Mark Carney: banks and regulators need to do more to rebuild trust in financial system

Mark Carney, the Bank of Canada's Governor and the next Governor of the Bank of England, gave a speech in which he observed that banks and regulators need to do much more to rebuild trust in the financial system.

As Bloomberg reported,

“It has been said that, ‘trust arrives on foot, but leaves in a Ferrari.’” 

There has been a “significant loss of trust by the general public” due to the excesses that led to the 2008 financial crisis, as well as allegations of wrongdoing in areas such as the setting of the London interbank offered rate, a benchmark interest rate known as LIBOR, Carney said....

The lack of trust has depressed the stock price of banks such as London-based Barclays Plc (BARC) and Frankfurt-based Deutsche Bank AG, and is “restraining the pace” of the global recovery, Carney said. It has also “increased the cost and lowered the availability of capital for non-financial firms.”...

Carney also called on banks to improve the transparency of their accounting and conduct regular “stress tests” of their balance sheets. 

One of the biggest blows to public trust came from the “perception of a heads-I-win-tails-you-lose finance,” he said. “Bankers made enormous sums in the run-up to the crisis and were often well compensated after it hit. In turn, taxpayers picked up the tab for their failures.”

Financial reforms must include “measures that restore capitalism to the capitalists,” Carney said.

At the end of the day, there is only one reform that builds trust and restores capitalism to the capitalists.

That reform is requiring the banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

With this level of disclosure, market participants can assess the risk and solvency of each bank.  With the ability to assess, market participants take on the responsibility for absorbing all losses on their exposures to the unsecured debt and equity of each bank.  This restore capitalism to the capitalists.

With this level of disclosure, bankers can no longer engage in bad behavior behind a veil of opacity.  Sunshine acts as the best disinfectant.  And with this sunshine, trust returns.