Analysis - Carney track record holds hints of Bank of England path
By Jeffrey Hodgson | November 27, 2012 7:28 PM EST
Britain can expect its next central bank chief to be tough with its banks while being more nimble on monetary policy than his recent hawkish talk might suggest.
Canadian central bank chief Mark Carney, named on Monday as the next governor of the Bank of England, 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.
Carney's approach to regulation has been "tough rules with some discretion, as opposed to tough rules with no discretion ... or simply weak rules," said Edwin Truman, Washington-based senior fellow at the Peterson Institute for International Economics.
As head of the Financial Stability Board, set up by the Group of 20 top economies to try to ensure there is no repeat of the global financial crisis, Carney has been a key player in leading the drive for new rules on banks.
Next year the Bank will take charge of British financial regulation as well as monetary policy, making Carney a key player in how the City of London is run.
Britain's bankers will not have forgotten his clash last year with the head of JPMorgan Chase & Co.
Jamie Dimon referred to requirements that banks set aside more capital as a buffer against future crises as "cockamamie nonsense," according to one of the attendees at the closed-door meeting.
Carney, who spent 13 years with Goldman Sachs Group Inc, reportedly told Dimon the rule changes are a "reasonable" response to the financial crisis before leaving the room visibly angry.
In the past year, Carney has not wavered from his stance on the need for the Basel III rules, which require banks to hold more capital. Just last month, he was quoted as saying the idea that global banking reforms should be watered down or delayed to protect a weak global economy is "fanciful."
"He's been clear the changes need to occur to assure that we don't pay the kind of costs that we did during the sub-prime mortgage crisis," said Derek Burleton, deputy chief economist with TD Bank Financial Group. "That's the message that he'll be delivering in London.
Carney may be less sympathetic to suggestions Britain's banks be forced to fully separate their retail and investment banking operations, a move suggested by a senior regulator.
Canada's six largest banks all have major investment banking arms. As Bank of Canada governor, Carney has not spoken out against this model for the industry.
Instead, Canadian policymakers have looked to regulation and supervision to prevent the blowups that led to taxpayer bailouts in other countries.
If the new Bank of England governor does feel British banks are falling short on any front, they can expect to hear about it in public. In Canada, Carney used his bully pulpit to warn about high household debt levels and the risks of the booming housing market.
He also courted controversy in August by accusing Canadian companies of sitting on piles of "dead money", saying they should invest it or return it to shareholders. Large British companies are in a similar position of having cash to invest, but little appetite to do so at a time of high economic risks.
FLEXIBLE ON MONETARY POLICY
On the critical issue of monetary policy, Carney's longer-term track record suggests he is more likely to be flexible than harbor an easing or tightening bias.
This year Carney has sounded hawkish. The Bank of Canada in April became the only Group of Seven central bank talking about raising interest rates.
It was also the first G7 central bank to tighten policy after the financial crisis, lifting its main policy rate three times in 2010.
But analysts noted Carney has generally been pragmatic on policy, deftly changing course when conditions merit.
Faced with fresh global economic headwinds, Carney last month scaled back the central bank's tightening bias, saying a rate increase was "less imminent". And the bank's main policy rate has stayed frozen at 1 percent for more than two years.
"I don't think it's obvious at all that he has a hawkish bent. The fact that the BOC has a hawkish bias reflects more the underlying economic situation rather than a (view) that Mr. Carney has," said Doug Porter, deputy chief economist at BMO Capital Markets.
Unlike the Bank of England, Carney decided against using quantitative easing - the buying of debt with newly created money. This was largely because Canada's economy never weakened enough to warrant it. The Bank has racked up 375 billion pounds of government bond purchases.
By contrast, under Carney the Bank of Canada pioneered using a commitment to long-term low interest rates as a policy tool, one that Bank has rejected using so far.
In 2009, the Bank of Canada offered a conditional commitment to hold rates at a record low 0.25 percent until the middle of the following year, a tactic that has since been picked up by U.S. Federal Reserve.
Carney may need such inventive measures given the struggles of Britain's economy, which has had two recessions since the financial crisis.
Carney's "strength going into this position is he will assess and be able to adapt appropriately, so not go in doctrinaire, being hawkish or dovish," said William Horton, chief investment officer with Canadian fund manager MD Physician Services.
(Additonal reporting by Randall Palmer in Ottawa, David Milliken in London and Jonathan Spicer in New York; Editing by Mohammad Zargham)
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