The full speech and report are available here

Key extracts from the report

The report is ambiguous on the impact of EU membership

‘The wave of UK and EU financial deregulation polices in the 1980s and 1990s may have helped propagate the general trend towards larger firms. The specific role of EU membership, however, is difficult to judge as the trend toward larger banks is not specific to EU countries’ (p. 56)

‘Free movement of capital and financial services within the EU is likely to have facilitated greater financial integration among its member states. In this regard, EU membership may have added to the rise in interconnectedness between EU banks. However, since non-EU countries have adopted similar approaches to capital flow management through mechanisms like the OECD’s Code of Liberalisation of Capital Movements, it is difficult to separate the role of EU membership from global factors.’ (p. 59)

‘The crisis affected the UK economy directly through its impact on the UK financial system. However, during this period, the UK’s membership of the EU may also have had an indirect bearing on the UK’s economic outcomes’ (p. 61)

It warns that the UK and other member states have lost control over financial laws and warns about the impact of further integration

‘Participation in the single market means that the majority of the legislation and regulation applying to the financial sector in the UK is determined at EU level.’ (p. 6)

‘the general movement away from setting minimum standards in favour of ‘maximum harmonisation’, which prevents national authorities from strengthening regulation to meet particular risks in their jurisdiction, has in some instances been problematic.’ (p. 6)

‘closer union between euro-area member states is likely to necessitate further harmonisation of financial regulation across the euro area. It is also likely to lead to reduced flexibility and discretion of the national authorities of euro-area member states in favour of decisions and rules by the authorities of the Banking Union – the ECB, the Single Supervisory Mechanism and the Single Resolution Authority.’ (p. 6)

‘A reformed domestic institutional framework for financial stability is in place to address the shortcomings exposed by the financial crisis and protect financial stability. This framework depends in part on the quality of financial regulation set at the EU level and the flexibility to apply that regulation to meet the specific financial stability challenges in the world’s largest international financial centre. In the main this combination has been achieved thus far. It may, however, become more challenging as the euro area integrates further.’ (p. 7)

‘As home to the world’s leading international financial centre, it is vital that the UK authorities are able to apply the highest standards and have the flexibility to take action to address financial stability risks.’ (p. 72)

‘the Bank of England is subject in its operations and policies to EU competition law and the monetary financing prohibition. Consequently, the design, or operation of, any unconventional monetary policy operations must comply with these laws. EU legislation also places restrictions on the use of capital controls or interventions designed to influence the exchange rate.’ (p. 74)
‘[on the bonus cap] this measure could have undesirable side-effects for financial stability if it limits the scope for remuneration to be clawed back.’ (p. 80)

‘since under the EU’s financial services passporting rules, as described in Chapter 1, it is not possible to require EU firms that do business in the UK to establish subsidiaries regulated and supervised by the Bank of England.’ (p. 76)

‘The requirements specified in CRR and CRD IV are generally maximum-harmonising in nature, which could constrain national authorities’ ability to support domestic financial stability in some cases.’ (p. 80)

‘Solvency II follows a maximum-harmonised approach in most areas, however, including for establishing capital requirements and disclosure. Given the structural differences in the insurance industries across EU member states, this could in future reduce the ability of regulators to account for country- or firm-specific risks.’ (p. 81)

‘Overall, finding the right balance between full harmonisation and national flexibility has been more challenging in the post-crisis period. The need for national regulators and supervisors to have the flexibility in applying EU rules to address the particular risks they face has in the main been respected. However, the general movement away from setting minimum standards in favour of ‘maximum harmonisation’ which prevents national authorities strengthening regulation to meet particular risks in their jurisdiction has in some instances been problematic.’ (p. 82)

It acknowledges that further EU integration will nevertheless take place

‘The euro-area member states have made clear that much remains to be done; as highlighted in the EU’s Five Presidents’ Report (p. 67)

‘Ultimately, as the Five Presidents and other reports have made clear, in order for monetary union to succeed, further financial and fiscal integration will be required among the euro area’s member states. That union would also contribute to the stability and dynamism of the rest of the EU, including the United Kingdom.’ (p. 67)

