UPDATE 2-German bond yields pull back from peaks as ECB cools taper talk
* BOE's Carney says to debate rate hike in coming months (Updates throughout)
LONDON, April 7 Bank of England Governor Mark Carney called on Friday for Britain and the European Union to agree to recognise each others' bank rules after Brexit, to avoid a damaging hit to financial services across Europe.
Below are excerpts of the speech given by Carney at Thomson Reuters in London.
To watch the event live, please click on: reut.rs/2nWLFGo
For a full text of the speech: here ON THE UK AS A FINANCIAL CENTRE:
"The United Kingdom has been at the heart of the global economy for centuries. Throughout that period, the City has channelled the life blood of the world economy, finance.
London emerged as the world's leading financial centre at the end of the 18th century, overtaking Amsterdam, as Britain became the dominant economy.
Whereas other major financial centres lost their importance as economic power shifted elsewhere, London has retained its pre-eminence even as the UK's relative economic weight has declined.
This staying power reflects London's inherent strengths: its people, law, language and time zone. And it testifies to the City's enduring commitments to markets, openness and innovation."
ON BUILDING RESILIENCE:
"Authorities who oversee the largest global financial hubs, like the Bank of England, bear special responsibilities. The Bank's primary one is, of course, to ensure that the UK financial system serves UK households and businesses.
This includes protecting the UK real economy from being sideswiped by global developments. As much as possible, we must do so in a manner that keeps cross-border markets open.
When these responsibilities come into conflict, we have to work with others to build resilience at home and abroad in the most efficient and cooperative way possible.
The pillars of responsible financial globalisation eroded prior to the global financial crisis. Regulation became light touch and ineffective. Looming risks in the financial system were ignored. Markets were fragile and unfair, plagued by numerous instances of misconduct and limited market discipline on large firms.
And few participants were exposed to the full consequences of their actions as governance and compensation arrangements focused on the short term." ON REGULATION:
"The resulting cost to our citizens has been tremendous. Over the past decade, UK average real earnings have fallen for the first time since the middle of the 19th century. Trust in the financial system has plummeted.
Over the past decade, the UK and its key G20 partners have been fixing these fault lines and creating a system that is safer, simpler and fairer.
The system is safer because banks are now much more resilient, with capital requirements for the largest global banks that are ten times higher than before the crisis and a new leverage ratio that guards against risks that may seem low but prove not.
The financial system is simpler. As banks have become less complex and more focused, they are lending more to households and businesses and less to each other.
A series of measures are eliminating toxic and fragile forms of shadow banking while reinforcing the best of resilient market-based finance. And more durable market infrastructure is simplifying the previously complex – and dangerous – web of exposures in derivative markets.
The financial system is fairer because of reforms that are ending the era of “too big to fail” banks and addressing the root causes of a torrent of misconduct."
"The benefits of these painstaking efforts are beginning to be realised. The global financial system is moving from fragility to resilience.
The too-big-to-fail public subsidy enjoyed by private systemic banks has fallen by 90 percent in the UK. Credit is now growing in all major economies. Sources of finance are increasingly diversified between banks and markets, helping to keep the cost of finance low.
And the system is demonstrating an ability to dampen shocks rather than amplify them.
Despite this transformation, there are nascent risks that, if left unchecked, could reverse the progress made and ultimately undermine the G20’s objective of strong, stable and balanced growth.
Indeed, the global financial system is at a fork in the road. On one path, we can build a more effective, resilient system on the new pillars of responsible financial globalisation. On the other, countries could turn inwards and reduce reliance on each other’s financial systems.
That would, in turn, fragment pools of funding and liquidity, reduce competition and impede cross-border investment.
The net result would be less reliable and more expensive financing for households and businesses, and very likely lower growth and higher risks in all our economies."
"The outcome of the Brexit negotiations could prove highly influential in determining which path the global financial system takes.
In that context, and fully consistent with the priorities of Her Majesty's government, the Bank of England will work to build a responsible financial globalisation that first protects and serves the UK real economy, and then secures the UK's traditional role of supporting global prosperity through an open global economy."
"How the Brexit negotiations conclude will be a litmus test for responsible financial globalisation. We start from a position where the high road is both readily attainable and highly desirable for all involved.
The UK and the rest of the EU have exactly the same rules governing our systems. And we have the most highly developed frameworks for intensive supervisory cooperation.
Capital flows seamlessly across our borders. The current EU legal regime allows firms to passport throughout the Union, supervised by the home supervisor.
The EU and UK are therefore ideally positioned to create an effective system of deference to each other's comparable regulatory outcomes, supported by commitments to common minimum standards and open supervisory co-operation.
These commitments could be reinforced by reliance on independent peer reviews and a new, independent dispute resolution mechanism. Such an outcome would be entirely consistent with the UK Government's stated aim of a new, comprehensive, bold and ambitious free trade relationship with the EU that embraces goods, services and network industries.
And such an approach could be applied more broadly to the immense benefit of the global economy. The UK and EU have the potential to create the template for trade in financial services – one that leverages the tremendous progress that has been made in recent years building resilience and cooperation.
But financial services are only part of a much broader negotiation. Given our responsibilities to promote financial stability, the Bank – like its counterparts on the continent – must plan, purely as a precaution, for all eventualities.
As the Vice Chair of the Supervisory Board of the Single Supervisory Mechanism recently stressed, for example, “both banks and supervisors must prepare for any potential scenario”.
"Under one scenario, negotiations could result in a new statutory and regulatory regime with a large number of firms – currently either physically based in the UK or providing services within the single market via passporting arrangements – coming directly under PRA authorisation and supervision.
In that case, we would need to form our own judgments, rather than relying exclusively on those of others.
As our continental colleagues have observed in the analogous case of UK firms operating in Europe, these judgements could affect whether the firm operates as a branch or a subsidiary, as well as the range of services it can supply.
Consistent with our current approach, and the PRA's stance towards non-EEA branches, any judgements would reflect:
* the cooperative and information sharing arrangements in place;
* our confidence in the standards to which others are adhering; and
* any assurances we have on arrangements to address circumstances when things go wrong.
Ideally all of these issues would be addressed in a cooperative and symmetrical way, as part of the overall agreement the UK will strike with the EU-27.
Whatever is agreed, there are risks to financial stability both in the transition to the new relationship and in the new steady state.
These risks include disruption of services, a further weakening of investment banking profitability and the potential for greater complexity in firms’ legal structures.
Increased complexity would place greater demands on firms’ risk management and on supervisory oversight, and pose challenges for effective resolution. We expect firms to plan accordingly.
So today, Sam Woods, the CEO of the PRA, is writing to all firms with cross-border activities between the UK and the rest of the EU asking them to inform us of their own planning in response to the UK’s decision to leave the EU.
These include, for example, subsidiaries of US investment banks based in London doing business throughout the EU under passporting arrangements, as well as UK banks doing likewise, and branches of institutions from other EU states operating here in London.
The main purpose of this letter is to ensure that all firms are making, and stand ready to execute in good time should the need arise, contingency plans for the full range of possible scenarios.
The FPC will oversee this process of contingency planning to mitigate risks to financial stability. Asking firms to plan thoroughly is the hallmark of the prepared and professional approach we take to promote financial stability." (Reporting by UK bureau; editing by Kate Holton and Guy Faulconbridge)
* BOE's Carney says to debate rate hike in coming months (Updates throughout)
* Dollar rallies since Bretton-Woods: http://tmsnrt.rs/2g7ph8E