Bank of Canada Governor Mark Carney, a former international investment banker, is taking aim at his former counterparts on Wall Street and in the City of London.
In remarkably forceful comments Monday, Mr. Carney suggested bankers in the United States and Europe are suffering from hubris, have lost sight of their proper role in the economy, and can't be trusted to operate in the best interests of the financial system.
"The financial system must transition from its self-appointed role as the apex of economic activity to once again be the servant of the real economy," Mr. Carney said in a speech in Montreal. "Stronger institutions and a system that can withstand failure are necessary conditions. But full realization of this objective also requires a change of attitude."
The comments were directed mostly at banks in the U.S. and Europe, based in New York and London, cities Mr. Carney worked in during a 12-year career with Goldman Sachs. They're also test grounds for the complex financial products and runaway risk-taking behind the financial crisis.
On Friday, U.S. Federal Reserve chairman Ben Bernanke pushed Congress to enact a broad overhaul of U.S. financial rules, and the previous day the Fed proposed new rules of its own that would dictate how the banks it supervises dole out compensation.
Mr. Carney's comments reinforced similar remarks by Christian Noyer, the head of the French central bank and a member of the European Central Bank's governing council, who used a speech in Singapore to warn that "there are signs that parts of the financial industry have resumed risk-taking practices reminiscent of those which led to the crisis," according to an account by Reuters.
Central bankers and other authorities are fighting increased resistance from the international banking lobby to new rules, even after many banks accepted hundreds of billions of dollars in public funds to avoid economic catastrophe. Policy makers worry that the window to enact major regulatory changes is closing as banks return to profitability and economic conditions improve, dulling the urgency to correct the factors that led to disaster with the complacency that comes with a return to better days.
Earlier this month in Istanbul, the leaders of the International Institute of Finance, a lobby group that includes Bank of Nova Scotia CEO Rick Waugh among its senior executives, said the Group of 20 nations' regulatory objectives risked hurting economic growth. At the same time, some of the bigger international banks that have bounced back to profit as stock markets come back to life have paid out tens of billions in bonuses.
Mr. Carney, who, along with Finance Minister Jim Flaherty will host next year's meetings of the Group of Seven finance ministers and central bank governors, said the Bank of Canada would prefer a regulatory regime guided by principles, and that relies on the judgment of financial executives. But arguments in favour of such a hands-off approach are being undermined by many big banks, which should be using profits to rebuild capital, not reward employees and shareholders, Mr. Carney said. "This approach requires a sensitivity from the industry, which has been absent in recent months," Mr. Carney said. "Relief is in danger of giving way to hubris."
Ironically, Canada's banking sector welcomed his remarks since banks here are ahead of international competitors when it comes to meeting many of the new standards the central bank chief laid out.
Tougher global capital and leverage requirements are unlikely to faze the Canadian banks, but could have a serious impact on many European and U.S. banks, which will be forced to sock away more money and cut risky loans. Banks here are hoping foreign competitors will have to make those changes sooner rather than later, giving Canada's banks an edge.
"Directionally, the areas that Governor Carney covered off are bang-on in terms of the direction that the global banking system should be moving toward," Gordon Nixon, RBC's CEO, said in an interview. "The good news is that the Canadian banking system is much further ahead in terms of compliance, and I just hope that other countries around the world move toward common global standards in a reasonable time frame."
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