Mark Carney: Closing remarks to the Open Forum
Closing remarks by Mr Mark Carney, Governor of the Bank of England and Chairman of the
Financial Stability Board, to the Bank of England Open Forum, London, 11 November 2015.
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Let me begin by thanking the Lord Mayor and his team for their gracious hospitality once again.
The Guildhall really is a fantastic venue, and I want to take this opportunity, as we approach
the end of your term as Lord Mayor, to salute you for the emphasis that you have put on the
broader role of finance in society, the broader role of the City of London in the UK economy
and in the global economy, and your broader contributions to society. City Giving Day is but
one example of that, and we are all very much in your debt for your enormous contribution.
On behalf of my colleagues, I want to thank the Chancellor of the Exchequer and the President
of the European Central Bank for their insightful comments. Let me also thank all of the
panellists for their well-chosen, provocative, and effective contributions. I am also grateful to
the moderators here today, in person or online from across the country, for helping drive our
Open Forum.
Most of all, let me thank our steering committee, those 20 people from all walks of life, who put
a tremendous amount of time and thought into the sessions. I also want to thank Andy Haldane,
our communications staff at the Bank, and our colleagues tasked with making the logistics
work - all the way to Edinburgh. Last but certainly not least, let me thank those of you who
spent the day with us at Guildhall, those who followed online, and those who participated in
our sessions in Birmingham and Edinburgh, Cambridge and Manchester and our many school
sessions. Apart from coming up with the words "Open Forum", I've added little to this
memorable day, but I have taken away a great deal!
Let me spend a couple of minutes on a few of these takeaways. They are far from
comprehensive, and only a starter, because part of the point is that we all need to go back and
reflect on what we learned and what we'd like to prioritise.
The first thing that struck me was the almost universal reaffirmation of the importance of
markets. Whether it was the vox-pops in the streets of Leeds or Belfast, the feedback from our
event in Birmingham, the interventions here in Guildhall, there was a clear recognition of how
important these markets are not just to the economy, and not just in an abstract sense, but to
people's everyday lives.
At the same time, the level of trust in institutions and market mechanisms is quite low. As
Elizabeth Corley highlighted, there is a disconnect between how we in finance - and I include
the public sector here - see the sector and how the general public sees the sector.
Interestingly, that disconnect is much less prompted by questions over the health of our banks.
Alex Brummer made this same point in terms of a sense of optimism around institutions. That
is a good thing because a tremendous amount has been done over the past seven years in
order to make banks much stronger. I will not go into all the details, but banks are indeed now
beginning to adjust their business models.
I'll add a very clear message on behalf of those of us on the regulatory side to the bankers in
the room and those watching from outside: there is no Basel IV. There is no other big wave of
capital regulation coming. With the agreement on Total Loss Absorbency Capacity, the last
pieces of the puzzle have been put in place.
It is true that we do have to make some adjustments to risk weights; and there will always be
things to iron out, but I repeat there is no big other prudential regulatory wave for the banking
sector. As Andrew Bailey made clear in one of the break-out sessions I attended, the focus
now is about greater certainty and adjusting business models to these new realities. As Andrew
noted, given the scale of the regulatory effort, that means that the business models pre-crisis
are not necessarily going to be very effective now.
Let me turn back to trust. Why is trust still so low? My sense from the discussions is that trust
remains low for two reasons. First, because of misconduct, and secondly, because of a
perceived - and, potentially, actual - lack of adequate client focus.
The frequent references to misconduct reinforced in my mind the importance of individual
accountability, the focus of the Fair and Effective Markets Review, chaired by Minouche Shafik.
It also emphasised the importance of the senior managers' regime coming into effect in the
first quarter of next year, and the importance of applying it to true codes and standards in
wholesale markets, in a manner that market practitioners understand. The people at coal-face
- junior traders, investors and asset managers - must understand what a true market is and
their responsibility to act in a way that is consistent with maintaining true markets.
In terms of a perception of a lack of client focus, I took away two gaps that were raised. The
first is a financing gap, which I felt came out during the first panel, and which some economic
historians in the room compared to the 'Macmillan gap' - the distance between finance and
industry being too great. People talk today about an excess of savings not finding a home. In
this country, it is felt most in terms of SME and mid-cap finance.
Many were struck by the potential ability of financial technology - fintech - to help bridge this
financing gap, but I would emphasise that there was also bit of a caution, as I believe Reverend
Giles Fraser noted in the last panel. We should not get too far ahead of ourselves, but look to
further evidence that it can bridge the gap. I think the Chancellor is absolutely right that fintech
has potential both in terms of expertise in finance and capability in technology. If these can be
married effectively, we have an opportunity.
There were a few specific examples that were mentioned that I would just like to reinforce.
First, and as Alex Brummer very rightly emphasised, the opportunities that come from big data
and a greater open architecture that is already there. As our Chief Operating Officer Charlotte
Hogg would note, the Bank of England is one of the biggest repositories of big data. There is
always a question about to what extent that can be leveraged more broadly into the system,
and though it is still early days, the Bank may want to consider taking this on as a challenge.
