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Carney at BOE Reveals Canadian Needed to Rescue U.K.

By Simon Kennedy, Theophilos Argitis and Svenja O’Donnell
November 27, 2012 5:26 AM EST
Mark Carney, governor of the central bank of Canada.
Photographer: Norm Betts/ Bloomberg
Mark Carney, governor of the central bank of Canada.

The world’s finance chiefs headed to the northern Canadian outpost of Iqaluit, just 195 miles south of the Arctic Circle, in February 2010.

Wearing duck-down parka coats to insulate themselves from temperatures far below zero Celsius, the guardians of the global economy went dog-sledding on the town’s frozen bay. While Bank of England Governor Mervyn King perched awkwardly on the back of a sledge, his Canadian counterpart drove a pack of huskies across the ice himself.

Mark Carney will take another set of reins from King, 64, in July when he succeeds him as head of the U.K.’s central bank. A former Goldman Sachs Group Inc. executive and current chairman of an international panel of bank regulators, Carney will need similar levels of control and daring as he inherits oversight of an economy close to recession and a banking industry in crisis.

“Carney is a fantastic central banker,” Edmund Clark, chief executive officer of Toronto-Dominion Bank (TD), Canada’s second-biggest by assets, said in an interview yesterday. “He’s clearly been recognized around the world for that, and so Britain, from its point of view, did a smart thing.”

Youngest Boss

A day after watching one of his four school-age daughters play ice hockey in downtown Ottawa, Carney, 47, was named yesterday by U.K. Chancellor of the Exchequer George Osborne as the first ever foreigner to run the 318-year-old Bank of England and its youngest boss in more than half a century.

“We needed the best, and in Mark Carney we’ve got it,” Osborne said at the end of a 10-week official search after the Canadian’s virtually unique blend of experience in banking, policy making and regulation beat out other contenders.

Having appeared as recently as August to rule out any interest in the job, Carney was wooed by Osborne to take a position he never applied for and offered the post last week. He negotiated an annual salary of 624,000 pounds ($1 million), including a pension contribution. His five-year term will be shorter than the eight years that were offered because of a desire not to remain in central banking for longer than a decade and because his term at the Financial Stability Board also ends in 2018.

Transatlantic Switch

Carney will make the transatlantic switch having spent five years overseeing a Canadian economy that bounced back from the 2009 global slump faster than the U.K., largely because its banks didn’t require bailouts. By contrast, the U.K. still is flirting with recession, facing the biggest fiscal squeeze since World War II and trying to plot a future for its rescued financial sector.

Unlike other British contenders, such as King’s deputy Paul Tucker, Carney will oversee an overhaul of the central bank free of the taint of banking scandal and of having been inside the country’s policy making when it failed to spot the looming financial stress and then proved sluggish to respond.

Three reports commissioned by the Bank of England’s governing body and published this month criticized its hierarchical culture and said staff must be allowed to be more assertive. Tucker, the bookmakers’ favorite, has worked at the central bank for three decades and was recently embroiled in the London Interbank Offered Rate rigging scandal.

Carney “is head and shoulders above the other candidates,” David Blanchflower, who helped set U.K. interest rates until May 2009 and now teaches at Dartmouth College in Hanover, New Hampshire, said yesterday on Bloomberg Radio’s “The Hays Advantage” with Kathleen Hays and Vonnie Quinn. “He’s going to come in with a big broom and sweep clean at the Bank of England, which is what is needed.”

‘Very Focused’

Carney previously said he wasn’t a candidate. When asked on the BBC’s “Hardtalk” program in August whether he would be interested in becoming governor, he said he was “very focused” on his current posts and “interested in who they pick.” Questioned about whether that meant “a no or a never consider the job?” he said: “It’s both. How’s that?”

Bookmakers cited Tucker as the frontrunner. William Hill Plc (WMH) didn’t mention Carney as a contender when it provided odds on Nov. 24 of 1-4 for Tucker, meaning a successful 4-pound bet on him would have yielded a 1-pound profit. Ladbrokes gave odds of 2-9 for Tucker and 12-1 for Carney.

In looking abroad, Osborne embraced an era in which finance is global and the best talent should be sought out regardless of passport, said Paul Donovan, an economist at UBS (UBSN) AG. The Bank of England’s policy-setting Monetary Policy Committee already has a track record of foreign participation, with American Adam Posen recently departing.

Nationality Incidental

“In an environment of international financial regulation, having somebody who has a strong track record in that is clearly important,” Donovan said. “The nationality is entirely incidental.”

Carney, the son of teachers born in Fort Smith, Northwest Territories, a town of 2,500 located about 3,900 miles from London, is no stranger to the U.K. Married to a Briton, he followed a degree from Harvard University in Cambridge, Massachusetts, with a doctorate in economics from Oxford University and spent time in the U.K. capital during his 13 years at Goldman Sachs. He will seek British citizenship.

“It was two decades ago that I started my first proper job here as a credit analyst,” Carney told the Canada-U.K. Chamber of Commerce in a November 2008 speech. “I came to London at the time because it really did appear poised to reassume its role as a center of global finance.”

Half a decade since the outbreak of the global turmoil, that status is still under threat after a series of trading scandals, most recently over Libor.

‘Light Touch’

London, home to the $2 trillion-a-day currency market, was also the site of JPMorgan Chase & Co. (JPM)’s trading loss of at least $5.8 billion and $2.3 billion fraud at UBS. Its onetime “light touch” regulatory approach has been blamed for failing to prevent the near-collapse of Royal Bank of Scotland Group Plc and the run on Northern Rock Plc.

