Mark Carney, the new chairman of the Financial Stability Board, is launching a more ambitious global regulatory agenda for banks and is doing so without the guidance of his trusted FSB adviser, Philipp Hildebrand.
A trading scandal ended Mr. Hildebrand’s career as chairman of Swiss National Bank and vice-chairman of the FSB on Monday. Mr. Carney, who is Governor of the Bank of Canada, said Tuesday that Mr. Hildebrand probably would not be replaced because, in effect, he considered him irreplaceable.
His appointment to the FSB “reflected the unique set of skills and attributes that Mr. Hildebrand possesses and the potential to most fully leverage those skills in the context of taking the FSB forward,” Mr. Carney said.
The two long-time friends were appointed to the FSB’s top two positions at the Group of 20 summit in Cannes, France, in November.
Overseeing his first official meeting as head of the FSB in Basel, Switzerland, Mr. Carney said the FSB’s oversight would be expanded later this year to include big domestic banks and insurers, whose capital may have to be bolstered to protect them from the financial shocks that felled many financial institutions in the 2008 credit crunch.
“We’ve already focused on the big global banks,” Mr. Carney said in an interview after the FSB meetings. “Now we turn to everything else and we say, ‘Do we have institutions that are systemic domestically but don’t have these big global spillovers that would bring everybody else to the edge?’ And if we do have those, what type of approach should we have?”
It seems likely Canadian banks would qualify as “domestic systemically important banks,” which could lead to tougher capital regulations for them despite their relative good health. But the FSB needs to adopt a definition of the new category before deciding which banks make the list. Canadian banks were not among the 29 global banks identified last year as “systematically important financial institutions” – the industry’s very largest players – whose failure could rupture the entire financial system.
Mr. Carney said there are no plans to publish the names of insurers that will be subject to deeper scrutiny. The insurers have argued that they are not the cause of the financial crisis and should not have to sustain expensive capital surcharges.
The loss of Mr. Hildebrand puts the responsibility for the FSB mandate squarely on the shoulders of Mr. Carney, who is also immersed in steering Canada’s monetary policy as the economy struggles to gain traction.
“The role of the FSB has expanded so greatly in terms of scope and in terms of membership … so if I were running the FSB I would love to have a vice-chair because I don’t think it’s feasible for one person,” said Amar Bhattacharya, who sat on an expert panel that urged the FSB to become more transparent. “You have to also remember now what you’re really doing is running a quasi-organization, and Mark Carney has a full-time job,” said Mr. Bhattacharya, now head of the G24 Secretariat, which co-ordinates developing countries’ global economic policy.
“One of the views was that under Carney and Hildebrand, there would be a bigger staff and more regular activities, and so on and so forth, and more outreach to various parts of the world. So having a vice-chair helps you to spread the burden,” noted Edwin (Ted) Truman, a top U.S. Treasury Department official during the Clinton administration.
Still, disruption caused by Mr. Hildebrand’s exit is expected to be limited since the vice-chairman position did not exist under previous FSB chairs. Though he was fully qualified for the job, the No. 2 position appeared something of a “consolation prize” for Mr. Hildebrand, who was the only other candidate.
And Mr. Carney already has strong support at the FSB; his Bank of Canada No. 2, Tiff Macklem, and Julie Dickson, Canada’s Superintendent of Financial Institutions, both chair key subcommittees.
Mr. Carney said that the FSB is also considering tougher regulatory treatment for the “shadow” banking system, which includes money-market funds, credit hedge funds, special investment vehicles and government-sponsored mortgage companies such as Fannie Mae and Freddie Mac in the United States.
In October, the FSB noted that the sheer size of the shadow banking system meant that it should come under greater regulatory scrutiny because of its potential systemic risk. It said the shadow banks grew from an estimated $27-trillion (U.S.) in 2002 to $60-trillion in 2007, the year before the financial crisis, and remained at that level in 2010.