Jon Cunliffe raised a separate and important issue with receivables finance, where fintech
could make a real difference. Following the crisis, payment terms for companies increased to
120 days and have not come back. We know there are effective fintech solutions to this which
leverage off the credit of the payer. In such circumstances, and more broadly where fintech
moves further into more traditional banking areas such as peer to peer and other lending, the
Bank recognises that we need to think about and take forward a proportionate, activity-based
regulatory response.
Let me turn to the second gap in relation to a lack of client focus: an engagement gap, if I can
put it that way. This manifests itself in a number of ways, as noted during the many insightful
interventions during our panel sessions. Perhaps Julia Black put it best when she described
the dangers of groups of professionals talking just amongst themselves.
This has been part of the issue with financial reform - a sense that reform was a pre-packaged
process built on discussions between regulators, banks, and investors, with sympathetic
academics adding in their words of support.
Part of the reason for our broader discussions today is to ensure we move out of this state of
affairs. And of course, once we bring in other perspectives, it changes our own perspective
and underscores just how hermetically sealed the industry in its broad sense can be. Let me
say a couple of words on this.
It should be recognized that the industry has made tremendous strides to address a number
of issues. An issue touched on earlier in the day was reporting and accounting, and one of the
things the industry has done is to come up with something called the Enhanced Disclosure
Task Force. The Taskforce proposed a set of recommendations for banks to develop
highquality, transparent disclosures that clearly communicate banks' business models and the key
risks that arise from them, so that people who supply capital to the banks can follow how they
make money, how they think about managing risk, and make judgments on the basis of that.
The important point was that this was industry-led, and co-chaired by a London-based bank.
There was some input from the authorities, but the industry led the initiative, and it's a model
we may use in other areas of finance.
I mentioned Total Loss Absorbing Capacity earlier - I won't use the acronym! I'm aware the
full name doesn't necessarily make it any more intelligible, but this is basically another layer of
capital, and the ability to absorb losses in the event that a firm fails. It is more cost effective -
so the cost is not passed on to borrowers. And the technology behind this was developed by
the private sector, with the authorities contributing to ensure it could work effectively and on a
global basis. But it was the industry, once again, that came up with the solution.
Further innovations are needed if the sector is to come to terms with the new business models
that Andrew Bailey and others have mentioned today. For example, innovations in the way
banks are organised that are consistent with orderly resolutions.
Separately, and as noted in a number of panels today, asset managers also need to innovate
to adapt to the new realities of market liquidity. The increase in the scale of the asset
management sector since the crisis has been notable, as has been the emergence of
investment funds that offer daily liquidity while investing in securities that only appear liquid.
The Bank, the Financial Conduct Authority and the Financial Stability Board are keenly aware
of these risks, and we are working to resolve them in an orderly manner.
The area of market liquidity is one place where there may be duplicative regulations and scope
for adjustment. Market participants should rest assured we have made adjustments in the past
where we have gotten things wrong. We adjusted the liquidity coverage ratio. President Draghi
noted the joint work between the Bank and the European Central Bank to change securitisation
- an example of fixing something we had not gotten exactly right. We will continue to adjust
our market operations.
Let me move towards the conclusion of my conclusion.
The point about reform and review being a continual effort came through in spades. David
Kynaston noted that there have been four big bursts of reform in the last 150 years. This one
does not need to end - not because we are due Basel IV, or another raft of reforms, but
because we will continually adjust as the industry itself innovates. Adjustments will be based
on improved engagement with the industry about what's necessary and conversations with a
much wider range of people.
Buried in your iPads, under the financial regulation section, is a list of all the current work
streams of the FPC, FSB, BCBS, EC, CMU, et cetera - it's all in there. Of course, there are
very few people who know what all those acronyms are and what they mean - and shame on
them if they do!
This reinforces the point about comprehension, one of the most important takeaways from
today. As Jon Cunliffe noted just a short while ago, rather than burying people in acronyms,
the responsibility of the official sector is to explain what's going on, why certain things are being
done, and what else is necessary. In other words, as a senior banker once told me early on in
my career in the private sector, "If it doesn't make sense, it doesn't make sense". I asked him
to repeat it because it didn't make sense to me at first.
If someone in finance explains something and it doesn't make sense, and if when they repeat
it still doesn't make sense, it's very likely that they don't understand it themselves, which is
quite often the case, or that, actually, it doesn't add up.
And that is a good challenge for us at the Bank as well as the broader official community when
explaining what's happening and how the system works. Lack of understanding leads to
disengagement, which in turn leads to mistrust.
Let me conclude by thanking the huge range of people across the country who really did
engage, who did spend the time here with us today. The long-term reward of course, is a more
resilient financial system that better serves the needs of society. In the short-term, I hope you
will join us for a quick drink in the Crypt of this fantastic building. For those of you in Edinburgh,
Alex Brummer would be happy to stump up. And for those of you at home, I hope you will join
us in spirit with a drink at your local pub - put it on the Bank of England as a form of quantitative
easing.