Market Remarks

The New Boss Of BoE Is Finance’s Statesman

Courtsey Sid Verma of Euromoney:

Carney cuts a statesman-like figure, rising above partisan affiliation, respected even by his detractors, and consistently open to dialogue, say bankers, all of whom are critical of the intellectual and operational thrust of Basel III.

But, Carney seems to be having a running feud with JP  Morgan’s Jamie Dimon or, perhaps more accurately, Dimon is waging it and Carney is merely responding.

Carney seems comfortable with the universal banking model – if buttressed by low leverage, prudent lending practices and strong supervision, as Canada’s success lays bare – but his ideological antipathy to Dimon’s views runs deep. Dimon’s attack on Basel III – reflecting the views of many of his global banking peers, who rarely speak on the record with such candour on regulatory affairs – is rooted in a laissez-faire view of the world. In an illuminating testimony to US policymakers in January 2010, Dimon incurred the wrath of reformers with the following statement: “My daughter asked me when she came home from school, ‘What’s the financial crisis?’ and I said, ‘It’s something that happens every five to seven years.’”

He is pro-reform.

For Carney reform is do or die. He says: “The major emerging market economies, having been side-swiped by the last crisis, have a concern about the health at the core of the global financial system, so the idea that we can somehow slow down the reform process and release capital rather than build it, and somehow that will help reinforce an open global economy, is fanciful.”

He is aggressive in battling off one of the central, and most emotive, arguments advanced by banks: that higher capital requirements and restrictive capital formation frameworks threaten to torpedo an already weak global economy while exacerbating pro-cyclical debt deflation. “The argument that financial reform is causing a shortfall of capital fails to take into account the fact that there are jurisdictions where there appears to be a fundamental shortfall of capital in a material number of institutions that is preventing the functioning of that financial system,” he says. “The shortfall is down to the fact that these banks are a long way from a reasonable level of capitalization in any way that’s transparent.”

He is a shrewd observer and a prescient analyst.

While the European Central Bank delivered a rate increase in July of that year, Carney’s market instincts rightly judged that the leveraged-loan crisis would trigger global contagion. And when policy rates in Canada hit the effective lower-bound, the central bank combated the crisis with the nonstandard monetary tool: the “conditional commitment’” in April 2009 to hold the policy rate for at least one year, in a boost to domestic credit conditions and market confidence more generally. Output and employment began to recover from mid-2009, in part thanks to monetary stimulus.

And, a pragmatic regulator.

The zeal with which Carney introduced this financial stability objective into the central bank’s mandate reflects the same philosophy that underpins his approach to regulation: the financial bubbles in the pre-Lehman Greenspan world order highlight the foolhardy contention that market forces can regulate finance. By contrast, ex-ante regulation, fleshed out in a necessarily imperfect framework, can and should mitigate excesses, he reckons. It’s a belief that also reflects Canada’s intellectual heritage, in the vein of William White, former chief economist at the Bank for International Settlements, and Malcolm Knight, the BIS’s former chief executive, two Canadians who have occupied senior posts in international finance. Both White and Knight sounded early alarms over weak regulation and excess risk-taking that fed the US sub-prime mortgage bubble, with White currently an influential proponent of the view that the loose G7 monetary policy cycle is fuelling asset bubbles.

Overall, he may be the doctor that UK needs.

It’s clear Carney is no career-serving technocrat or a soldier simply executing the regulatory battle for his G20 generals. Although David Dodge, Carney’s predecessor as governor, occasionally commented on public policy challenges, Carney “has played a more active role in economic affairs than any other central banker in recent Canadian history,” says Nixon. “He has rightly broadened, informally, the central bank’s mandate and has done so because he has the platform, the economic skills and practical working knowledge of capital markets.”

 

 

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