Regulators have been promising since the crisis that broken banks should never again be propped up with cash from governments. But it is only now that the Bank of England governor thinks lenders could be allowed to fail without devastating repercussions.
One last push from the authorities this year could mean banks at last come up with proper plans for any future collapse, Carney said, ending the so-called too big to fail problem.
“Bankers made enormous sums in the run-up to the crisis and were often well compensated after it hit. In turn, taxpayers picked up the tab for their failures,” Carney told an Inclusive Capitalism conference at the Mansion House. “By replacing such implicit privilege with the full discipline of the market, social capital can be rebuilt and economic dynamism increased. This is the year to complete that job.”
But his words came as Christine Lagarde, the head of the International Monetary Fund, warned banks that “progress is still too slow, and the finish line is still too far off.”
Culture and behaviour in finance are still a problem, she said, while short-term profits are still the focus of much of the sector.
“To restore trust, we need a shift toward greater integrity and accountability,” she said. “We need a stronger and systematic ethical dimension.”
Carney used the event to highlight his plans to make bankers wait as long as 10 years before receiving their bonuses, and clawing back rewards from those who misbehave.
Even bosses who are not directly responsible for bad behaviour could lose their pay if someone below them acts wrongly, putting pressure on chiefs to reform the sector’s values.
“These provisions will apply not only to employees who are judged culpable directly, but also to ... senior executives who could reasonably be deemed responsible by establishing the culture and strategy of the organisation,” he said.
The Bank of England is also considering extending similar rules on conduct to the insurance sector.
Additionally, the conference addressed the purpose of finance, with Carney railing against “unchecked market fundamentalism”, warning that it “can devour the social capital essential for the long-term dynamism of capitalism itself” and Lagarde saying the sector should do more “to enrich society.”