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Carney To Banks: Don't Forget Who Saved Your Bacon

Global leaders are determined to fundamentally reform the world’s financial systems despite the disappointing push-back coming from some bankers, Bank of Canada governor Mark Carney said Monday.

“The leaders have decided about the big initiatives and we will put them in place,” he told a financial regulators’ conference in Montreal.

Despite the complexities of the issues being addressed, the world’s central bankers, regulators and finance ministers are determined to institute the reforms agreed to by world leaders, Carney said.

Carney said he and other bank governors are disappointed by some of the actions taken by global bankers including large bonuses being paid by some before financial systems have solidified.

“Is it a good idea to pay big bonuses when at the same time there is a shortage of capital?” Canada’s top central banker said in response to a question. “Maybe regulators will decide.”

It’s the latest tough talk from Carney, who said last week that the Bank of Canada would use the tools at its disposal – including intervention in the currency market, if necessary – to keep inflation within the target range.

That was interpreted as the latest in a series of warnings that Canada’s central bank would move to squelch currency speculators from bidding up the loonie and putting the economic recovery at risk.

Carney warned Monday that financiers had better get ready for major changes to the way they do business.

He appeared close to exasperation with financiers who have already forgotten their central role in causing the recent global financial and economic meltdown.

“Relief is in danger of giving way to hubris,” Carney said in a speech.

“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.”

One of those vows is that banks will build up their capital reserves so that they can better withstand crises.

Carney warned bankers that they should not underestimate the determination of the G20 countries to enforce new rules on executive pay and bank capitalization.

“The industry should be in no doubt that capital requirements are going up,” Carney said.

While bonuses should be tied to long-term performance, G20 leaders urged firms to immediately implement sound compensation practices immediately.

Bank profits have returned, largely because the public sector – governments – have not only saved the financial system through massive injections of cash, but continue to assume risk.

In the future, he said, the system must be set up so that risk is again assumed by financial institutions, and if they fail, so be it.

“There is a firm conviction among policy-makers that losses endured in future crises must be borne by the institutions themselves,” Carney said.

Last week, U.S. President Barack Obama proposed to limit compensation to any financial institution that took government money to save itself from bankruptcy.

Carney’s apparent frustration was directed more at global bankers than Canada’s institutions, since he said several times that some of the changes being demanded are already in practice in Canada.

The bank governor stressed that financiers owe it to taxpayers to clean up their act and start behaving in a responsible manner that supports jobs and economic growth, rather than serves themselves.

He pointed out that some industrialized countries committed up to one-quarter of their gross domestic product to support their financial sectors.

Even in Canada, the federal government’s mortgage purchase program pumped $65 billion of liquidity, or 4.3 per cent of GDP, into banks, and the Bank of Canada’s own emergency measures added another three per cent of GDP.

This has reduced bank funding costs, and because of less competition, the sector has quickly returned to bumper profits.

But the sector should not be patting itself in the back, he said, or using the windfall for bonuses.

Instead, financial institutions should use profits to build up capital reserves so they again can return to their primary function of supporting economic activity through lending.

Meanwhile, Carney waded gently in the debate over a single national regulator in Canada, but refused to say whether he recommends that provinces join on.

“I think we’re all agreed that a single regulatory regime is preferable and there’s different ways to do that and we’re working towards it.”

Carney noted that he regularly meets and talks with the heads of Canada’s 13 regulators and that everyone is working within the current system to do the best possible job.