Will Mark Carney champion transparency?

Ultimately, Mark Carney, the Bank of England governor designate, will be remembered by whether or not he champions transparency and market discipline and rejects the combination of complex rules/regulations and regulatory oversight as a substitute.

As I am using transparency, it refers to the idea of bringing transparency to all the opaque corners of the financial system including banks and structured finance.

• For banks, this takes the form of ultra transparency under which banks are required to disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

• For structured finance securities, this takes the form of requiring them to provide observable event based reporting under which all activities like payments or delinquencies involving the underlying collateral are reported before the beginning of the next business day.

Regular readers know that if he champions transparency and market discipline, the financial crisis in the UK will quickly be brought to an end and long-term financial stability put in place.

Regular readers also know that if he continues to reject transparency and market discipline in favor of the combination of complex rules/regulations and regulatory oversight there will be no end in sight for the financial crisis.

Based on an interview with Euromoney, it is hard to tell exactly where Mr. Carney will come down.

Carney, who was appointed FSB chairman in November 2011, is tasked with implementing the Basle III accord.

His in-tray is groaning under the weight of the reform agenda and the ostensibly insurmountable challenges: crafting a regulatory system that reduces the prospect of another financial meltdown, but without choking off capital formation in an already depressed global economy. 

Carney is staking his credibility and reputation that Basle III – the third global regulatory effort in around two decades – is the world’s best bet to reduce the risk of another financial Armageddon. 

In his capacity as chairman of the global agenda-setting and co-ordinating body, which works with the Basle Committee on Banking Supervision, he is executing changes to the composition and definition of capital, liquidity and counterparty credit risk, capital buffers and the leverage ratio, while crafting a single rule book, enhanced supervisory measures and sanctions for noncompliance....

This suggests he prefers substituting complex rules/regulations and regulatory oversight for transparency and market discipline.

"The reform agenda is being pursued with a legitimate effort to increase the resilience of the system in the most efficient way possible. We could build capital to the moon and we would not have to worry about an institution failing but the economy would not be there," he tells Euromoney. "The interests of the private financial community should be absolutely aligned with those of the regulatory community to grow the real economy in a sustainable way. And the more enlightened members of the financial community have that perspective."...

Regular readers know that transparency is the most efficient way to make the financial system resilient without negatively impacting growth in the real economy.

So it sounds like Mr. Carney is open to hearing about transparency and market discipline.

Gordon Nixon, chief executive of Royal Bank of Canada, agrees: "He acknowledges the fact that the complexity and over-reach of regulation inflicts economic damage and he is fighting to achieve a better balance between regulation and growth within a very constrained political context. I would rather have him fighting for that balance than anyone else I have ever met in the regulatory or political world." 

Although recent scandals have reintroduced calls to break up the big banks even as they maintain their argument that the universal banking model benefits from diversification of geographic exposures and earnings by business type, Carney’s assessment is more nuanced. 

He principally cites the failings in operational oversight and culture, rather than the inherent structural risks of scale and complexity, in the most recent scandals. 

"In these [recent] episodes there were fundamental issues of conduct, and troubling issues of oversight, be it risk management or operational oversight," he says "It is not truly accurate to say they prove something systemic. A common aspect in several cases is that the people involved did not appear to take into account wider societal norms or the implications between what they did and their institution’s ultimate relationship with the real economy." 

He cites money-centre and deposit banks in the US and elsewhere as evidence that it is possible to run well-managed large, global institutions, although he refrains from naming specific banks.

The common aspect of these cases was they all occurred in the opaque corners of the financial system where sunshine could not act as the best disinfectant of bad behavior.

As I said earlier, it is hard to tell whether Mr. Carney will champion transparency and market discipline or not.  If he does, I would expect a quick resolution of the financial crisis in the UK.  If he does not, I would expect that the next Governor of the Bank of England will be dealing with an economy in far worse shape and a financial crisis that is exponentially worse.