‘The need for national regulators and supervisors to have the flexibility in applying EU rules to address the particular risks they face has in the main been respected. However, the general movement away from setting minimum standards in favour of ‘maximum harmonisation’ has in some instances been problematic.’ (p. 72)

‘Looking forward, closer union between euro-area member states is likely to necessitate greater harmonisation of regulations and integration of supervision across the euro area. It is also likely to lead to reduced flexibility and discretion of the national authorities of those euro-area member states in favour of decisions and rules by the authorities of the Banking Union – the ECB, the Single Supervisory Mechanism and the Single Resolution Authority. It is important, particularly given the weight of the members of the single currency in the EU, that arrangements are put in place so that the future development of the EU regulatory framework aids the necessary deepening of the integration in the euro area without impairing the ability of the Bank of England to meet its financial stability objectives.’ (p. 72)

The report notes that other parts of the EU remain less open

‘Other parts of the EU financial system are less financially open… From a borrower’s perspective, there is a lack of depth in capital markets.’ (p. 28)

‘there are areas where EU member states appear to be constrained by common EU rules, notably in product markets’ (p. 33)

It also stresses that other factors, aside from the EU, have increased the UK’s attractiveness

‘Studies suggest that it is likely that membership of the EU has played some role in boosting the attractiveness of the UK as a destination for FDI, though this effect may have varied over time, with other factors such as the integrity of the UK legal system also playing a role.’ (p. 28)

‘More foreign banks operate in the UK than any other country and around half of the world’s largest financial firms have their European headquarters in the UK. EU legislation – such as the passporting regime – is likely to have facilitated this expansion, but it is also likely to reflect other factors such as the large pool of skilled labour located in London, the English language and a convenient time zone.’ (p. 31)

It shows how membership of EU has not delivered on promises of 1970s

‘The UK government’s White Paper of 1971 laid out the UK government’s perspective on the main benefits of EEC entry, noting the impressive growth performance of the EEC countries in the 1950s and 1960s. This performance enabled the EU6 countries to converge on the US in terms of both productivity per hour (Chart A) and GDP per capita (Chart B), whereas the UK had stood still relative to the US… However, there has been relatively little convergence in terms of domestic income (GDP) per capita by either the UK or the EU as a whole.’ (p. 47)

It argues that EU membership has exposed the UK to financial shocks

‘Increased economic and financial openness means the UK economy is more exposed to economic and financial shocks from overseas’ (p. 3)

‘Greater openness can increase the exposure of the UK economy to overseas shocks. This has the potential to amplify economic volatility in the UK – for example, if foreign shocks are bigger, or more likely to occur, than domestic shocks’. (p. 50)

‘The crisis also showed that greater interconnectedness can undermine the resilience of the system in times of stress’ (p. 59)

It argues that over-exposure to the EU financial sector led to the crisis being worse

‘Banks in the rest of the EU withdrew cross-border funding from the UK rapidly – and by much EU membership and the Bank of England more so than US banks. Since the crisis, banks in the rest of the EU have continued to reduce cross-border funding – contributing to the tightening in credit conditions seen globally and to the weakness in lending seen in the UK. Thus, while the primary impact of the crisis on the UK financial system and economy came through direct channels from overseas, capital flows between the UK and the rest of the EU may also have been a secondary channel.’ (pp. 54-55)

‘By enabling bank branching, the EU passporting regime may have played some role in affecting the volatility of the UK credit cycle during this period… These issues were partly caused by a lack of adequate liquidity standards before the crisis’ (p. 55)

‘Given the close links between UK banks and those in the rest of the EU, the EU banking system represented a key link in the chain by which the global financial crisis affected the UK… The UK’s membership of the EU is likely to have made this link stronger than otherwise would have been the case – exacerbating the impact of the global financial crisis on the UK economy via the withdrawal of funding by EU banks’ (p. 61)

‘EU membership had a significant effect on the UK during the euro-area crisis. The UK’s strong economic and financial links with the rest of the EU economy, over 85% of which is accounted for by the euro area, means the euro-area crisis is likely to have had a material impact on UK GDP growth’ (p. 64)

‘Given the degree to which the UK economy and financial system is intertwined with the euro area, a more severe crisis – particularly if it prompted renewed concerns about euro-area break up – would almost certainly have a material impact on UK economic and financial stability’ (p. 67).