Treasury Select Committee supports ending EU bank passporting rights (Part 1)

The UK Government’s Treasury Select Committee (“TSC”), under the Chairmanship of the Rt. Hon. John McFall, MP, released on Friday, 31st July their final report on the banking crisis.

The report “Banking Crisis: regulation and supervision” reaches conclusions and makes recommendations on:

• The FSA’s regulation of banking
• Systematically significant banks
• Macroprudential supervision
• Reform to the institutional framework of financial stability
• International dimensions, and
• The way forward

The report, which is hard-hitting, generally reaches a commendable balance between recognising:

• the interactions of the serious issues the globalisation of the banking industry poses, particularly the balance between size and risk of failure,
• the fact that complex, cross-border banks with balance sheets larger than the home state’s GDP are here to stay,
• the genuine concern being with the effectiveness of tools of supervision rather than the institutional framework for deploying them,
• the distinction between idiosyncratic liquidity failures for specific banks as against the freezing of the entire liquidity market,
• the position of national taxpayers as the underwriters of bank failure and the moral hazard that implies for managing larger, complex banks.

In the context of the European Union, the report is simplistic, unremittingly sceptical and implicitly dismissive of current and proposed European regulatory structures, both in its conclusions and in the specific evidence quoted from, for instance, the Governor of the Bank of England and the Chairman of the Financial Services Authority.

The Governor’s lack of enthusiasm for the new European Systemic Risk Committee was manifest – “Whether this body turns out to be a mere talking shop or a useful talking shop, in terms of an exchange of views and ideas being generated, remains to be seen…we will do our best to try and raise the level of debate.”

Lord Turner’s confidence in FSA’s role at the heart of the European supervisory debate shone through in his evidence to TSC as quoted, “..we will be extensively involved, in detail, in helping create the professional standards and the technical competence of this regulatory authority [presumably the European Banking Authority]...we think that we would be setting the standard of what that professionalism is…”

Given that much of continental Europe very clearly blames the excesses of the ‘Anglo-Saxon banking model’ for the current global recession, it will be interesting to see if the benign patronage implied by both the Governor and Lord Turner of the European supervisory model is achievable in practice. That may be further complicated by one of the more dramatic ideas amongst the TSC’s conclusions.

The TSC – based (we surmise) largely on the problems caused by the collapse of the Icelandic banking system, and on the failure to repatriate Lehman Brothers International (Europe)’s £4.4bn ‘spare cash’ back to London before the US parent filed for Chapter 11 - supports the ideas that “..national banking units of global banks should be obliged to establish as stand-alone subsidiaries of the parent group, regulated and supervised by the host state regulator. The capital of these stand-alone banking units would need to be ring-fenced to prevent the parent group snatching it away upon failure of the global bank…”, and recommends that FSA considers how feasible such a system would be, including whether it could be implemented unilaterally without international agreement.

This seems a momentous statement for a non-partisan and cross-party Parliamentary oversight committee to make. European single market laws – which in turn dictate our own - enshrine the rights of EU credit and financial institutions, under the freedom of establishment doctrine, to establish and then operate from branches in any other European state (as well as to provide services cross-border).

Changing this situation would merely require a 180° turn in European Community policy relating to the Single Market, permitting the tearing up of European banking legislation in all its forms.

Consequently, Mr McFall, the answer is that forcing European banks to form subsidiaries in order to provide banking services in the UK, and UK banks to form subsidiaries in other European markets is not feasible to be implemented without either (a) EU agreement, or (b) the UK’s withdrawal from the European Union.

The genie is now out of the bottle.