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After nearly twenty years as Chairman of the Federal Reserve, steering the American economy through international challenges of the past, Alan Greenspan has a unique insight into the international challenges of the present.
And thank you too for the benefit of your advice over the past few days with the Business Council for Britain, the group advising the Prime Minister, myself and the rest of the Government on the wider range of challenges we all must meet, government and business here today, to prepare ourselves for the global economy.
As the Prime Minister has said, what the current international financial instability shows us is the sheer scale of global change already upon us – and how quickly what happens in one part of the world can affect us all.
For Britain’s part, we face these changes with an economy whose fundamentals remain strong and stable.
And we do so with a commitment to open markets and free trade. And commitment to go further, as we will do with reforms in the Pre Budget Report, to enhance the dynamism and flexibility of our economy which has been the cornerstone of our approach, and which – as Alan has said today – is essential for all countries to respond quickly.
Our ability to do so is underpinned by our economic framework established almost ten years ago –
- independent monetary policy,
- clear fiscal rules,
- the setting up of the FSA and a new system for financial stability,
- a commitment to take the right long term decisions,
– which I believe makes us well placed to deal with today’s challenges, just as it withstood the international challenges we faced in the past.
So we can be confident of the resilience of our economy and that it will continue to grow.
But we cannot be complacent. The current challenges remind us we must be ever vigilant and be ready to take further steps to ensure we can respond to rapidly changing international market conditions.
As the international economy changes and challenges arise, so we need to able to adapt quickly to those changes and respond to the challenges. And we will do that.
And over the past ten years, the international financial market has changed dramatically: global financial flows have doubled to five trillion dollars, a quarter of global assets are internationally owned.
Britain has established itself as the centre of this global market, with here the City of London world leading financial services, represented by many of you here today. And we are determined to keep it that way.
In this time, the way banks do their business has changed, funding their loans not just from the deposits of their savers but from increasingly innovative instruments and a much wider set of investors. The market is more complex and interconnected and our system must reflect that.
So too has the way people do their business with their banks changed, putting their money in and out not just through branches but over the phone and the internet. People are better and more informed of any problems as they arise. Confidence matters more than ever, and our system needs to reflect this too, putting in place a system that protects the public interest.
And recent events show that further reforms are needed.
So when I report to the House of Commons I will set out the steps we are taking to reinforce our system based on three objectives:
- maintaining the stability of our financial system,
- its competitiveness,
- and maintaining confidence.
Lets be absolutely clear, the responsibility to minimise risks and prevent problems happening in a particular institution lies, first and foremost, with the people who run and own that institution. As I said last week, no government should ever be in the business of using public money to protect executives who make the wrong call or bad decisions.
But governments – acting not just individually at the national level but increasingly together at the international level – do have a role in ensuring our regulatory system, while being principled and proportionate, reinforces firms responsibilities.
We will not rush into heavy handed reforms that we later regret, a temptation we rightly resisted in the past. Its important to think first and then act.
But at the meeting of world Finance Ministers in Washington later this month I will put forward practical steps I believe the international community can take, recognising that regulation needs to focus on solvency but also on liquidity. So:
- swiftly implementing the agreement for banking solvency;
- making more rapid progress on new international regulations on liquidity, which have been in discussion for too long, and now need to be accelerated;
- and developing common approaches to increase transparency and prevent risky investments being hidden off balance sheet.
The FSA are at the forefront of these international discussions and are examining what is needed here in Britain.
Second, we need a greater role for the international community in identifying global risks to stability and preventing problems occurring in the first place.
The British Government has already called for a stronger role for the IMF in maintaining the stability of the international economy.
We now need a new responsibilities for the International Monetary Fund and the Financial Stability Forum – first set up after the Asian financial crisis ten years ago – working together as the international community’s early warning system. The Fund should use its surveillance system to identify global economic and financial risks, and we need a stronger role for the Forum in tackling them.
This stronger role should include bettercommunication between nations and sharing best practice, from how best to support banks with liquidity problems to providing protection for depositors, and leading coordinated regulatory responses to risks to prevent problems before they occur.
But in a global financial market no country or company can insulate itself entirely from international risk.
So if a problem does happen, we need to be able to deal with it quickly to maintain stability and confidence.
Savers need to be sure that they can get their money out if they need to.
That is why, as we have set out in a number announcements, in the current market circumstances we are providing a guarantee for Northern Rock’s depositors.
But for the future, we now need to put in place a better regime – a new orderly process with a better protection scheme as its foundation.
Under the current scheme only the first £2,000 of people’s savings and 90 per cent of the next £33,000 were guaranteed.
As a first step before more fundamental reform, today I can announce the Financial Services Authority has increased the limits of the financial services compensation scheme so that it covers from today in full the first £35,000 of people’s deposits in any institution at 100 per cent.
This will be just the first stage of our reforms that I will set out to Parliament and then, with the FSA, consult on. This will ensure consumers can continue to carry on doing their essential day-to-day banking. And by increasing the compensation scheme’s guarantee significantly further still and enabling us to separate out their savings from the outset, will give them confidence their savings and deposits are accessible, safe and secure.
We will legislate in the forthcoming Parliamentary session to implement this new regime.
At its foundation is our objective to maintain stability. Transparency in our markets is an essential part of that and is embedded in European law.
But we also need to recognise the difficulty central banks can face in using the lender of last resort tool in a world where markets rightly expect high levels of disclosure and transparency.
This is not a simple issue, nor is it restricted to Britain. Through the Financial Stability Forum, countries can learn from each other on this. And if it proves necessary to clarify the ability in Europe for central banks to provide support to protect financial stability, we will work with other European countries to provide that certainty.
Alan Greenspan has today set out some of the challenges we all face in maintaining international stability.
I have today set out the steps we are taking here and proposing internationally as the platform on which we will all meet the challenges of global change.
When I deliver my Pre Budget Report and Comprehensive Spending Review I will the set out the reforms and investments we will make to equip our country and support you as business in meeting them
Throughout I will take no risks with stability of our economy and ensure Britain plays its role in ensuring the stability of the global economy as the foundation of our future prosperity.
Ladies and gentlemen, thank you for coming here today. And to Alan Greenspan in particular, on behalf of us all, thank you for the benefit of your advice which we shall continue to value.
Thank you.
