In the wake of a financial crisis that has cost tens of millions of jobs and trillions of dollars in foregone output, Bank of Canada Governor Mark Carney called on financial institutions to participate fully in the regulatory reforms of the G20.

“The fundamental objective of the G20 reforms is to create a resilient, global financial system that efficiently supports worldwide economic growth,” Governor Carney said in a speech Monday to the Autorité des marchés financiers.

Carney outlined some of the reforms that are underway in response to the financial crisis. He said that, “Stronger institutions and a system that can withstand failure are necessary conditions. But full realization of this objective also requires a change in attitude.”

Carney said that the Bank prefers principles-based regulation and reliance on the judgment of people, rather than blind faith in higher capital requirements, “But this approach requires a sensitivity from the industry, which has been absent in recent months. Relief is in danger of giving way to hubris,” he said.

“Financial institutions need to demonstrate an awareness of their broader responsibilities. Financiers should ask themselves every day how their activities affect systemic risk? And what are they doing to promote economic growth?” he added.

“We will not remind market participants of the many oaths they swore a year ago; nor do we expect scores of financiers to join religious orders. However, we do expect those fevered battlefield vows to be respected through daily peacetime concern for and contributions to building a better, more resilient financial system—a system that serves the real economy, by replacing those lost jobs and making up for that lost output,” he said.

Carney said that policymakers are convinced that in the future losses endured in crises must be borne by the institutions themselves, not taxpayers. “Protecting the cycle from the banks requires building a system that can withstand the failure of any single financial institution and is buttressed by resilient markets. Today, after a series of extraordinary but necessary measures to keep the system functioning, we are awash in moral hazard. If left unchecked, this will distort private behaviour and inflate public costs.”

To create a system in which individual financial institutions are less important and markets are more important, he stressed that, among other things: regulators should institute staged intervention regimes to detect problems early; banks should develop ‘living wills’, or plans to unwind in an orderly fashion if they were to fail; and work must be done on ways to break liquidity spirals in funding markets when they happen.

A more resilient financial system will also require a return of private-label securitization, he said.

IE