The financial industry has work to do to restore trust in markets and its own role in society, says Bank of England governor Mark Carney.
Speaking to an industry conference in London, England Tuesday, Carney, former head of the Bank of Canada, observes evidence of growing economic inequality, the erosion of social capital, and the breakdown of trust in financial markets, which threatens the market system. In recent years, he noted, market fundamentalism has been ascendant, and this blind faith in markets contributed directly to the financial crisis.
Since then, events have further strained trust in the financial system, he notes. “Many supposedly rugged markets were revealed to be cosseted: major banks were too-big-to fail: operating in a privileged heads-I-win-tails-you-lose bubble; there was widespread rigging of benchmarks for personal gain; and equity markets demonstrated a perverse sense of fairness, blatantly favouring the technologically empowered over the retail investor.”
Prior to the crisis, the financial industry became fundamentally detached from its wider social function, he says, “banking became about banks not businesses; transactions not relations; counterparties not clients.”
“When bankers become detached from end-users, their only reward becomes money. Purely financialcompensation ignores the non-pecuniary rewards to employment, such as the satisfaction from helping aclient or colleague succeed. This reductionist view of the human condition is a poor foundation for ethical financial institutions needed to support long-term prosperity,” he says.
This, in turn, sows mistrust of market mechanisms, which reduces both happiness and social capital, he says.”Just as any revolution eats its children, unchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself,” he warns. “To counteract this tendency, individuals and their firms must have a sense of their responsibilities for the broader system.”
The erosion in social capital has to be rebuilt to make markets work, Carney says. “This is not an abstract issue or a naive aspiration. I will argue that we have already made a start with financial reform and that by completing the job, by returning to true markets, we can make capitalism more inclusive.”
Central banks can contribute to this goal in two ways, he suggests. First, by promoting social welfare through its core macroeconomic work. “Second, we can help to create an environment in which financial market participants are encouraged to think of their roles as part of a broader system,” he says. “By building a sense of responsibility for the system, individuals will act in ways that reinforce the bonds of social capital and inclusive capitalism.”
To that end, central banks can help drive needed financial reforms, he suggests; including, ending too-big-to-fail policies; creating fair and effective markets; reforming industry compensation; and, building a sense of vocation and responsibility.
In addition to a variety of reforms that are underway, Carney suggests that policymakers should look at increasing pre- and post-trade transparency in a host of fixed income markets, and pushing more derivatives trading onto electronic exchanges and platforms.
“Consideration should be given to developing principles of fair markets, codes of conduct for specificmarkets, and even regulatory obligations within this framework. There should be clear consequencesincluding professional ostracism for failing to meet these standards,” he says. “The basic point is that all market participants, large and small, should recognize that market integrity is essential to fair financial capitalism.”