Mark Carney wants more “we” and less “me” in global finance.
The financial crisis and trading scandals revealed how banks lost their way and staff operated for personal gain without regard to their impact on society, the Bank of England Governor said in a speech yesterday. Rules to prevent such behavior should embody the idea that firms and employees bear responsibility to the system in which they function, he said.
“We need to recognize the tension between pure free-market capitalism, which reinforces the primacy of the individual at the expense of the system, and social capital which requires from individuals a broader sense of responsibility for the system,” he said. “A sense of self must be accompanied by a sense of the systemic.”
Carney, speaking at the “Inclusive Capitalism” conference in London, set out a list of steps to repair the financial system’s ethos. He called for governments to complete this year measures to enable all failing institutions to be resolved, and said that tougher bonus rules might need to penalize entire groups of staff in cases of widespread failures in performance or risk management at banks.
“The combination of unbridled faith in financial markets prior to the crisis and the recent demonstrations of corruption in some of these markets has eroded social capital,” he said. “When combined with the longer-term pressures of globalization and technology on the basic social contract, an unstable dynamic of declining trust in the financial system and growing exclusivity of capitalism threatens.”
The governor made the case for reform of the “hard and soft infrastructure of markets” following evidence of rate-rigging and foreign-exchange manipulation. Officials should also consider increasing transparency in fixed-income markets and accelerating the shift in derivatives trading to electronic exchanges, he said.
“Merely prosecuting the guilty to the full extent of the law will not be sufficient,” Carney said. “Authorities and market participants must also act to recreate fair and effective markets.”
During the crisis, institutions that were too-big-to-fail unjustly survived at taxpayers’ expense, with some employees continuing to enjoy high pay even after the industry was bailed out, Carney said. Banks must encourage a sense that work is a vocation, and not an opportunity for personal gain at the expense of the wider system, he said.
“Employees must be grounded in strong connections to their clients and their communities,” Carney said. “To move to a world that once again values the future, bankers need to see themselves as custodians of their institutions, improving them before passing them along to their successors.”
Carney’s keynote address followed speeches by Prince Charles, former U.S. President Bill Clinton and International Monetary Fund Managing Director Christine Lagarde at the conference in the City of London.
“All ideologies are prone to extremes,” Carney said. “Capitalism loses its sense of moderation when the belief in the power of the market enters the realm of faith.”
In his comments, he also recognized that central bank policy favored some parts of society at the expense of others. Record-low interest rates and quantitative easing have benefited asset owners and borrowers at the expense of savers, he said.
“While to not have acted would have been catastrophic for all, the distributional consequences of the response to the financial crisis have been significant,” he said. “Central banks are not blind to these issues.”
Still, loose policy is needed so central banks can help to ensure that a generation of workers isn’t lost, according to Carney. He said monetary stimulus in the U.K., including keeping the benchmark interest rate at a record-low 0.5 percent, has “sharply reduced” the risks of long-term unemployment.