The recently appointed governor of the Bank of England, Mark Carney, explains how tightening regulatory framework is essential in order to ensure economic stability.

Speaking during the International Monetary Fund/World Bank’s annual meeting in Tokyo, Mark Carney, chairman of the Financial Stability Board (FSB) and governor of Canada’s central bank, was positive about the pace and direction of developments in the international regulatory framework.

 

“We have made good progress at the core of the agenda, which included implementing Basel III capital,” he says. “We are now in a position where the translation of those rules across jurisdictions in Europe, the US and Japan have been audited, if you will, by the Basel committee, and there is better knowledge, and public knowledge, [on whether] there is deviation from the text. That allows jurisdictions to work [towards] adjustments. So Basel is moving forward.”

Task ahead

As of early November 2012, however, only eight of the 27 members of the Basel Committee on Banking Supervision are on track to translate those Basel III reforms into national law by January, even though the rules were supposed to be phased in by then. Subsequently, in a letter to G-20 leaders, Mr Carney wrote that “the tasks ahead remain considerable”.

At the core of the agenda, Basel III is not the only initiative the FSB has been concerned with, and Mr Carney is keen to provide definite rules and realistic deadlines for the market. Major international issues such as ‘too big to fail’ institutions, over-the-counter derivatives and shadow banking are being studied.

“One of the challenges is ensuring that we can provide as much certainty to the private sector as quickly as possible on final decisions and on realistic frameworks,” he says.

Cooling period

Pushing the international regulation agenda forward is not Mr Carney’s only responsibility. As governor of Canada’s central bank, he is also responsible for overseeing the country’s monetary policy and its banking sector dynamics. With worries of a potential overheating of the household debt market in the country – as of October, statistics showed household debt to have reached 165.8% of income and the Bank of Canada labelled household debt as the biggest risk facing the domestic economy – much effort has to be made reassuring analysts and international observers that all is under control.

Mr Carney is well aware of Canada’s current economic and financial markets risks but, he says, these are typical of a country that was not sucked into a financial crisis, and of a country that has engaged in accommodating monetary policies geared towards supporting domestic demand.

“The main domestic risk relates to the housing sector and household debt, but I would say this is a common risk to markets which did not have a financial crisis, have well-functioning financial systems, and provided lots of stimulus to grow domestic demand during this financial crisis,” he says.

To counterbalance such risks, the Canadian government has been further tightening rules on government-backed insured mortgages. These measures include the reduction of the maximum amortisation period to 25 years from 30 years, the reduction of the maximum amount that an individual can borrow when refinancing to 80% from 85% and the exclusion of homes with a purchase price of more than $1m from the government-backed programme. New guidelines on residential mortgage underwriting and related practices have also been recently issued by the Office of the Superintendent of Financial Institutions. Mr Carney welcomes such initiatives. Past loose monetary policies were adequate, he says, and so are current initiatives to mitigate new risks.

“What is happening in Canada, where we had accommodating monetary policies, is that the government has tightened measures around consumer financing and household debt that is helping to mitigate this risk. Collectively, we will remain
vigilant on this,” he says.  

Mark Carney is Canada’s central bank governor and chairman of the Financial Stability Board.

He was recently appointed as the governor of the Bank of England.

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