Carney: threat to UK from EU rules

MARK Carney last night accused Europe of lacking ‘flexibility’ over rules governing the City of London as he called for ‘safeguards’ to protect Britain.

The Governor of the Bank of England laid out in clear detail how rules cooked up on the Continent threaten financial stability in the United Kingdom.

He said it was ‘essential’ that the UK is not penalised by closer integration in the single currency bloc – and called for ‘clear principles to safeguard the interests of non-euro member states’.

Carney said regulation must recognise that ‘the EU comprises multiple currencies with multiple risks’.

The comments, in a landmark speech at oxford University, came as the central bank published a 100page report into how EU membership affects its ability to manage the economy and financial system.

It marked a foray into highly political territory ahead of an in-out referendum on Britain’s membership of the EU.

Carney said ‘further financial and fiscal integration’ was needed within the eurozone to shore up the economy and secure the future of the single currency bloc.

But he said financial stability in the UK ‘depends in part on the quality of financial regulation set at the EU level as well as the flexibility we have to apply that regulation to meet the UK’s specific financial stability challenges’.

The Governor added: ‘In the main this combination has been achieved so far. However, there have been some limits on flexibility in certain areas.’

He highlighted the row over the bonus cap imposed by the EU on bankers across the bloc – including in the City of London. Carney said such a cap is now ‘restricting the proportion of pay that can be clawed back in the event of excessive risk taking or poor conduct thereby weakening discipline from remuneration’.

The Governor, who is head of the Financial Stability Board, the global regulator, also criticised the details of plans to make banks issue debt that can be converted into equity.

He said that the ‘trigger thresholds’ for so-called contingent convertible capital instruments or CoCos – hybrid capital securities that absorb losses when the capital of the issuing bank falls below a certain level – may be ‘too low’.

And he bemoaned the ‘reduced role for national discretion in insurance supervision’ – a particular issue for Britain given the size of the insurance industry in the country and the presence of the Lloyd’s of London insurance market in the heart of the City.

‘ while common international standards and effective EU rules should continue to support the operation of the single market, it is imperative that UK authorities, including the Bank of England, continue to retain the flexibility to impose the high standards necessary to manage the world’s leading global financial centre,’ said Carney.

‘This flexibility may be challenged by how EU financial regulation evolves. Ensuring the Bank of England has the instruments necessary to achieve its financial stability objective will depend on the EU continuing to have regulations of the highest standards.’

He said they must ‘ strike the appropriate balance between harmonisation and flexibility’ as well as ‘accommodate necessary national responsibilities’.

The Governor added: ‘How financial regulation in the EU evolves in future will be critical to the resilience of both the euro area and the UK economy,’ said Carney.

‘Closer union between euro area member states is likely to necessitate further harmonisation of finan- cial regulation across the euro area. By extension, those regulations can affect the rest of the EU.

‘In that light, it is important that any future EU legislative measures, designed to meet the needs of deeper integration in the euro area, do not adversely affect the Bank of England’s ability to ensure the stability of the UK financial sector or compromise the single market.’