Bank of Canada Governor Mark Carney Named to Lead the Bank of England

By David Dittman • November 27, 2012 • Canadian Edge Weekly

Chancellor of the Exchequer George Osborne has chosen Bank of Canada (BoC) Governor Mark Carney to replace Sir Mervyn King as the head of the Bank of England (BoE). When he assumes his new role in June 2013 Mr. Carney will be the first foreigner to lead the BoE in its 318-year history. He will be the most powerful non-elected official in the UK.

Mr. Carney’s successes since his ascendance to the top BoC post on Feb. 1, 2008, have earned him widespread acclaim, and his appointment to be the next BoE governor has been met with similar praise. Indeed he has been both pragmatic and innovative in executing his role at the BoC during a time of significant global economic and financial upheaval.

He will require pragmatism and innovation as he takes on the new challenges of helping revive a struggling UK economy and seeing through reforms at the Bank of England. Beginning in 2013 the BoE will have responsibility for both setting interest rates and for establishing financial stability. His decisions will impact consumers and institutions.

Canada–guided Mr. Carney’s emphasis on a strong and sound banking system, which in turn was complemented by words and deeds of Finance Minister Jim Flaherty–avoided a financial crisis while the rest of the world, including its most important trading partner, the US, melted down in 2007-09.

In his frequent public speeches Mr. Carney has warned in very certain terms of the threats of housing bubbles in key Canadian markets such as Vancouver and Toronto while also citing excessive consumer debt as another potential threat to economic stability.

These twin factors lie behind the BoC’s relative hawkishness in recent months, as its bias has tended strongly toward hiking its policy rate at a time when other central banks continue to extend low-rate pledges and implement ever more exotic forms of monetary policy.

At the same time he has lobbied Canadian corporations to unleash their significant cash balances into new investment in research and development, capital and foreign expansion.

His cooperation with central bankers from the major economies, including the US and the UK, in flooding the world with liquidity at the height of the 2008 panic earned his international credit and eventually led to his appointment by the G-20 to chair the Financial Stability Board (FSB).

The BoC statement announcing his new role noted that Mr. Carney will remain chairman of the FSB. It is entirely right and proper that he should, as the FSB, which is based in Basel, Switzerland, will rewriting the rules of global finance with the hope of preventing the type of risk-taking that led to the recent crises.

In a two-pronged mid-2012 approach Mr. Carney and Mr. Flaherty took renewed aim at housing and excess, the finance minister announcing tighter mortgage requirements and the BoC governor backing him with a tough stance from his bully pulpit.

“Federal authorities have taken additional prudent and timely measures to support the long-term stability of the Canadian housing market, and mitigate the risk of financial excesses. Our economy cannot depend indefinitely on debt-fuelled household expenditures, particularly in an environment of modest income growth,” warned Mr. Carney.

According to Reuters, in his role with the FSB Mr. Carney has “gained a reputation on the global stage by challenging some of the world’s most powerful financial executives to make their banks less risky, even if it left them less profitable.”

JPMorgan Chase & Co (NYSE: JPM) CEO Jamie Dimon reportedly referred to requirements that banks set aside more capital as a buffer against future crises as “cockamamie nonsense.” But Mr. Carney, whose experience includes 13 years with The Goldman Sachs Group Inc (NYSE: GS), answered by describing the proposed rules as a “reasonable” response to the 2007-09 crisis and left the room, “visibly angry,” according to Reuters.

Mr. Carney is a solid supporter of the Basel III rules, which require banks to hold more capital. He recently described the suggestion that global banking reforms should be watered down or delayed to protect a weak global economy as “fanciful.”

On the other hand, Mr. Carney won’t likely press ideas that UK banks be forced to split their retail and investment banking operations. Canada’s Big Six banks all have major investment banking arms. In other words, there is no US-style Glass-Steagall separation in Canada, nor did Mr. Carney ever argue for one.

What he did do was ensure policymakers used regulation as well as supervision to maintain financial stability.

Mr. Carney cut interest rates one month after assuming his role, contra the oft-practiced attempt to establish a central banker’s presence with authority with a hawkish-toned rate hike. His 50 basis point reduction in the BoC’s target overnight rate from 4 percent to 3.5 percent on Mar. 5, 2008, still stands in stark contrast to the European Central Bank’s decision to boost its benchmark in July 2008.

And when the US subprime crisis had finally morphed into the Global Financial Crisis/Great Mr. Carney was the first central banker to make a “conditional commitment” to keep interest rates low for a set period of time. The BoC’s benchmark hit the effective lower bound in April 2009; in his statement announcing the move Mr. Carney noted:

…it is appropriate to provide more explicit guidance than is usual regarding its future path so as to influence rates at longer maturities. Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target. The Bank will continue to provide such guidance in its scheduled interest rate announcements as long as the overnight rate is at the effective lower bound.

The April 2009 cut to 0.25 percent and the one-year commitment eased Canadian credit conditions and boosted market confidence. This monetary stimulus helped lead to improved output and employment in the middle of 2009. It also served as a template for other central banks around the world.

The loonie softened somewhat on news of Mr. Carney’s coming Atlantic crossing but remains above parity with the US dollar, while the British pound bounced a bit. The Canadian dollar may suffer from a bit of uncertainty until Mr. Carney’s successor is named.

The pound, on the other hand, could be reacting to the promise of soon-arriving ideas about central bank contributions to economic growth and stabilization of large financial institutions. It is a significant loss for the BoC and for Canada more generally. But it’s clear that the UK–and the world, in fact–needs Mr. Carney now more than the Great White North does.

The policy decisions that allowed Canada to avert the worst of the Great Financial Crisis and the Great Recessions can’t be credited to any one man. In fact the moves that helped Canada as the first decade of the 21st century wound down in crisis started at the end of the 20th century, when a Liberal government in 1995 tabled and passed a budget that included drastic spending cuts designed to eliminate a burdensome budget deficit.

Neither can the conservatism of the Canadian financial system and the cooperation between private institutions and public regulators be ascribed to one central banker. But Mr. Carney certainly reflects these characteristics.

Canada will survive and likely thrive under his successor at the Bank of Canada. And the UK will benefit from his set of skills, as well as his imagination, at the Bank of England.

The Roundup

Here’s where to find analysis of recent results for all Canadian Edge Portfolio Holdings.

Conservative Holdings

Aggressive Holdings

Stock Talk

Comments Guidelines

Add New Comments

You must be logged in to post to Stock Talk OR create an account