This afternoon an EU document relating to Financial Services and Prudential Requirements was placed before the House of Commons. It was not debated: debate took place in Committee last week. I attended, though I was not formally assigned to the Committee.

The EU’s proposals amount to further European Union encroachment and unnecessary regulation: the document, rather than teaching granny to suck eggs, teaches bankers to make loans. It is fundamentally misguided. The EU’s preoccupation with attempting to regulate away the consequences of moral hazard is as futile now as ever. I have said as much repeatedly and that’s why I introduced my Financial Institutions (Reform) Bill.

I did not have a vote in Committee on this occassion but I was able to press the Minister, Mark Hoban, about my reservations. Here are the relevant sections:

Steve Baker (Wycombe) (Con): May I draw my hon. Friend’s attention to article 170 on the use of models? I have looked through the provisions, and most seem so elementary as to be not worth stating. For example, under article 170(e),

“the institution shall complement the statistical model by human judgement and human oversight”.

Does my hon. Friend share my view that such elementary provisions should not be imposed on institutions? Institutions should be capable of coming up with them for themselves.

Mr Hoban: One would have thought so, but we saw that in the run-up to the financial crisis people placed undue reliance on models or credit ratings, and institutions did not use their own judgment to question and challenge models and ratings. It may seem elementary, but in the past the elementary has often been overlooked.

Steve Baker: I was grateful for my hon. Friend’s earlier answer about the need to spell out elementary truths in this document. Indeed, we could have dipped in virtually anywhere and found something that is really teaching granny to suck eggs in the financial system. I am struck that one of the issues here about the terrain of the debate on all of these questions, including capital adequacy in relation to commercial risks, is that we have left in place all the moral hazard in the financial system and now we are trying to regulate away the consequences. Is there anything in this document that deals with the underlying moral hazard in the financial system?

Mr Hoban: One of the reasons why we have moral hazard in the financial system is the existence of the implicit taxpayer guarantee. The work that we are doing through the Independent Commission on Banking aims to remove that in the context of the UK by ensuring that banks hold enough capital to absorb losses or that where those losses exceed their equity, bondholders are bailed in so they bear that cost. As I said earlier, CRD IV is one part of the European jigsaw on this. The next document that we expect to see—the crisis management framework—will deal more explicitly with the issue of moral hazard and the implicit taxpayer guarantee. We should not see this as the only venture by Europe in these matters. I am keen to see the crisis management framework being brought forward because while we tackle the implicit taxpayer guarantee here at home, we need to make sure that that is tackled across Europe as well.

I suppose we’ll see whether the EU approach is appropriate. I hope the experience is not too painful and I will continue to set out alternative approaches for a sound financial system.

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