heads of State or Government. In each case it sets a target date for a decision by the end of this year.
My hon. Friend will be familiar with the decision-taking process on the sites of European institutions and will realise that this is a very ambitious target, particularly now. But, logically, the first decision for the Community to 923 take must be on the site of the European Monetary Institute, which under the treaty is due to be operational from January 1994.
My hon. Friend referred in particular to London's bid to host the new EMI. I agree with him that London is, of course, Europe's leading international financial centre and the world's leading centre for ecu business. Against that background, the case is very strong on objective grounds for the new monetary institutions to be in London.
London would undoubtedly be the best place for the EMI to monitor financial developments, it would be the best place for it to develop monetary instruments and by far the best place for it, in the words of the treaty,to facilitate the use of the ecu and oversee its development".Similarly, as and when the time comes for the central bank to be established, the case for location in London is compelling. In short, if the new institutions want to develop their credibility, they would need to be in London.
I am conscious that there have been discussions ranging from whether a central bank or a monetary institute should be in just one location or whether various other formulae might operate whereby a supervisory or central board might be in one location and operational arms in another. That is not up for decision this evening, but it is clear that, wherever the central bank eventually is located —we hope and believe it should be in London—it is absolutely essential that, operationally, it must have a base in London because this is where the action is.
London is, of course, not the only financial centre in the United Kingdom. If for any reason the Community could not agree on placing the EMI in a major centre, there are also excellent smaller United Kingdom candidates in Edinburgh and Manchester, which are both making strong bids.
I can assure my hon. Friend that the Government are fully seized of the issues he has raised. I am grateful to him for highlighting them, and I can assure him that we shall take careful note of the points he has made.
It has been suggested by some that Britain's so-called opt-out in the Maastricht agreement and treaty might limit or ruin our chances of having the central bank in London. I do not accept that for a moment. It is of course for this House to decide in due course whether to participate in the final stage of economic and monetary union, but participation will also depend on member states fulfilling the necessary conditions for a single currency by reference to the convergence criteria in the treaty. We fully intend to meet the criteria, but at this stage no one can be completely sure which other member states will do so.
It is also worth noting that. if we did not participate, the Bank of England would still be part of the European system of central banks, with the Governor sitting on the wider general council of the central bank. It would therefore be misleading to suggest that uncertainty about the United Kingdom position is an absolute bar to the European Monetary Institute or the European central bank coming to the United Kingdom.
Some have suggested that London's future depends on the central bank being located here. Although I believe that it would be a great advantage if the European Monetary Institute and later the central bank came to London, I do not think that London's future depends solely or mainly on these institutions coming here. London's standing and market position are such that, 924 provided it continues its unrivalled traditions of experience, service and innovation, it has little to fear in the years to come.
I should like to say a little more generally about the prospects for the United Kingdom in Europe, especially as we approach the opening of the single market. It has always been the Government's view that British banks have everything to gain from a genuinely open, liberal and competitive market for banking services in the Community. Of course, many of our banks are already well established in other Community countries. The four largest United Kingdom banks already have branch and subsidiary operations in France, Germany, the Netherlands and Spain. One of them, Barclays, has branch and subsidiary operations in all 11 other member states. The smaller and perhaps more specialist institutions are well represented in the key centres too.
If British banks are to make the most of their strengths, however, this inter-penetration of different national banking markets needs to be recognised by the European regulatory system, and we need to ensure that bureaucratic barriers do not inhibit cross-border business opportunities —an issue to which my hon. Friend rightly referred. There are supervisory benefits to be gained from a rationalisation of responsibilities among different national regulators. For all these reasons, the United Kingdom has been in the forefront of those arguing in Brussels for measures that will genuinely create a single open market in banking.
A word about the second banking directive—one of the measures referred to by my hon. Friend. It is the centrepiece of the single market for banks. It was adopted in 1989 and will come into force in January next year. The directive will enable banks from any member state to provide a wide range of banking and financial services in other member states simply on the basis of the authorisation from their home authority, without requiring separate authorisation from the host country. This has come to be known as the banking passport.
