Mark Carney’s debut at the Financial Stability Board meetings was supposed to be dull and predictable.
The Tuesday event was to be about reforming the FSB, the banking-regulation advisor for the Group of 20 countries, to give it some sort of legal status, and carry on with its mission of regulating the “shadow banking” system. A bore for anyone not involved, in other words, and maybe for some who are.
Thanks to Philipp Hildebrand, this afternoon’s FSB press conference in Basel will take on a more colourful tone. Mr. Hildebrand was the president of the Swiss National Bank (SNB) until yesterday, when a trading scandal involving his wife triggered his resignation. He is also gone from the FSB, where he was vice-chairman, making him the No. 2 to Mr. Carney, the Bank of Canada governor who became the FSB’s chairman in November.
What is not known is whether Mr. Carney will appoint a new No. 2 in a hurry, or whether he even has the ability to do so, given the FSB’s strange status. The FSB has no legal status or proper budget. It is thinly staffed and is managed as a secretariat within the Bank for International Settlements (BIS). Technically, the FSB’s members -- the G20 members, the European Central Bank, the International Monetary Fund , the BIS and many others -- have the right to appoint the chairman and vice-chairman.
But in reality, it is the G20 countries that hold the political power at the FSB. Note that Mr. Carney’s appoitment to the FSB was confirmed at the last G20 meeting in Cannes, France. So the G20 might have to approve Mr. Hildebrand's replacement. Welcome to the ego-driven politics of global institutions, Mr. Carney.
What is known is that Mr. Carney will miss Mr. Hildebrand’s presence.
Mr. Hildebrand resigned even though the SNB had cleared him of any wrongdoing and had closed the investigation into his wife’s trading activities. In August, Kashya Hildebrand had bought half a million U.S. dollars, a few weeks before the SNB, in an attempt to stop the Swiss franc from soaring, put a ceiling on the euro/franc exchange rate. She made a profit when she traded the funds back into francs.
The disclosure of the trade triggered conflict of interest accusation against Mr. Hildebrand and a scandal was born. On Monday, he resigned while insisting he did not know about his wife’s trade. He admitted, however, that he could not prove his innocence.
As a central banker, he was well regarded. He forced the two largest Swiss banks, UBS and Credit Suisse, to raise their capital reserves (the banks’ assets were substantially larger than Swiss GDP, putting the whole country at risk if they were to fail). He lowered borrowing costs and stopped the franc from rising to the point that it crippled exports. Mr. Carney on Monday said Mr. Hildebrand, who attended the University of Toronto and has been Mr. Carney’s friend for many years, as “instrumental” in responding to the global financial crisis.
Mr. Carney is expected to reveal his thoughts on Mr. Hildebrand’s replacement, or lack thereof, this afternoon.