As the days of Wild West style banking slowly fade into memory, new sheriffs are being appointed to keep the industry in check. Yesterday, the Bank of England announced a new governor to replace Mervyn King when his term ends next June: Mark Carney. Carney was a longshot for the position, even though The Economist said he was the best man for the job. So, who is this Canadian banker, and more importantly, what does his appointment mean for investors?
Carney attended Harvard and Oxford as a student. After Harvard, he spent 13 years at Goldman Sachs (NYSE:GS), before getting his PhD from Oxford and being appointed deputy governor of the Bank of Canada in 2003. In 2008, he was promoted to the head of the central bank, and he has spent the past four years in that post. His move to the U.K. was a surprise to almost everyone, because of his earlier insistence that he was not looking to take the open role, and would not be looking at it in the foreseeable future. In addition to his day job, Carney is a member of the Financial Stability Board, which is an international organization set up to help individual central banks connect on policy.
In its pseudo-endorsement -- "pseudo" due to his hardline on not looking at the U.K. -- The Economist said that Carney "has an enviable mix of economics know-how, executive ability and experience of financial markets." But his most prized attribute may be his non-Britishness. With the ongoing LIBOR scandal, accusations that the Bank of England knew about the fiddling while it was taking place, and the seemingly endless list of banks that have been implicated, the U.K. is a hazardous place to be from if you want a big promotion. Almost all of the frontrunners seemed to be tainted in one way or another.
Bringing in an "outsider" -- ignoring the fact that Carney worked for Goldman in London during the 80s -- was seen as paramount. Not only was Carney an outsider, but he was surprisingly talented. During the credit crisis, Canada was largely unaffected. Unemployment is only about one and a half percentage points up from its pre-crisis position, sitting around 7.5%. Analysts generally point to the Canadian response as a good guide for future policy, and Carney was instrumental in that response.
Banking on the future
Carney has massive challenges in front of him. The U.K. has only just emerged from a double-dip recession, and mistrust is rampant within the banking sector. Ever since Barclays (NYSE:BCS) admitted to Libor manipulation earlier this year, banks have seemingly been lining up to take their shot at a scandal. Just this week, UBS (NYSE:UBS) was fined $47 million for its rouge trading scandal. Carney will need to sort out the oversight of those banks and restore consumer trust. U.K. banks are doubly suffering -- self-imposed, admittedly -- as scandals have hit both the investment and retail side of the industry.
As a result, no one trusts anyone anymore. To fix the problem, the U.K. is doing away with the FSA and rolling some of its powers into the new Prudential Regulatory Authority (PRA), which will act as part of the Bank of England. Carney will oversee this new unit and will largely be judged on his ability to get the banks in line. Hopefully, the pursuit of that goal will be where the PRA really shines. As a new enforcer, the PRA is taking a "comply or explain" approach to banks and will be focused on "the harm that [financial institutions] can cause to the UK financial system."
The bottom line for investors
The combination of a new regulatory framework, an increasingly litigious atmosphere, and fresh blood in the top role should lead to some hard lines being drawn. While this is going to mean some short-term heartache for bad banks, it's long-term gold. The financial sector is still depressed from the crisis, and no amount of cloak and dagger work is going to change that. What the whole industry needs is a change in transparency and to have its dark days put behind it. If that means fines and firings, then so be it. Carney offers a good chance to make a change, and I for one welcome him.
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