Carney: banks on the road to safety
THE job of agreeing measures to mend the fault lines that caused the financial crisis is ‘substantially complete’, Mark Carney told leaders of the G20 economies at a summit meeting in Brisbane, Australia.
His claim came after a tumultuous week for the banking sector, when six of the world’s biggest banks including HSBC, JP Morgan Chase and RBS were fined billions of pounds for rigging the foreign exchange markets.
Carney said in a letter to the G20 leaders that the focus will now turn to identifying new risks to the financial system, and on rebuilding trust. The Bank of England governor was writing in his capacity as chairman of the Financial Stability Board, a global watchdog set up by the G20.
Carney has pledged that taxpayers’ money should never again be used to rescue failing banks.
Taxpayers have spent billions on propping up RBS, HBOS, Northern Rock and other institutions that ran aground in the financial crisis.
His letter is a progress report on the work that began at the G20 summit in 2008, the peak of the crisis, when thanks to the urging of former prime minister Gordon Brown, leaders committed to a f undamental overhaul of the world’s financial system.
‘The job of agreeing measures to fix the fault lines that caused the crisis is now substantially complete,’ Carney wrote, adding that stronger international standards are building more resilient institutions and more robust markets. But he indicated there is work still to be done and said the banking industry must ‘improve its own culture, ethics and governance.’
He said that proposals to end the problem of ‘Too Big to Fail’ will be a ‘watershed’. These are banks that are so significant they cannot be allowed to go under but must be bailed out by taxpayers to avoid wider meltdown.
‘Once implemented, these agreements will play important roles in enabling globally systemic banks to be resolved without recourse to public subsidy and without disruption to the wider financial system,’ he said.
Under new rules, large banks must have much bigger cushions to absorb potential losses.
Earlier this week, the FSB proposed a new requirement for banks to hold equity and bonds equivalent to 16 to 20pc of their assets, to reduce the risk of having to call on taxpayers for a bailout.
The idea is that the authorities would be able to allow a big bank to go under without endangering the financial system as a whole.
He warned that the regulators may never achieve absolute success in ending ‘ too big to fail’ because banks cannot be protected from all external shocks.
He said the changes to the system mean banks will ‘ bear the costs of their own actions’ and the ‘consequences of the risks they take’. The FSB has already finalised tougher standards for financial derivatives such as credit default swaps, but Carney said implementation was uneven and behind schedule. He said the FSB is shifting its focus onto new risks, including shadow banking and other activities at the fringe of the financial system.
He added that the next phase is to promote a global system based on ‘mutual trust and co-operation’.
The point is to stop individual countries acting out of narrow self-- i nterest to protect their own national economy from a failing foreign bank, to the detriment of the wider financial system.
In the past, regulators have found it hard to push through tough reforms on their own because banks have threatened to move their headquarters away from countries with strict regulatory regimes to ones where the rules are more relaxed.