1O DOWNING STREET LONDON SW1A 2AA
THE PRIME MINISTER
<| Q December 2009
Dear Colleagues RISK, REWARD AND RESPONSIBILITY: THE FINANCIAL SECTOR AND SOCIETY
At our meeting today we will address the strategy we need to ensure strong, sustainable and balanced European growth for the future. I wrote to you in October setting out my ideas. As part of our discussion, I think we need to focus attention on the role played by the financial sector. A strong and competitive financial sector is essential to a productive modern economy. Banks and other financial institutions play a key role supplying businesses large and small with the financing necessary to maintain growth and increase productivity. But as we have seen, bank failure can have a high cost. Following the collapse of Lehman Brothers in 2008, governments around the world, with Europe in the lead, acted decisively to protect retail depositors, maintain financial stability and enable banks to continue lending to the economy. Without such action the consequences of the crisis would have been far worse. But these actions have placed heavy burdens on taxpayers despite the fact that, both preceding the crisis and again now, banks have made very large profits, and some of their employees have received bonuses equal to many multiples of average earnings in our countries. The rapid return to profitability of the sector, at a time when overall economic and financial conditions remain difficult, highlights some of the structural concerns about the sector which we need to
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address - while the benefits of success are reaped by the few, the costs of failure are borne by the many. We must therefore act to redress the balance of risks, rewards and responsibility between society and the financial sector. This week, the UK has taken steps to tackle remuneration practices that have contributed to excessive risk taking by the banking industry. Yesterday, in our Pre-Budget Report, the Government announced an additional bank payroll tax where bank and building society employees are awarded discretionary bonuses above £25,000 in the period from the Pre-Budget Report to 5 April 2010. This tax will encourage banks to consider their capital position and to make appropriate risk adjustments when settling the level of bonus payments above £25,000. I believe that we must now, together, take further steps to establish a new economic and social compact to underpin a more sustainable and equitable system in the long run. A global debate is underway on how best to achieve this. A number of proposals have been made to ensure that the financial sector pays for the systemic risk that must be borne by the rest of the economy: these include proposals for contingent capital and capital insurance, and for systemic risk levies to finance resolution funds. And in order to address the wider issue of the contribution that the sector should make to wider social and economic objectives, some have called for this issue to be addressed through a general financial transaction tax. It is clear that any new arrangements should be: • global - some options could realistically only be implemented at a global level, while others would require international agreement and coordination on key principles to be effective; • non-distortionary - we must avoid measures which would damage liquidity, drive inefficient allocation of capital or lead to widespread avoidance; • stability enhancing - actions on this must support and not undermine the regulatory action we are already taking to enhance the stability of the international financial system and the global economy; and
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â&#x20AC;˘ fair and measured - financial services must be able to continue to contribute to economic growth and any additional costs should be distributed fairly across the sector. Today, as our initial contribution to this international debate, the UK has published a paper - Risk, Reward and Responsibility: the Financial Sector and Society - which examines these issues in the context of the changes we have agreed to financial regulation and supervision and considers the issues raised by the different options available to ensure a fairer balance of risk and reward. The EU has played a leading role in the international debate on reforming the international financial system. With our international partners, we have agreed on the steps needed to prevent future crises and are encouraging the development of the new global standards on better quality capital and stricter liquidity requirements that are needed. It is vital that we take this work forward quickly. We have also reformed our own supervisory and regulatory frameworks, and have an ambitious work programme going forward to ensure the Single Market remains open, competitive and stable. However a globally competitive EU financial services sector will require a level playing field beyond the boundaries of the Single Market. The EU should work actively with our international partners to develop proposals to ensure a better balance of risks, rewards and responsibility between society and the financial sector. In particular we should: 1.
Actively support and contribute to the IMF's work on how the financial sector could contribute to paying for burdens associated with government interventions to repair the banking system. This should include the full range of options, including an insurance fee for systemic risk; a resolution fund; contingent capital arrangements and a financial transactions tax.
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Invite our Finance Ministers, assisted by the Commission, to build on the work programme they have already agreed and identify the key principles which new global arrangements would need to respect, to inform further discussion of these
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important issues at next year's IMF and World Bank Spring Meetings. look forward to our discussions. Yours sincerely