Why the Carney doctrine is great news for London’s economy
BANKER bashing is over – that was the dramatic message from Mark Carney last night, as he finally ditched his predecessor Lord King’s hostility to the City, replacing it instead by a much more sensible approach.
In a remarkable speech which signals a new settlement between the UK state and international finance, the governor of the Bank of England outlined what deserves to be called the Carney doctrine: large banks are to be welcome in London, even if that means that the assets of the financial sector will swell to many times the size of the UK’s national income, as long as they are well capitalised, properly managed and governed by strict resolution mechanisms to protect taxpayers in the event of failure.
As Carney put it, “the Bank of England today is the friend of resilient banks, continuous markets, and good collateral; and we are the enemy of taxpayer bailouts, fragile markets and financial instability…our circle of friends is expanding.”
It’s worth quoting him at length, such is the importance of the policy shift: “The Bank of England’s task is to ensure that the UK can host a large and expanding financial sector in a way that promotes financial stability.” Even more radically, Carney believes that by 2050, UK banks’ assets could exceed nine times GDP, and that there will also be rapid growth of foreign banking and shadow banking based in London. But while he admits that there are risks to this if mismanaged – at present, assets are around 400 per cent of GDP – he explicitly rejects the view that banking’s relative importance needs to be reduced, decrying the fact that such sentiments have so far gone “unchallenged”, and arguing instead that “if organised properly, a vibrant financial sector brings substantial benefits.”
It’s a pro-growth, tough but fair approach, of the kind we have seen for years now in places such as Singapore, where the financial sector’s contribution is hugely valued but is closely supervised. It’s very different to the post-crisis Swiss approach, which is fixated by cutting the sector’s balance sheet as a share of GDP.
It’s not a perfect set of policies, and there is much that one could disagree with at the margins – but given the political climate, the dominant intellectual framework and the nonsensical approach we saw in the late 1990s-2000s under Labour, and then the very different but equally pernicious attitude since 2010 under Lord King/the coalition/the EU, this is a huge and welcome improvement.
The biggest change has to do with the idea of too big to fail. Carney is rightly saying that no institution need be too big to fail, with the right bankruptcy code. Size restrictions per se are not needed (though of course excessive leverage would be disastrous at institution level); what matters is the ability to deal with a crisis by bailing in bondholders and protecting taxpayers. There must be an end to morally despicable bailouts. As Carney rightly put it, the UK state cannot stand behind a banking system many times the size of its GDP – it would be bankrupted – but he, unlike others, draws the correct conclusion from this.
This is not a return to the Gordon Brown years where the state and banks signed a Faustian, if implicit, pact, where they financed his public spending and he encouraged them to grow: that era was characterised by moral hazard, a safety net of taxpayer bailouts combined with incompetent supervision, with the discipline of markets and the fear of failure removed – a bizarre combination of misregulation and government intervention, socialised losses and privatised profits.
When Carney was hired by George Osborne, I was one of those excitedly welcoming the appointment. Since then, I fear that he has got monetary policy wrong. But when it comes to financial regulation, he is starting to deliver the revolutionary change that the City so desperately needs.
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