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In New Era for Central Banking, Carney Has It All

“Next summer, I’m going to take my talents to the banks of the River Thames and join the Bank of England.” Governor Mark Carney didn’t exactly phrase it that way, but the announcement that he was leaving the Bank of Canada for England’s central bank is as important  to the financial world as LeBron James’ “Decision” was for sports fans.

This move was the subject of speculation for months, but seemed implausible. Mr. Carney did not publicly apply for the job, and denied the rumours during interviews. Yet British insistence paid off. In a press conference with Finance Minister Jim Flaherty on Monday, Mr. Carney stated that he had made up his mind over the past few weeks. At age 48, he will become the first ever foreign governor of the Bank of England, established 318 years ago.

Mr. Carney will replace Sir Mervyn King, a highly respected Governor, in July next year. The announcement was met with a mixture of shock and pride by Canadian observers. Meanwhile, reactions in London have been overwhelmingly positive. Martin Wolf of the Financial Times welcomed the “bold” move and termed it a “historic” event, while underlining the challenges that await Mr. Carney.

This appointment is a recognition of Mr. Carney’s success at the helm of Canadian monetary policy since 2008, and the resilience of the Canadian financial sector as a whole. Indeed, under Mr. Carney’s term as governor, marked by unprecedented global financial distress, the Canadian economy performed relatively well, and its financial system is hailed as a model by his peers. Pragmatic policies and an active involvement in international talks have made him one of the most highly regarded central bankers.

Mr. Carney’s appointment to one of the most important jobs in the global financial system is also reflective of a new age in central banking. The recent crisis highlighted central banks’ complacent monetary policy and their narrow focus on price stability, as well as undermining the belief in self-regulating financial markets. As a result, central banking has been going through a period of transformation, taking on new responsibilities and blurring the line between monetary and public policy. Not only will central banks continue to be active on the monetary side (following their unprecedented, coordinated monetary easing in response to the crisis), they will also be responsible for ensuring financial stability. As McGill Professor Christopher Ragan has argued, “macro-prudential” regulation, involving countercyclical tools that guard against systemic risks and ensure financial stability (such as minimum ratios of bank capital and leverage restrictions), must be included in the institutional framework of central banks. A combination of monetary policy and macro-prudential regulation will enable the latter to “lean” against credit cycles.

Such theoretical thinking has prompted significant institutional reform in central banks, including the Bank of England. A new regulatory structure established by George Osborne, the Chancellor of the Exchequer, has assigned the task of supervising the British financial system to the Bank of England, in addition to its existing monetary responsibilities.

Mr. Carney’s extensive involvement in global regulatory reform made him the perfect candidate in the eyes of British officials. A former Goldman Sachs executive, he has proven an ardent advocate of increased oversight of the financial sector, especially shadow banking institutions, and champions the use of macro-prudential tools. In late 2011, he was named chairman of the Financial Stability Board, an international body, essentially making him the top banking regulator.

Canada has lost one of its best and brightest, but it can take comfort in the fact that Mr. Carney, in these critical times, will head such an important institution whose policies are felt not only by the British but also by the European and global economies.

As Martin Wolf noted on Monday, although central banks are officially independent, they perform an inherently political task, even more so in current economic and financial circumstances. Mr. Carney will face both intellectual and political battles but the latter may be a formality for a man who, rumour has it, nurtured political ambitions of his own. Liberals, in particular, saw a potential leader in Mr. Carney. Their hopes might not be in vain. Upon his return from London, he may again prove the rumours right and pursue a career of seemingly limitless ambition.

–  William Debost

(Featured photo: AttributionNoncommercialNo Derivative Works World Economic Forum, Creative Commons, Flickr)

 

About William Debost

Student of Economics, International Relations and History at McGill University. Born and raised in Paris, William holds French and Canadian dual citizenship. Biculturalism has always been an important part of his life, which is one of the reasons why he chose to study in Montreal. His main areas of interest in today’s world are the European Union, French politics, and current issues in political economy. He is delighted to take part in the Political Bouillon project, and has no doubt this experience will help him in his aspiration to be an “engaged spectator” (using the words of Raymond Aron) of world affairs.

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