Carney buries predecessor’s liquidity policies
Mark Carney, the new governor of the Bank of England, on Thursday announced a sweeping overhaul of the way the central bank deals with lenders in financial difficulties, bringing it in line with the Federal Reserve and the ECB. In a speech at an event to celebrate the 125th anniversary of the Financial Times, Mr Carney said the BoE had a duty to "keep up" with events and provide a backstop to private markets to enable greater dynamism in financial services. Mr Carney said five words described the BoE’s new willingness to provide liquidity if banks need it. "We are open for business," the governor said. The BoE will now offer money for longer periods, accept a wider range of collateral, including "any asset of which we are capable of assessing the risks" and lower the cost of using the bank’s facilities. The approach buries the policies of his predecessor, Lord King, who was worried that the "moral hazard" of providing insurance to commercial banks would encourage them to take greater risks. Mr Carney said he expected to see an increase in banks using the new facilities as central banks tightened monetary policy in response to economic recovery, prompting bouts of market volatility. He also suggested the BoE would throw open its liquidity reserves to foreign currency borrowing and to non-bank financial companies. During the crisis, the BoE at first refused to extend general liquidity operations to banks, and then made the terms so onerous that institutions shunned the facility for fear of stigma. The Federal Reserve’s discount window and the ECB, which accepted much broader collateral, allowed banks to tap liquidity without the same reputational damage. Mr Carney also signalled the BoE would strengthen its oversight of shadow banking, the less regulated part of the financial system that operates in a similar way to banks. He said the next item on his agenda was to "turn activities of shadow banking into market-based finance" with "robust infrastructure". Rejecting the national antipathy towards the City, the governor said that, "If organised properly, a vibrant financial sector brings substantial benefits . . . The UK’s financial sector can be both a global good and a national asset – if it is resilient". He added: "The Bank of England today is the friend of resilient banks, continuous markets, and good collateral; and we are the enemy of taxpayer bailouts, fragile markets and financial instability." With bank assets now four times the size of national income, he suggested that on past trends, Britain’s banking assets were likely to be nine times the size of the economy by 2050. With 1m jobs in financial services and two-thirds outside London, he added that the City enhances the strength of the national economy. "The UK stands to benefit because of London’s place at the heart of the global financial system. Properly structured, this creates investment opportunities for British savers, reinforces trading ties for UK firms and improves access to credit for the real economy across this country." Revolutionising the often sniffy language of the BoE towards banks, he committed his organisation to helping financial services to grow in a way that benefited the whole economy. "The Bank of England’s task is to ensure that the UK can host a large and expanding financial sector in a way that promotes financial stability," the governor said. To achieve his ambition of a more vibrant yet safe financial sector in Britain, Mr Carney reiterated the need for global rules to make banking and financial markets safer and to make taxpayers immune from failing institutions. "The Bank of England’s task is to ensure that the UK can host a large and expanding financial sector in a way that promotes financial stability," the governor said. "Only then can it be both a global good and a national asset . . . helping to renew globalisation to the benefit of all".