Hand in hand with this framework of mutual recognition go a whole series of directives which set common minimum standards for the prudential supervision of banks, taking into account the different risks they run. This harmonisation of prudential rules is a key element of the whole process; it provides the reassurance that the reduction of bureaucracy is not at the expense of standards of regulation.
Taken together, the effect of this package of directives is that barriers to cross-border expansion will be removed, and there will be improved competitive opportunities for banks wishing to do business abroad. Consumers of banking services may also expect the benefits of greater choice and competition.
Of course. Europe is not the only important overseas market for our banks, and it is vital that the breakdown of barriers in Europe should not be accompanied by the creation of new barriers between Europe and the rest of the world. The Community as a whole, and London in particular, benefits rather than loses by remaining open to institutions from outside the Community. That was one of the principles on which the United Kingdom insisted during negotiations on the second directive—with, I am pleased to say, a great measure of success. I attach special importance to that and was pleased to have the opportunity to raise the matter with the Finance Minister of Japan during his recent visit to this country.
925 We benefit from allowing access to Japanese and other international banks and financial organisations, but there must be reciprocity, and our banks and investment firms must be allowed to enter Japanese markets. I am pleased to say that I have had reassurances in writing from that Minister, and I intend to take the matter forward for United Kingdom and European banks. If the Japanese have access to our markets, we must have competitive access to theirs.
My hon. Friend asked about legislation on the second directive. The deadline for implementation of that directive is 1 January 1993. Work is already well under way on the legislation that is required to transpose the directive into United Kingdom law. A consultation document covering the draft regulations will be issued in the near future. My hon. Friend also spoke about the important issue of the investment services directive and asked what it means for banks. That is an important matter in the context of the level playing field to which my hon. Friend refers because there is some concern that, if the second banking directive comes into force without the investment services directive, the playing field will be slanted unfairly against a key sector of the United Kingdom financial services industry.
I can well appreciate those concerns, and it is quite right to recall that the investment services directive was intended to complement the second banking directive, by delivering an analogous single passport for investment firms, and the aim was that it should be adopted in time for simultaneous implementation.
As my hon. Friend will no doubt be aware, events have turned out rather differently, and the investment services directive negotiations have been stalled for about 18 months following attempts on the part of some other member states to introduce provisions restricting the market rules and organisation that are permitted. As a result, the directive as currently drafted could seriously damage London as a financial centre.
The contentious areas—the requirements concerning publication of prices and volumes of transactions on regulated markets, and the question whether banks should be allowed direct access to stock exchange membership without having to set up subsidiaries in the member countries—are of such importance that it is preferable to accept the possibility of an uneven playing field once the second directive comes into effect than to agree to a bad investment services directive. I emphasise that the Government are negotiating constructively to achieve agreement on the investment services directive in good time for the arrival of the single market at the beginning of next year.
Two measures in particular are currently nearing the top of the Brussels agenda and in them important principles are at stake for British banking. The first measure relates to the important question of the deposit protection arrangements that should back up the new supervisory framework that will be in force from next year. The United Kingdom has long advocated the transfer of responsibility for deposit protection to a home state basis, to parallel responsibility for supervision. The aim is thus that the home state which authorises a bank should also have to ensure that its deposit protection scheme covers deposits in all the EC branches of that bank. Such a move would provide the right incentives to back up the second directive, and is widely supported by other member states.
926 We therefore very much welcome the Commission's recently proposed draft directive on deposit protection, and look forward to discussing this as a priority under the United Kingdom presidency. As well as allocating responsibility for deposit protection coverage to home states, the Commission's draft directive would introduce certain minimum requirements for deposit protection schemes. These include the provision of at least 90 per cent. protection of deposits until the amount reimbursed reaches 15,000 ecu, which is currently equivalent to about £10,500.
