-Fresh Perspective Seen for UK Financial System

By Courtney Tower and Akhil Shah

OTTAWA (MNI) – Bank of Canada Gov. Mark Carney, a sharp-elbowed ice hockey
player in his days at Oxford University in England, will take with him to the
Bank of England a reputation for agile wit and a penchant for not brooking
opposing views gladly.

When he takes the helm of the BOE as of July 1, he also takes with him a
focus on inflation-targeting and a readiness to keep the BOC’s policy interest
rate at 1.0% for just over two years while other major central banks have been
easing.

As he heads back to England, Carney will maintain his chairmanship of the
Financial Stability Board of the Group of 20 nations, which he has described as
“a policeman’s role” in laying out financial system reforms that nations and
their financial institutions are, or will be, required to adopt.

He retains his skepticism that, despite recent moves he has applauded,
European nations are doing enough, working in concert, to attack their own debt
and banking problems with common approaches. He has often said promises are one
thing but implementation is the key.

As FSB chair, he is intent on seeing implementation across the G20 of
banking reforms including higher capital requirements, stricter regulation and
oversight, higher liquidity standards, and bringing derivatives markets under
regulation and control.

Carney, 47, brings a polished performance laced with quick humor to his
public presentations. On the job though, Bank of Canada employees would
sometimes smart under harsh putdowns of work or of opinions he considered
ill-formed. He has been known to exhibit impatience, even to erupt with anger at
BOC employees when he considered work to be lacking.

And there was a famous clash a year ago in New York with JPMorgan Chase CEO
Jamie Dimon, who was angry about higher capital reserve and other requirements
of banks by the G20, an opposition that continues amidst considerable lobbying
on the part of systemically key banks.

Carney exhibited his impatience with being lectured at the time, in an
exchange of words with Dimon but also in blunt language later: “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.”

The press was enraptured. Carney has been a darling of the media, then and
now, and is the most media-available Bank of Canada governor ever.

An Oxford University ice hockey player, as he was in his remote sub-Arctic
home hamlet of Fort Smith, Northwest Territories, Carney won credit at the
central bank for helping stickhandle Canada through the world financial crisis
somewhat bloodied but largely unbowed.

His perspective from the stickhandling will be fresh and useful at the Bank
of England and to a City of London that is in disarray, Craig Alexander, chief
economist at Toronto-Dominion Bank, told MNI.

“In the U.K. you have one of the world’s largest financial centres that’s
in disarray,” Alexander said. “You have a financial system that is going through
deep reforms, and an economy that has just recently flirted with a second
recession since 2008, so the economy is incredibly weak.”

Carney brings to that “an exceptionally good knowledge of monetary policy
(and) an enormous knowledge about regulatory reform,” Alexander said. “With
London being a leading financial centre, an awful lot of the regulatory changes
that are implemented at the Financial Stability Board will impact the City of
London.”

Avery Shenfeld, chief economist of CIBC World Markets, made the point to
MNI that while Carney has won applause for his role at the BOC, he did not do it
alone. “Carney operated very much within the tradition of the Bank of Canada as
an institution as an inflation-targeting central bank.”

“He was at the Bank during a long period of considerable economic slack and
of relatively well-contained inflation,” Shenfeld said. “For the most part, we
have had a period of very low interest rates by historical standards. Virtually
everything he has done has been in the traditional mandate of the way the BOC
would steer policy in that sort of environment.”

“He has been very much in the legacy of his predecessors, in keeping
inflation under control,” Shenfeld added.

In fact, the total Consumer Price Index is near the bottom range of the
Bank’s 1%-3% control target, at 1.2%, while core inflation, stripping out
volatile items, is at 1.3%.

Krishen Rangasamy, senior economist at National Bank, noted to MNI that in
the early stages of the global financial crisis the European Central Bank was
raising rates while Carney took a proactive stance and began a long period of
lowering them, fairly dramatically.

He did not see much change ahead in the BOC’s stance, after Carney leaves,
since the Bank’s decisions are consensual, made by the Governor-in-Council
comprised of the governor, senior deputy governor and four deputy governors.

Other analysts and commentators also expected little change ahead in the
Bank of Canada’s posture, because Carney does not leave for six months and
because, in any event, he is not the sole decision-maker on interest rates or
monetary policy generally.

Somewhat of a contrary view is taken by Philip Cross, research coordinator
at the Macdonald-Laurier Institute, an Ottawa think tank, and former chief
economic analyst at Statistics Canada.

Cross said Carney’s first reaction to the financial crisis, lowering
Canadian rates, “was appropriate. But five years in, at some point you’ve got to
be saying is this working – and are low interest rates at some point causing
more damage than we are curing?”

He added: “This extended period of low interest rates is creating some
structural problems for savers, pension funds, insurance companies, and we
should be attending to that as well.”

Philip Rush, contributing economist for Nomura Securities, wrote on Monday:
“The relatively hawkish stance of the BOC suggests the BOE may enjoy a slightly
less dovish culture in future, albeit with the same policy mix. That would lower
the probability of QE after the STG50 billion that we expect in February.”

Speculation as to Carney’s successor so soon after the announcement is just
that, speculation. Independent directors of the Bank’s Board of Directors, taken
from private sector across Canada, will form a special recruitment committee.
The choice made will have to be approved by the Finance Minister and cabinet.

Shenfeld and others noted that, apart from Carney and David Dodge before
him, BOC governors over the decades have been taken from within the Bank. That
would, if followed, put in a strong position Senior Deputy Gov. Tiff Macklem,
who was appointed for seven years beginning July 1, 2010. He is the Bank’s chief
operating officer, a longtime senior figure before that at the Bank and Finance
Department.

Macklem also is chair of a key G20 committee mandated to see to
implementation in member nations of the agreed-to banking reforms, so that he
will continue working in close contact with FSB Chair Carney.

Macklem’s is the one name most analysts raise, although all say it is too
soon to have strong front-runners and dark horses.

–MNI Ottawa Bureau; tel: +1 202-371-2121; email: dcoffice@mni-news.com

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