Good Luck, Mr. Carney

Fisher Investments  |

When UK Chancellor of the Exchequer George Osborne announced Mark Carney will succeed Sir Mervyn King as BOE chief next year, the surprise was universal: The Brits picked a Canadian?!

My surprise, however, was of a different sort: Osborne didn’t pick a regulatory guru?!

You see, the next BOE Governor won’t have a central banker’s typical portfolio. Next year, financial regulatory oversight moves from Financial Services Authority (FSA) to the BOE, making the bank’s chief supreme overlord of monetary policy and bank regulation. Thus, the governorship’s applicant pool was rather atypical: Sure, there were a couple monetary policy wonks, but there were also politicians and regulatory officials—not exactly logical picks for a position with veto power over interest rates, quantitative easing and the like.

Then again, it’s tough to argue the reverse—that a monetary policy specialist has much business chairing two new committees on financial sector regulation. Hence why having one chief to rule them all seemed a headscratcher. Consolidating financial sector oversight within the BOE might make sense as a way to streamline regulation—generally a positive—but that doesn’t mean the same person must or even should oversee everything. Especially when one considers potential conflicts of interest between regulators and monetary policymakers.

Thus, when the UK Treasury ran a job posting in The Economist in September seeking one BOE governor to chair the Monetary Policy Committee (MPC), Financial Policy Committee (FPC) and Prudential Regulation Authority (PRA)—someone to play “an important role in setting monetary and regulatory policy” and “lead the Bank through major reforms to the regulatory system”—I was skeptical. And when the short-list of candidates emerged—and when said candidates began campaigning in the UK press—skepticism morphed to a touch of fear.

So when Osborne uttered Carney’s name in Parliament, I was rather relieved. Carney, Canada’s central bank chief, was the dark horse—widely considered the best man for the job, but he seemed to rule himself out of the race in August. The odds-on favorite was BOE Deputy Governor Paul Tucker, with FSA chief Lord Adair Turner on his heels—both experts in their fields, but Tucker’s regulatory credentials were tainted by his implication in the LIBOR scandal, while Lord Turner didn’t exactly demonstrate a keen understanding of monetary policy’s finer points. Carney, on the other hand, rather straddles both arenas—he’s shepherded Canadian monetary policy since February 2008, and in recent months he’s chaired the Financial Stability Board, the G20 committee on financial regulation. That’s not to say all his policy decisions have been great, but he at least has more relevant experience than his rivals, which inspires some confidence. (Though, how he’ll fare at writing those infamous letters to the Chancellor explaining high inflation remains to be seen.)

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That knowledge and experience will be put to the test very quickly as the bank’s next governor will face a host of challenges. Inflation remains higher than policymakers would like, while growth remains lackluster despite historically low interest rates and a £375 billion quantitative easing program—most of which is sitting at the BOE as excess reserves. Bank lending is still struggling to take flight despite several initiatives aimed at boosting it, largely because of mounting regulatory uncertainty—not least of which stems from the bank’s own FPC. Though the committee’s powers are still being formalized, it’s pushing for the ability to mandate countercyclical capital buffers, more stringent mark-to-market accounting (potentially problematic, depending on how it would apply to illiquid assets) and arbitrarily set individual banks’ capital requirements above national standards. All of which flies in the face of the MPC’s attempts to stoke the economy through accommodative policy.

To put it mildly, Carney will have to negotiate a spider’s web of tangled problems and competing interests. Yet most observers seem more preoccupied with his potential difficulties mastering British euphemisms, facing questions about his outsider status and weathering the press’s scrutiny of his wife’s social activism—none of which should matter or has any bearing on his ability to do the job. Which is rather emblematic of the UK’s larger problem: Regulatory uncertainty, arguably one of the nation’s greatest economic headwinds (tax increases tied to deficit reduction efforts also play a role), has largely flown under the radar. Oh, sure, pending regulatory changes are well-documented—the Independent Commission on Banking’s regulatory review was front-page news—but the potential unintended consequences of overly strict capital requirements and forced changes to banks’ business structures are too often ignored. Or, equally discouraging, warned of only by industry insiders and, thus, written off as self-interested lobbying. This gives regulators precious little incentive to ease banks’ burden, which would enable them to lend more enthusiastically.

Unless something gives, it’s difficult to imagine the UK breaking out of its funk—creative programs to boost lending, like Funding for Lending and UK Guarantees, are all well and good, but they have too much competition from regulatory changes known and as-yet unknown. Despite current regulators’ blind belief banks will meet soon-to-be-increased capital requirements by issuing new equity (and, thus, lend more), banks are hoarding capital and keeping credit tight. Thus, for the UK’s economic future, the key question: Will Mark Carney, with his central banking and regulatory experience, see the struggle between lending and regulation? And do something about it?

Not that one man can be any country’s economic savior—Carney’s no more messianic than any other central banker, and the FSB’s regulatory proposals under his guidance weren’t exactly dovish. But his dual portfolio and broad experience at least uniquely position him to identify problems where others perhaps can’t. Maybe, just maybe, he’ll connect the right dots, bring some sense to the ongoing deliberations over the FPC’s powers and help clear up at least some of the UK’s regulatory uncertainty.

This article constitutes the views, opinions, analyses and commentary of the author as of November 2012 and should not be regarded as personal investment advice. No assurances are made the author will continue to hold these views, which may change at any time without notice. In addition, no assurances are made regarding the accuracy of any forecast made herein. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets. Click here to read disclaimers.

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