Economic analysis

Carney rules

How Canada’s central banker rose to the head of the world’s banking watchdog

Bank of Canada governor Mark Carney was named chairman of the Financial Stability Board on Friday, a global banking watchdog in charge of preventing the repeat of another 2008-style financial meltdown. He’s now one the highest-profile voices on global finance. The world will stop to listen when he speaks. How did he get there?

Mark Carney.

Profile: Carney has it all. With a doctorate in economics from Oxford, 13 years spent working as an investment banker for Goldman Sachs, and a brilliant record in government—not just at the Bank of Canada but at the Department of Finance as well—Carney brings to the table a mix of academic credentials, Wall Street credibility and public sector expertise few central bankers can match.

It’s at the helm of the Bank of Canada that Carney started turning heads among policy makers the world over. In March 2008, only a month into his new job as the bank’s governor and well before the collapse of Lehman Brothers, he slashed interest rates, demonstrating an early grasp of the true depth of the turmoil brewing in the financial markets. In 2009 he raised eyebrows again by taking the unprecedented step of promising to keep rates low for 15 months in order to see the weak Canadian economy through rough times. Two years later, Fed chairman Ben Bernanke borrowed a page from Carney’s book by promising near-zero interest rates in the U.S. through 2013.

Carney is also a true believer. The Financial Stability Board “needs a person who really believes in the need for the Financial Stability Board,” says Chris Ragan, a professor of economics at McGill University and a former special advisor at the Bank of Canada. Our central banker is known as a staunch supporter of new and tougher rules for the financial markets. “If some institutions feel pressure today,” he said little over a month ago in Washington, “it is because they have done too little for too long, rather than because they are being asked to do too much, too soon.”

According to Thomas Bernes, executive director at the Centre for International Governance Innovation, the top three items on Carney’s agenda as he takes the reins of the world’s banking watchdog are likely to be:

1.    New regulations on the $60 trillion so-called shadow banking system, which includes non-bank financial entities such as insurance companies and money market funds. Though these institutions perform many bank-like activities, they are not properly “banks,” and are not–for now–subject to the same strict requirements and oversight as banks.

2.    More supervision of the opaque global derivatives market. Financial instruments called over-the-counter derivatives are widely blamed for spreading risk throughout the markets in ways that are difficult to track and predict. A breakdown in the derivatives market dragged down the entire financial system when Lehman Brothers collapsed 2008.

3.    Tighter rules and scrutiny of institutions judged “too big to fail,”—those whose demise poses a significant threat to the entire financial system. Among them are U.S. banks such as Carney’s former employer Goldman Sachs, and JPMorgan Chase.

Good to Know: Don’t mess with Mark. A former Wall Streeter himself, Carney has no problems locking horns with the titans of global finance. When JPMorgan chief Jamie Dimon attacked Carney during a private meeting in Washington two months ago, Canada’s central banker retorted with a vibrant public speech in defence of tougher capital requirements for institutions like JPMorgan. Dimon later called Carney to apologize.

Fun Fact: He was a hockey goalie at Harvard in the 1980s.