Andrew Bailey vows to fight Brussels power grab over the City
Andrew Bailey has warned Brussels against plotting a protectionist power grab with tough new laws of “dubious legality” aimed at stealing business from the City.
The Bank of England Governor said that the European Union could seek to seize part of London’s prized derivatives clearing market in a “very controversial” legal effort that Britain must “resist very firmly”.
Brussels has long had designs on the Square Mile’s euro clearing market, a vital part of trading infrastructure which handles €1 trillion of deals a day. However, Mr Bailey said that EU officials have realised the euro market is too small to be sustainable on the Continent on its own – and could now be considering laws which would force banks to shift other business too.
Speaking to MPs on the Treasury Select Committee, he said: “To get that by fiat would require something very controversial such as an attempt at extraterritorial legislation, or an attempt to force or cajole banks and dealers to say there will be some other penalty for you unless you move this clearing activity into the eurozone.
The EU has agreed that the UK’s financial rules in clearing are equivalent to its own, as the regulations have not changed after Brexit. This allows EU companies access to clearing houses in Britain, which are key to the safe functioning of financial markets.
But if it revokes that temporary equivalence after 18 months then euro-denominated clearing, which accounts for about a quarter of derivatives clearing in the UK, would be forced over the Channel.
Mr Bailey said that this is too small a share to form a viable market, because efficient and low-cost clearing requires large volumes to function.
He said: “The efficiency really comes from having a very big pool of derivatives that can be netted and cleared down.
“By splitting that pool up, the whole process becomes less efficient, and having the smaller part of the pool is even less efficient.”
As a result, there is speculation the EU could try to legislate to force more non-European business to leave London and move to the single market, or cajole international businesses into making such a move and so gain the other 75pc of the market.
Mr Bailey said: “Legislating extraterritorially is controversial anyway and obviously of dubious legality frankly.
“Probably therefore the more likely way to do it, which itself is controversial, is to say to firms you need to move this business into our area and if you don’t we will think of something else to do. And that would be very controversial. I think it would be a very serious escalation of the issue.”
Eurozone politicians have long coveted London’s financial power and sought ways to force business into the currency bloc even when the UK was a member of the EU, resulting in lengthy legal battles over the rules.
Brexit appears to have triggered the latest argument, although Mr Bailey noted that the UK and EU both follow guidelines set at a global level. The EU also deems New York’s clearing houses to be equivalent even though there was a much bigger gap between EU and US rules than the bloc has with the UK.
Earlier this month Mr Bailey used a keynote speech to the finance industry to warn that the European Union is poised to lock Britain out of its banking market by refusing to grant widespread market access in other areas through its equivalence regime, in a move that would push up financial costs for millions of consumers on both sides of the Channel.
“I don’t think there is a valid financial stability argument at all” for forcing clearing out of the UK, Mr Bailey said.
He added: “It is a matter of saying, have we got a set of rules for clearing houses that delivers safety and soundness and financial stability, and the answer is yes.”
When asked about the importance of the EU having its own financial centre, the Governor said: “The answer to that is competition, not protectionism. “Trying to put a wall up around it isn’t going to deliver you a stable outcome.”
Separately Mr Bailey said the economy appeared to be performing better than expected during the current Covid restrictions as “we’ve all become more adept at finding ways to do things in lockdowns”, such as turning to online shopping.
He said the Prime Minister’s reopening roadmap should result in the economy growing rapidly over the next six months, getting GDP back to its pre-Covid levels by early 2022.
Ben Broadbent, Deputy Governor for Monetary Policy, said: “The evidence from last summer, when the furlough scheme was in place, was that as restrictions were lifted, you do see a pretty immediate bounce in spending
He added that this “recovery in consumption was, across the board, stronger than we and just about every other economic forecaster had anticipated” both in the UK and across the rich world.