Mark Carney: Finance’s new statesman

Sid Verma
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Regulators have regained their reformist muscle in the shape of Mark Carney, Bank of Canada governor and chairman of the Financial Stability Board. In a wide-ranging interview, Carney talks about recent banking scandals, the Volcker Rule, and why fears about Basle III are wide of the mark.

In September 2011, at a now-infamous closed-door meeting in Washington of global bankers, under the purview of the Financial Stability Board (FSB), JPMorgan chief executive Jamie Dimon launched an ill-tempered tirade against Mark Carney, Bank of Canada governor.

At the meeting, Dimon charged that the Basle III framework was ill conceived both in theory and in practice and would greatly increase the cost of capital in an already subdued global economy. Dimon also argued that the capital surcharge for systemically important institutions (Sifis) was disproportionate and, in particular, penalized US banks in capital calculations.

The attack on the Bank of Canada governor – who was accurately tipped at the time to become the next FSB chairman – was promptly leaked, grabbing global headlines. The outburst nurtured a narrative in the court of public opinion: global bankers had launched a full-scale assault on root-and-branch regulatory reform, led by the pugnacious JPMorgan chief.

"Dimon was being very aggressive in order to intimidate Mark," said one person privy to the meeting. Carney – who was visibly unsettled by Dimon’s attack – delivered a public speech a couple of days later to the Institute of International Finance (IIF). He remarked: "If some institutions feel pressure today, it is because they have done too little for too long, rather than because they are being asked to do too much, too soon". Although the speech had been written at least a week before Dimon’s tirade, it was widely seen as a riposte to his detractors, highlighting Carney’s reformist resolve and desire to mitigate the systemic excesses of the industry.

Dimon – who promptly apologized to the governor for his outburst – is no longer feted as the last banker standing post-crisis. Although JPMorgan has emerged larger and healthier than many of its rivals since the Lehman Brothers collapse, Dimon’s leadership and reputation was tarnished in May when his bank’s opaque chief investment office (CIO) lost up to $5.8 billion in trades, which he attributed to "errors, sloppiness and bad judgement". The losses put the spotlight on a seemingly unreconstructed deposit-guaranteed industry that garners profits on proprietary bets, with little operational or regulatory scrutiny.

Carney, who was appointed FSB chairman in November 2011, is tasked with implementing the Basle III accord. His in-tray is groaning under the weight of the reform agenda and the ostensibly insurmountable challenges: crafting a regulatory system that reduces the prospect of another financial meltdown, but without choking off capital formation in an already depressed global economy.

Carney is staking his credibility and reputation that Basle III – the third global regulatory effort in around two decades – is the world’s best bet to reduce the risk of another financial Armageddon. In his capacity as chairman of the global agenda-setting and co-ordinating body, which works with the Basle Committee on Banking Supervision, he is executing changes to the composition and definition of capital, liquidity and counterparty credit risk, capital buffers and the leverage ratio, while crafting a single rule book, enhanced supervisory measures and sanctions for noncompliance.

These regulatory efforts have been given renewed vigour as global banks’ business practices are once again in the spotlight this year, from HSBC’s money-laundering drama, JPMorgan’s CIO loss, Nomura’s insider-trading scandal, Barclays and the Libor manipulation, and the probe of Standard Chartered’s dealings with Iran.

The instinctive defence from some quarters of the banking industry – that these are, generally speaking, unrelated cases of risk-management or governance failings that existing market and supervisory mechanisms will address – clash with the emerging narrative.

Put simply, despite four years of ground-breaking global cooperation, tougher supervisory codes, G20 summits, and market pressures for reform, calls are growing for ever-tighter financial regulation to reduce the incentives for risk-taking. The jury is out on whether global universal banks are still too complex to manage or simply too big.

What’s more, these developments have taken place amid a leadership vacuum in global banking. There is a vanishingly small number of senior international banking executives with the guts and personalities to defend publicly the size and structure of their multi-product, multinational business models at a time when recent scandals have emboldened the reformist mission.

Against this backdrop, it’s not hard to draw a cartoonish caricature portraying Carney as the hard-nosed reform advocate, battling valiantly against the forces of incompetent or casino banking that perennially threaten to besiege the financial system.

But when Euromoney sits down with Carney in the Bank of Canada’s headquarters in Ottawa, the FSB chairman, who succeeded Mario Draghi in the post, is circumspect and thoughtful, attempting to strike a judicious balance between economic stability and credit expansion. He also refrains from caricatured judgements, perhaps unlike some of his peers in the policymaking community.