Britain’s bankers look forward to Carney era
Mark Carney’s investment banking background with Goldman Sachs in stak contrast with that of Mervyn King
Reuters in London and Ottawa
To many in the City of London financial centre, incoming Bank of England governor Mark Carney looks and sounds like one of them.
His instincts for finance were shaped at the outset by 13 years working for Goldman Sachs - a contrast with his predecessor Mervyn King, an academic economist.
King, like many in the country, has barely disguised his disdain for bankers.
Britain’s banks helped bring the US$2.5 trillion (HK$19.4 trillion) economy to its knees by racking up risky bets that forced the government to bail them out when the financial crisis erupted.
The banks are now hoping for a better working relationship with Carney. He starts his new job on July 1 with sweeping new powers to kickstart an economy that is suffering its slowest recovery from recession on record.
“Mervyn is seen as hostile and sometimes contemptuous of bankers and that will change,” said John Gieve, a former Bank of England deputy governor in charge of financial stability. “Carney is likely to be someone who speaks the same language as the bankers.”
But Carney will be no soft touch.
The 48 year-old, who once said he gears up for big meetings by listening to Hell’s Bells by rockers AC/DC, is quick tempered and not afraid to ruffle feathers. He has shown little patience for pleas to slow the pace of banking reform, as head of the Bank of Canada and of the Financial Stability Board that leads global efforts to improve regulation and supervision.
“He will see himself as tough and no-nonsense but he is coming at it from a fundamentally different history and that will be a big change,” Gieve said.
Britain’s banking sector remains fragile more than five years after the crash.
The combined balance sheet of Britain’s largest banks is five times the size of the economy, despite some radical downsizing. Lending to businesses, a lifeblood for the economy, is still shrinking as banks remain fearful of risk and companies say they don’t want to borrow because demand is so weak.
Carney has a chance to meld British monetary and financial policy in a way he couldn’t in Canada. He tried in 2009 to win more powers, suggesting the central bank play a lead role in a new financial risk watchdog. Other regulators feared a power grab and the finance minister backed the status quo.
Even so, Canadian bankers say Carney didn’t hesitate to raise sensitive issues with them. “He certainly pushed the boundaries a little bit there,” one banking industry official said.
Carney immersed himself in financial crisis management early in his governorship of the Bank of Canada when he had to broker an emergency deal to fix Canada’s money markets.
Former colleagues recall him working the phones at a staff Christmas party to clinch the involvement of big foreign banks.
Few were surprised when the world’s central bankers selected Carney to run the Financial Stability Board, the global body charged with making sure that the lessons of the financial crisis resulted in tougher new rules for the banking industry.
Carney is taking over the Bank of England just as it assumes greater powers over Britain’s banking sector.
Finance minister George Osborne tore down the previous, sprawling regulatory system which failed to head off the credit crisis. When he named Carney as King’s successor last November, he stressed Carney’s banking expertise.
Economists say Carney will want to act quickly to get the ailing British economy up to what he calls “escape velocity.”
“George Osborne has really bet the ranch on Carney. This puts Carney in an immensely powerful position,” said Rachel Lomax, a former Bank of England policymaker.
Yet, despite his reputation for bold thinking, Carney may struggle to introduce sweeping changes in monetary policy.
He is expected to push the bank to give a clear idea of how long interest rates will stay at rock-bottom levels. That could encourage businesses and households to spend more. But some fellow policymakers are worried about making such a commitment, probably limiting how far Carney can go with that option.
Carney has endorsed the bond-buying programmes of the US Federal Reserve and the Bank of Japan as appropriate for those economies. But if he tries to revive the BoE’s asset purchases, he will also have to overcome opposition in the MPC.
Signs that Britain’s economy is clawing its way out of two years of stagnation have slightly lessened the urgency for a monetary policy revamp. And, given the massive debt hangover from the financial crisis, there can be no quick fix.
Yet economists say an outsider can change the tone of the Bank of England and the way it deals with banks is a perfect way to do it.
Former BoE policymaker Lomax said a priority should be to get the central bank’s three powerful decision-making bodies - the ones that set monetary policy, write rules for banks and make sure they follow them - to work better together.
“Carney has the opportunity to look right across the piste and try to get better coordination,” Lomax said.
Bankers complain about mixed messages as the BoE encourages them to lend more, especially to small businesses, while at the same time requiring them to raise capital levels.
“We have had an ongoing tirade from the current governor saying banks must raise more capital, raise more capital, raise more capital,” said Simon Hills, head of prudential capital and risk at the British Bankers Association.
“Of course, if you are continually being exhorted to raise more capital...then you’re going to sit on your lending book.”
King vigorously contests the banks’ argument. “The reverse is true. It is insufficient capital that restricts lending,” he said in a farewell speech last week.
The next morning, the BoE set a limit on lending relative to capital which, like other bank reforms in Britain, was adopted ahead of a global deadline. One banker sarcastically called the announcement “the Mervyn King memorial press release”.
Tensions between King and Britain’s banks have a history. Shortly after taking control of the BoE in 2003, he scrapped the governor’s monthly lunches with top bankers, setting the tone for a more distant relationship.
City executives say King neglected the central bank’s in-house finance team, leaving it badly placed to respond quickly when the global financial crisis erupted.
When the crisis struck, relations between King and bankers came under severe strain. King, angry at the risks taken by banks, balked at the moral hazard of helping them out.
Later, King played a key role in the ouster of Barclay’s boss Bob Diamond over the Libor rate-fixing scandal and he has shown no let-up in his disapproval of banking practices.
That sentiment is shared by many in Britain who are still angry about the tax-payer bailouts of the banks.
But many in the City of London feel it is time for a new approach from such a powerful policymaker.
Carney has a chance to bring pragmatism to the bank.
British bankers hope he will be more sympathetic to their concerns about the way the new rules are being applied.
Hills at the British Bankers Association said banks wanted a more flexible approach to modelling potential future losses, more dialogue when it comes to deciding higher capital requirements and a clearer sense of what new capital demands might be made in the future.
Carney has shown some flexibility at the FSB, agreeing to what he called generous deadlines on new capital requirements.
And when Carney looked to fill the Bank of England’s new post of chief operating officer, he poached Charlotte Hogg from the British arm of Spanish bank Santander who also worked for Morgan Stanley, a background noted by some in London.
He can bring in more fresh blood when Paul Tucker, deputy governor in charge of financial stability - and who was pipped to the top job by Carney - leaves the bank later this year.
But anyone in the City hoping for an easy ride under the bank’s new leadership will be disappointed.
In 2008, Carney accused Canadian banks of hoarding cash, prompting a sharp retort from the banks which published details of how lending had in fact risen. And in 2011, he clashed with the man regarded by many as the most powerful banker on Wall Street, Jamie Dimon, the chief executive of JPMorgan Chase.
His other encounters with bankers have been more cordial, a Canadian official said. But Carney shares King’s impatience with those who insist higher capital hurts bank lending.
When the head of the Canadian Bankers Association called in April last year for a pause in the new rules for the financial industry, Carney’s response was withering. “No one pressed pause in the middle of the financial crisis when US$4 trillion were lost and 28 million jobs were lost, 400,000 here in Canada,” he said.