Transforming a rampant moral hazard

A speech given by Mark Carney, Governor of the Bank of England, to the 29th Annual G30 International Banking Seminar in Washington has highlighted the fundamental overhaul of the financial system which has taken place across the globe in the last few years.  Headline improvements include a strengthening of bank capital requirements, a transformation of shadow banking and safer derivative markets.

Mark Carney didn’t mince his words when he said that “tackling the rampant moral hazard at the heart of the financial system hasn’t been easy” and there is still more work to be done both to remove the “too big to fail” implication and to build an open global financial system.   Key to this second ambition according to Mr Carney is the word trust:

• Trust between financial institutions.
• Trust between regulators.
• Trust between industry and finance.
• And most fundamentally, trust between the public and the financial system.

Creating trust in a new global system involves paying attention to three key areas.  Firstly, intensive co-operation across national boundaries by authorities to remove the chance of ring-fencing or subsidisation affecting international markets.  Secondly, rigorous and transparent peer-review and assessment processes to ensure agreed standards are being applied consistently and that there are no unintended consequences.  Thirdly, it is important to keep alive to new and emerging vulnerabilities and to co-ordinate responses.

In conclusion Mark Carney acknowledged that the reforms which have been put in place so far have put the finance sector in a much better position to face new risks.  However he counsels that there is still scope to improve and that the process of reform is not over with more work to do before leaders can “deliver the open and resilient financial system that can support strong sustainable balanced growth around the world.”