As we look forward – and for so many reasons we must look forward – it is important to focus on the future of financial services, and the important role they play in our economy and internationally. This will be my focus today.
I am going to look forward with the benefit of history and context and set out why open financial markets are in the interests of all – home and abroad – and something we should always strive for. I want to start with the Bretton Woods agreement towards the end of the Second World War. This was a fundamental and decisive commitment to an open world economy. This commitment did not come free at the time – the adjustment was hard for this country – and of course the more formal Bretton Woods system broke down in the 1970s. But that breakdown did not compromise the commitment shared broadly across nations to an open world economy. There have been times when the commitment has been sorely tested, but it has not been abandoned.
What followed the breakdown was a shift of emphasis, not a free for all. The shift was towards managing the consequences of greater openness with much more emphasis on the stability of the financial system and its ability otherwise to do harm, both domestically and internationally. What was needed was not just openness, but safe openness. This emphasis was never more evident than during and after the global financial crisis. There was a moment at the height of the financial crisis when it might have been natural to consider forfeiting the commitment to an open financial system in the face of damaging international linkages. That did not happen to our great relief – the G20 nations stood firm to the principles of Bretton Woods and committed to significantly reforming the international financial system and its regulation, by raising global standards for regulating the system and reinforcing the institutional structure.
The Covid crisis has been the first big test of those reforms – and it has been a big test. The scorecard to date is encouraging – by no means perfect, but the core of the system has stood up well, which is needless to say a huge relief.
In order to preserve this public good of an open world economy and now also an open financial system, has required a commitment to institution building both internationally and domestically. Bretton Woods created the IMF and World Bank, and slightly less directly the GATT and then WTO. Out of the financial crisis came the importance of the global Financial Stability Board with a mandate to promote international financial stability underpinned by strong regulation, supervisory and other financial sector policies, reinforcing thereby the importance of G20 nations. The FSB works closely with, and is supported by, the four standard setting bodies of the international financial system – the Basel Committee for banks, IOSCO for markets, the IAIS for insurance, and the CPMI for payment and markets infrastructure. And, just to underline the importance we see in these bodies, it is with pride that I can say that the Bank of England chairs two of the four – Jon Cunliffe for CPMI and Victoria Saporta for IAIS.
These bodies are where the critical standards for governing the financial system get hammered out, where safe openness is put into practice. They are very clearly global in reach, necessarily so. They are not regional, they are global. We cannot participate in these bodies, and they cannot function as they do, unless we are all prepared to enter into the process and listen to and accept ideas from others. It requires us to give up some control over our standards and rules, because the alternative of a narrow domestic control is illusory – it would jeopardise achieving the very things we want, safe open markets, and likewise open economies. Above all, these bodies enable us to build the trust that enable our financial systems to stay open.
But, we do not for a moment believe that we can maintain the arrangements we have without change. As the world around us changes, so too do we have to adapt how we achieve these public goods. Also, we do not participate in these global institutions with the intention to water them down, misguidedly because we think this would preserve some notion of our competitiveness as a nation. The UK could not be a global financial centre for long if we did.
Let me reiterate again, the public goods of open economies, an open financial system and the stability of that system…
Read More: The case for an open financial system