Mark Carney’s No. 2 at the Bank of Canada has a blunt message for anyone who argues the current turmoil in the global economy should mean a slower, more cautious approach to toughening up the rules of international finance: Guess again.
Without naming names, Tiff Macklem, senior deputy governor at the bank, rejected long-standing arguments of financial-industry lobbyists that an aggressive reform agenda threatens to undercut lenders’ capacity to lend to consumers and businesses at a time when growth is fragile and the landscape is littered with unknowns.
Mr. Macklem, also a top official at the Financial Stability Board – the global body headed by Mr. Carney that is trying to co-ordinate the sweeping changes – warned against letting this line of argument gain currency, amid a recession in the euro zone and worries about the persistent sluggishness of the U.S. recovery.
“Some are calling for a slowdown of the reform process, arguing that a weak global recovery and elevated uncertainty are good reasons to ease up on implementation,” Mr. Macklem said in a speech in Toronto to the Rotman Institute for International Business. “The current challenges are not an excuse for delay. Quite the opposite – they underscore the urgent need to make the financial system more resilient.”
The leaders of the Group of 20 most important economies charged the FSB with crafting global guidelines for everything from the amount of capital banks must hold in reserve so they can withstand shocks, to how to allow big institutions that get themselves into trouble to fail with shareholders bearing the losses instead of taxpayers through massive government bailouts.
After identifying a list of about 30 “globally systemically important” banks that it wants to hold extra buffers, the FSB by the end of the year will draw up a list of big domestic banks and insurers whose capital may have to be bolstered to protect them from the financial shocks that felled many institutions in the 2008 credit crunch. Most Canadian banks will probably qualify as “domestic systemically important banks,” despite their relative good health.
By the end of 2012 the FSB also intends to have designed proposals for tougher treatment for the “shadow” banking system, Mr. Macklem said Tuesday, which includes money-market mutual funds, credit hedge funds, special investment vehicles and government-sponsored mortgage companies such as Fannie Mae and Freddie Mac. In October, the FSB noted that the sheer size of the shadow banking system meant that it should come under greater scrutiny.
Observers, however, lament that the FSB lacks the authority to enforce its will on member governments, and some say its ability even just to keep tabs on whether elected officials are pusing reforms at the national level is hampered by the fact it has a small staff and no budget of its own.
Some, including former Finance Minister Paul Martin, have argued the FSB needs to evolve into a treaty-based organization like the International Monetary Fund, with power to actually punish members that don’t follow through on what officials agree to around the table.
Mr. Macklem, who heads the FSB’s committee on standards implementation, said this isn’t necessarily needed for the FSB to be effective. The FSB is making “good progress on the basis of consensus and co-operation,” he said, and “countries that are not complying have been called out.”
Still, he did remind his audience that the FSB “needs to be placed on a more secure footing,” namely getting more resources now and, ideally, its own budget and legal status later. Ultimately, though, governments need to have the political will to push ahead with reforms and force their local financial institutions to play ball.
“Tougher tests lie ahead, and it is essential that the spirit of internationalism and co-operation is sustained,” he said. “If there is a reproach to be made, it is that progress has not been faster.”