Should We Fear Singapore-on-Seine?
The phrase “Singapore-on-Thames” is shorthand for Britain becoming a low-tax, lightly regulated economy that can out-compete the sclerotic, over-regulated eurozone. Yet, there is no meaningful political support in Britain for significantly lighter bank regulation – in contrast to the situation in France.
LONDON – The idea that London might have a post-Brexit future as a kind of deregulated “Singapore-on-Thames” is one of the more curious notions to have emerged in the three and a half years since the United Kingdom’s citizens voted narrowly to leave the European Union in the fateful June 2016 referendum. In fact, at least as far as the financial sector is concerned, the bigger threat to European regulatory harmony could come from France.
The phrase “Singapore-on-Thames” is shorthand for Britain becoming a low-tax, lightly regulated economy that can out-compete the sclerotic, over-regulated eurozone from a strategic position only 20 miles or so offshore. The general idea was first mooted a couple of years ago by Philip Hammond, then Britain’s chancellor of the exchequer, as a means of encouraging the EU to strike a friendly Brexit deal with the UK.
Those who know Singapore well will quickly recognize that the analogy is far from perfect. True, Singapore has low tax rates (unless you wish to import an expensive foreign car), and low levels of public spending – although the latter does not seem to be part of the plan for Singapore-on-Thames advocates.
But the idea that Singapore is a deregulated paradise is not borne out by reality, as anyone who has tried to dispose of a piece of used chewing gum there will know. As Guy de Jonquières has noted, Singapore’s success owes more to the fact that it is a “meticulously planned economy,” with “handholding and cosseting” of overseas investors by “powerful, eager to please bureaucrats.”
The political prospectuses of both major parties in the UK’s December 12 general election, with their nostalgic ideas for reviving British manufacturing, would seem to suggest that Britain should be reborn as a latter-day Stoke-on-Trent, rather than as a twenty-first-century European Singapore. Nonetheless, the notion that the UK might seek a post-Brexit competitive advantage through deregulation – particularly in relation to financial services – has taken hold on the continent, where it has become something of a bogeyman, used to frighten other EU member states.
The EU commissioner responsible for the financial sector, Valdis Dombrovskis, has warned that the UK cannot hope to retain access to EU markets if it departs from the bloc’s rules. “The more systemically important the market,” he argues, “the closer the regulatory alignment that is expected.” The UK, Dombrovskis says, must think very carefully before it moves away from rules followed by the rest of the EU. If it does diverge, the access of UK-based financial firms to EU markets could be restricted.
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From the perspective of a London-based bank, this argument seems strange. I can identify no notable constituency in British politics that favors significant bank deregulation. The Bank of England argues that capital ratios are now adequate, and those who disagree tend to want even heavier burdens on banks. The issue of financial regulation has not featured prominently in the general election debates, which is hardly a surprise. And we have seen no sign that the pendulum is swinging back toward deregulation, as it has begun to do in the United States.
UK banks have an average core Tier 1 capital ratio – the key measure of their strength – of over 15%, which is above the eurozone average, and the prospect of a material reduction of that figure seems remote. The Bank of England’s stress tests, which are the tightest constraint for most banks, are “biblical” in nature: banks must show that they can survive a 5% annual contraction in GDP, a doubling of unemployment, and precipitous falls in house and stock prices. So, the argument that the UK is about to deregulate its banking system seems odd. And it seems even stranger when one compares the political rhetoric on both sides of the English Channel.
Whereas British politicians recently have offered no words of comfort to UK banks, France’s finance minister, Bruno Le Maire, has declared himself in favor of easing the capital burden on French banks in the interests of competitiveness. “We have gone too far in setting these requirements,” Le Maire said recently. Basel III, the stone tablets that contain the global standards for banking regulation, “must be simplified and lightened,” he declared, adding that “American banks are not subject to rules as strict as those which apply to European banks.”
Le Maire thus seems to be on a collision course with Dombrovskis, the EU’s financial rule-setter-in-chief, who says, “the EU is committed to carrying through the final Basel III reforms faithfully.”
That is the UK position, too, but it seems no longer to be the French view. So, in the world of financial regulation, a “Frexit” from the Basel framework seems more of a threat to the level European playing field than Brexit is. With French President Emmanuel Macron having recently deemed NATO to be in a state of “brain death,” it seems that a similar verdict on the Basel Committee on Banking Supervision is now being prepared.
It is true that some aspects of the global agreement on Basel III, reached – reluctantly in the case of France and Germany – at the end of 2017, weigh more heavily on European banks than on their US peers. That is partly because mortgages are rarely securitized and sold in Europe, whereas in the US, two state-guaranteed enterprises, Fannie Mae and Freddie Mac, stand behind the mortgage market and warehouse loans originated by banks. Also, European banks lend more to large, highly-rated corporate customers, which in the US typically fund themselves in the capital markets. The so-called “output floors” in the Basel accord therefore affect European banks more severely.
These are valid points. But, rather than launching another transatlantic political dispute, it would be preferable if consenting regulators could privately negotiate a way to smooth the hard edges in the Basel accord. Frexit could be just as damaging to Europe’s financial system as Brexit.