The directive also requires deposits in all currencies to be covered. It envisages that branches abroad would be covered by their home state scheme but with the right to join the host state scheme in order to top up the coverage for their depositors. The draft also proposes that deposit protection payments would have to be made within three months of a bank's closure.
The Government welcome the broad thrust and minimalist nature of the draft directive, and it is hoped that we can make significant progress under the United Kingdom presidency, but the Government have concerns about some of the details, not least the practicability of topping-up, on which further negotiations will be necessary. We shall of course be consulting the United Kingdom industry fully about the issues that arise.
I shall deal now with the complex but highly important issue of the capital adequacy directive—another measure of great importance to British banks in Europe and to security houses and other financial services firms. This is under negotiation in the Council of Ministers. This measure aims to set a common framework of capital requirements for securities firms, but will also refine the existing framework of risk measurement for banks.
The issues at stake in this directive are of course highly technical, but underlying the technical requirements are crucial issues of principle, whose importance is not lost on the City, or the Government. That the directive should deliver a prudent capital adequacy is common ground: what this means in practice is more a matter of dispute. The United Kingdom's concern is that the requirements that are agreed should be appropriately tailored to the different kinds of business covered by the directive: a simple blanket application to securities business of requirements that were designed for long-term and illiquid banking risks would do unnecessary and unjustified damage to key players, both in London and elsewhere in the Community, for no corresponding prudential benefit.
The Government take the view that, if we are to build on the successes already achieved in the banking sector, future regulation must be based on the principle of minimum necessary harmonisation, and in particular must not operate in a way that discriminates unfairly against particular types of institutions or national market structures.
Here, too, there is an important international angle. If Europe burdens itself with a regulatory regime that is significantly more constraining than that of our most important third country competitors, then it is their markets that will gain, at our collective expense. Equally, we must be careful that Europe does not, through indecent haste, undermine moves to harmonise prudential rules for securities business in wider international forums. Many of the questions that are being discussed in the capital adequacy directive are being aired simultaneously in other forums, the BIS forum in particular, and in the 927 international securities regulators grouping. If Europe rushes ahead to set its solution in stone, we may find that we damage the wider movement towards international convergence.
I can assure the House and my hon. Friend that the Government are fully seized of the importance of securing an appropriate regulatory regime in this directive. Throughout the negotiations, Ministers and officials have had the benefit of a great deal of constructive and thoughtful input from a wide range of United Kingdom institutions, and we have taken full account of their views. We are determined to secure the best possible outcome we can—always, of course, within the constraints of qualified majority voting.
My hon. Friend referred to cross-border payments. He drew attention to the importance, for consumers and industry, of achieving cheaper and quicker methods of effecting cross-border payments. As he may be aware, the Commission has recently published a report on the ways in which retail cross-border payment systems work at present, and how they can be improved. The Government fully support the intention of improving the speed and 928 efficiency of cross-border payments, but believe that the emphasis--as stressed in the Commission's report—should be very much on the banks introducing their own initiatives in this sector. The industry is already undertaking a good deal of work in this important area, and this should be allowed to develop.
Finally, my hon. Friend made a number of comments on the Lloyds bid and the Hongkong and Shanghai bid for Midland. As he is aware, the former is now before the Monopolies and Mergers Commission, and in those circumstances it would not be right for me to comment. However, I can assure him that I have taken full note of what he said, in particular about the Hongkong and Shanghai bid. If he has any concerns that he wishes to put to the commission, it is open for him to do so.
This has been a useful debate, which has given the Government an opportunity to put on record their firm intention of bringing the monetary institutions and the central bank to London, and the importance of the wider opportunities, the glittering prizes, that can be delivered for the banking industry in Europe. I hope that it has been helpful to my hon. Friend.
Question put and agreed to.
Adjourned accordingly at half-past Ten o'clock.