Coverage of the unfolding crisis
...and how to fix it
Monday, November 26, 2012
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by Sid Verma
At the IMF annual meetings in Tokyo, Carney, who is also chairman of the Financial Stability Board (FSB), jokingly quipped you should ask Glenn Stevens [Australias central bank governor] about it, underscoring the credit bestowed to developed-world central bank governors, who have overseen stable banking systems.
Carney has won acclaim for his monetary zeal and flexible approach to an inflation-targeting regime. Canadian monetary policy is the envy of most G7 central bankers, as 21 years of highly successful inflation-targeting have helped to anchor inflation expectations, a world away from the UK. Whats more, as the allure of low market rates trumped job insecurity, mortgage-borrowing shot up from 2010 in Canada, underscoring the dangers of the low rates and the clean monetary transmission channel. Amid fears that ultra-low interest rates have fed a bubble in the Canadian housing market, at the end of 2011 the Bank of Canada announced a "flexible" approach in determining the time-horizon when its 2% inflation target will be achieved. Carney, buttressing his reputation as a vocal hawk, told Euromoney in August: There is potentially a role for monetary policy to lean against the wind and reinforce other measures, and this is part of our framework. We are not part of the caricature of inflation-targeting regimes, which has been described as a mechanistic, dogmatic-based approach to monetary policy."
The comments underscore Carneys fears over consumer leverage and the possible need for a counter-cyclical monetary policy in Canada in sharp contrast to the UKs structural deleveraging drive. Nevertheless, Carneys monetary activism was laid bare after his decision to cut the policy rate in March 2008 one month after his appointment in Canada, combined with the non-standard monetary tool to keep the "conditional commitment" in April 2009 to hold the policy rate for at least one year. Both Carneys proactive monetary loosening and bid to anchor expectations amid low rates serve for food for thought as the market mulls Carneys likely resolve to embark on further rounds of quantitative easing in the UK. Carney is credited with bringing more market-based analysts into the sleepy Toronto headquarters, his pragmatism and beefing up transparency with a more timely publication of monetary policy reports. However, Carneys challenge will be complicated by his FSB duties, where his reform agenda hangs in the balance. Carney is facing off challenges, fittingly from within the BoE, by executive director for financial stability Andrew Haldane, who favours fewer and less-complex regulations.
Specifically, Haldane, who Carney says he is well-acquainted with, has called for the removal of risk-weighting in the calculation of banks risk-weighted assets, triggering Carneys ire. He told Euromoney: Is the basic point that one would want institutions to have these measures buttressed by relatively simple checks? Yes and that will influence shadow-banking reform efforts, especially. Basel I was simple and it drove us off a cliff. Andrew Haldanes conclusion is not supported by the proper understanding of the facts." Nevertheless, Carney has astute political skills and is known for his well-timed market instincts, which should serve him in good stead to tout the virtues of his monetary views and bank-reform position. He has established rapport with trade unions in Canada, by lashing out against income inequality and excess corporate savings, while expressing sympathy with the Occupy movement. Whats more, its a testament to his political capital that rumours abound in Torontos financial district that Carney could one day become the Canadian prime minster for the Liberal Party, a fact that perhaps highlights why news of his BoE appointment was a closely-guarded secret. However, Carney is now swimming in uncomfortable waters given the scale and depth of challenges in the UK and at the FSB. On the latter, the post-Lehman consensus over the Basel III framework is under severe strain, as the US postpones the January 2013 initial start date, while competing regulatory agendas in Europe complicate the Basel push. The following interviews conducted with Euromoney throw into sharp relief Carney's likely monetary and reform activism in the UK, steely resolve and interventionist instincts.
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