As the government seeks to avoid a repeat of such strife, Carney will run a Bank of England with increased responsibility for U.K. financial control as home to regulators overseeing all deposit-taking institutions, insurers, investment banks and clearing houses. He also will lead the Financial Policy Committee, charged with addressing risks to the broader financial system.

Calling Shots

“The new system puts the BOE at the center and has the BOE calling the shots, so next time there’s a financial crisis, the finger will be pointed at the BOE,” said Richard Barwell, a former Bank of England official who is now an economist at the Royal Bank of Scotland.

Carney already has experience rewriting the rules of finance at a global level as chairman of the FSB for a year, a position he will retain after he leaves Canada. He has pushed for tougher regulations for global lenders and clashed with banking executives, such as JPMorgan Chief Executive Officer Jamie Dimon, over requirements to hold more capital, saying earlier this month the case for tougher rules is “as clear today” as it was when the crisis began.

“Measures to strengthen financial stability support economic growth and create jobs rather than hold them back, even in the short term,” Carney said in a Nov. 8 speech in Montreal.

Rule Making

On his watch, the FSB is extending its rule-making into the shadow-banking system and has begun to tackle the question of how it should enforce implementation of its agreements.

Carney, one of Time magazine’s most influential people of 2010 and Euromoney’s central banker of 2012, also will take the helm of the MPC. It has left the benchmark interest rate at 0.5 percent for three years and is mulling whether to bolster a 375 billion-pound asset-buying program.

While the U.K. economy just emerged from its first double- dip recession since the 1970s and the government is enforcing austerity, inflation has run above the bank’s 2 percent target since 2009.

Carney, who raised borrowing costs three times in 2010 and has held the policy rate at 1 percent since then, is alone among Group of Seven central bankers in still suggesting an inclination to raise borrowing costs and has refrained from asset purchases as Canadian banks continued to expand lending. Instead of quantitative easing, Carney introduced a “conditional commitment” in 2009, when he said the benchmark rate would remain at its lowest possible level for 15 months.

As of Aug. 31, the Bank of Canada’s balance sheet was 72.7 billion Canadian dollars ($73 billion). The Bank of England’s was 414 billion pounds on Nov. 21.

‘Less Dovish’

That suggests the Bank of England may boast a “slightly less dovish culture” in the future, said Philip Rush, an economist at Nomura International Plc in London, adding that Carney’s appointment makes him less confident the Bank of England will extend quantitative easing beyond the 50 billion pounds he expects in February.

Still, weak demand for Canada’s exports has handcuffed Carney’s ability to raise borrowing costs, and the Bank of Canada’s interest rate pause, the longest since the 1950s, has helped fuel record levels of household debt that Carney now calls the country’s the biggest domestic economic risk.

In his current job, Carney has been “somewhat hawkish in words, but dovish in action,” Avery Shenfeld, chief economist at the Canadian Imperial Bank of Commerce, said in a note to investors yesterday.

Robert Wood, a former Bank of England official until he recently moved to Berenberg Bank, said Carney also may be “more creative than King,” given the Bank of Canada’s past willingness to give time frames for low rates and more specific economic forecasts.

Stimulus Playbook

Federal Reserve Chairman Ben S. Bernanke last year took a page from Carney’s stimulus playbook when he chose to specify a date for his pledge to keep borrowing costs low. Under Carney’s watch, Canada’s central bank also adopted a “flexible inflation targeting” system that allows it more leeway to lean against asset bubbles.

“In addition to being very smart, he was tough and creative,” said Ralph Goodale, a former Canadian finance minister who said he hired Carney away from the Bank of Canada in 2004 over its objections. Carney joined the central bank in 2003 before moving to the government’s finance department for a three-year stint and had “an amazing ability to grasp issues,” Goodale said.

Complete Change

Carney oversaw a complete change in the membership of the central bank’s interest-rate-setting panel since he was named governor at the end of 2007, under the Canadian system that gives him total legal authority for monetary policy. The views of individual governing-council members are difficult to judge because the group sets rates by consensus rather than by voting.

He may have more difficulty wresting control of policy makers in England. He recently criticized Andrew Haldane, the Bank of England’s executive director for financial stability, for saying new bank regulations are too complex, according to a Euromoney interview.

“Carney has headed an institution where the governor effectively makes policy decisions on his own, and it remains to be seen whether he can effectively govern the more diffuse power structure” at the Bank of England, BNP Paribas SA economists Bricklin Dwyer and David Tinsley said in a report. Carney also “will have a steep learning curve mastering the intricacies of the U.K. economy.”

Goldman Sachs

Carney, who played ice hockey as a student and has run marathons, is one of several Goldman Sachs alumni to shape international economic policy. European Central Bank President Mario Draghi, Federal Reserve Bank of New York President William Dudley and current Bank of England policy maker Ben Broadbent were there, too.

Carney worked for the fifth-biggest U.S. bank by assets in Tokyo and New York, as well as London. He became co-head of sovereign risk and executive director of debt capital markets, advising governments in Europe, the Middle East and Africa.

In 1998, he moved to New York as vice president of corporate finance, before returning to Canada to help Goldman Sachs build its investment-banking relationships in Toronto. He left the New York-based bank to become deputy governor of the Bank of Canada in 2003, responding to an advertisement in the Economist magazine, which Osborne also used to promote the Bank of England vacancy.

“I’m going to where the challenges are greatest,” Carney said in Ottawa yesterday. “This is a major challenge, a major opportunity.”

To contact the reporters on this story: Simon Kennedy in London at skennedy4@bloomberg.net; Theophilos Argitis in Ottawa at targitis@bloomberg.net; Svenja O’Donnell in London at sodonnell@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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