Carney, Mark

Mark Carney (1965-) is a Canadian banker who in 2013 became the 120th Governor of the Bank of England. He is the first non-Briton to hold that position. Prior to this appointment, Carney served (from 2008 through 2013) as the eighth Governor of the Bank of Canada. His actions during the 2008-09 global financial crisis are widely believed to have helped Canada avoid its most severe consequences.

Carney was educated in economics at the Universities of Harvard and Oxford. He worked for 13 years for Goldman Sachs in several locations and capacities, including managing director for investment banking. In 2003, he began a career in public service in Canada. He was appointed as a Deputy Governor of the Bank of Canada in 2003, and then seconded by the Canadian Department of Finance (in 2004) to serve as Senior Associate Deputy Minister. In that position he handled several delicate files, including income trusts (flow-through investment vehicles designed to avoid corporate taxes) and the 2007 freeze in Canada's asset-backed commercial paper market. He was appointed Governor of the Bank of Canada, replacing the retiring David Dodge, beginning in February 2008.

The global financial crisis was already gathering momentum as Carney took office at the Bank of Canada in 2008. Canada's banking system entered the crisis in a stronger position than those of many other OECD countries, for several structural reasons (Stanford, 2012). The Canadian banking industry is highly concentrated (the five largest banks account for over 85 percent of all bank assets in Canada) and strongly profitable (earning a return on equity consistently higher than the economy average); hence the banks were well capitalized. Canadian banking regulations are incrementally stronger than other countries', including the application of a global leverage ratio lim- iting banks' total assets to no more than 20 times equity capital. The system is further stabilized by several public institutions, including the Canada Deposit Insurance Corporation (which provides automatic deposit insurance) and the Canada Mortgage and Housing Corporation (which guarantees and sets quality standards for most mortgages in Canada). Mergers and foreign takeovers of the major Canadian banks are prohibited. Finally, the culture of Canadian banking is more cautious than in the United States or Europe - perhaps because of the stable, consistent profitability banks have enjoyed.

Nevertheless, Canadian banks experienced losses from asset markets in the United States and Europe, and were seriously threatened by the collapsing confidence that destroyed banks in other countries. Carney moved quickly to address the crisis, through several channels. He reduced the Bank of Canada's target interest rate quickly as the crisis emerged (moving faster than many other central banks): from 4 percent when he took office, to 1.5 percent by the end of 2008, and then to 0.25 percent (the effective lower bound) by April 2009. The Bank of Canada implemented an emergency liquid- ity programme to assist banks, involving at peak 41 billion Canadian dollars' worth of emergency loans (nominally backed by assets, on unconventional terms; see Zorn et al., 2009). These liquidity injections were supplemented by similar actions by the Canadian government (through an Emergency Financing Framework programme; see Department of Finance, 2009) and by Canadian access to liquidity support (valued at 31 billion Canadian dollars at peak) from the US Federal Reserve (MacDonald, 2012). With the interest rate at its lower bound, Carney developed other channels for monetary stimulus as the recession deepened. The Bank of Canada prepared a mechanism for quantitative easing (involving unsterilized purchases of government bonds), although it was never implemented. Carney also pioneered a new strategy of "conditional commitment", whereby the Bank of Canada committed (in April 2009) to maintain the interest rate at its lower bound initially for at least one year (conditional on inflation). He hoped that an explicit indication of the Bank of Canada's intentions would reduce interest rates across the spectrum of assets (He, 2010). Another reform under Carney's watch was the subtle amendment of the Bank of Canada's inflation target mandate (jointly agreed with the federal government) to give it more "flexibility" in the pursuit of that target (2 percent, plus or minus 1 percentage point). The addition of the term "flexible" to the formal mandate is widely interpreted as allowing the Bank of Canada to give more weight to GDP growth, employment, and financial stability in determining its monetary policy.

Thanks in part to these interventions, no Canadian bank collapsed during the 2008-09 crisis. The Canadian economy experienced a significant recession anyway, led by contrac- tion in business investment and exports (offset by a substantial but temporary expansion in government spending). Real GDP began recovering in mid 2009, although progress was slow and uncertain. By mid 2010 the emergency liquidity supports provided by the Bank of Canada to commercial banks had been fully repaid. In June 2010 the Bank of Canada became one of the first central banks in the world to increase interest rates after the crisis, boosting its target to 1 percent over the next three months. That may have been premature, however, as various economic headwinds stalled growth. One major inhibi- tor was a strongly overvalued Canadian dollar: partly the result of Canada's booming petroleum industry, but exacerbated by rising Canadian interest rates. Carney (2012) acknowledged the dollar's negative impact on Canada's trade performance, but remained steadfast that the Bank of Canada (unlike several other central banks) would not directly influence the exchange rate. Carney also spoke out regularly on broader economic issues, such as his concern with excess consumer indebtedness, and his disappointment at weak capital spending by Canadian businesses (producing large corporate cash balances that he famously termed "dead money"; see Carmichael et al., 2012). Carney's media profile became very high, a development that was said to annoy the Finance Minister. He was even courted (unsuccessfully) to run for leadership of the Liberal Party of Canada (which was in opposition during Carney's tenure).

The relative stability of Canada's banking industry enhanced Carney's international stature. He was appointed to a three-year term as Chair of the Financial Stability Forum in 2011 (a position he carried with him to the Bank of England). The Chancellor of the Exchequer in the United Kingdom, George Osborne, in announcing Carney's nomina- tion as new Bank of England Governor in November 2012, called him "the outstand- ing central banker of his generation" (Sculthorpe, 2012). Carney began his new role in London on 1 July 2013. His early actions included various forward guidance strate- gies aimed at convincing financial markets that interest rates would remain low for an extended period (thus stimulating faster investment and growth), informed no doubt by the apparent success of these techniques in Canada. UK growth picked up notably in the first years of Carney's tenure, although how much of that was due to his policy approach is unclear. In coming years Carney's policy interventions will also have to reflect lingering stagnation in the euro area and the contractionary impact of domestic fiscal austerity.

See also:

Bank of Canada; Bank of England; Effective lower bound; Financial crisis; Forward guidance; Inflation targeting; Investment banking; Quantitative easing.