Volcker Rule: Mark Carney, Bank Of Canada Governor, Criticized In New York Times For Bank Reform Opposition

Mark Carney Volcker Rule Simon Johnson

First Posted: 02/17/2012 1:44 pm Updated: 02/17/2012 1:52 pm

OTTAWA -- A top U.S. economist is taking Bank of Canada's Mark Carney to task for his opposition to the so-called Volcker Rule designed to reduce risk-taking by American banks.

In a strongly worded comment published Friday in the New York Times webpage, Simon Johnson suggests Carney has simply misinterpreted the proposed new regulations intended to curb U.S. banks from betting government-insured deposits on risky investments.

The former chief economist with the International Monetary Fund calls Carney's assertion that the proposed new regulations could limit the market for Canadian government bonds an "absurdity'' and suggests he retract his claims.

The Volcker Rule, a section of planned U.S. law originally proposed by American economist and former U.S. Federal Reserve chairman Paul Volcker, aims to restrict banks from making speculative investments that don't benefit their customers.

Volcker argued that speculative trading played a key role in the 2007-2008 Wall Street financial crisis that sparked a worldwide recession.

The rule is often referred to as a ban on proprietary trading, where customer deposits are used to trade on the bank's personal accounts to make profits on stocks and bonds to currencies, commodities, derivatives and other financial instruments.

A spokesman for the Bank of Canada said there would be no response to Johnson's criticism.

It is not the first time Carney, perhaps Canada's most outspoken and globally active central bank governor in history, has drawn fire for his views.

In September, the governor and Jamie Dimon, chief executive of New York banking giant JP Morgan Chase, clashed at a private gathering in Washington over the need for banking regulations, but this time it was Carney who was advocating stronger restrictions.

That well-publicized tiff appeared to cement Carney's reputation as someone who can play in the big leagues and he was shortly afterwards named head of the Financial Stability Board, an international body that polices banking regulations.

The latest public criticism stems from a letter Carney fired off to U.S. authorities complaining that the Volcker rule would have extraterritorial reach into Canada's sound banking practices.

Finance Minister Jim Flaherty sent a similar comment, and other governments, including Japan, the United Kingdom and the European Commission, also raised objections to the proposed rule, as have numerous financial institutions and banks.

But Johnson only names Carney personally in his article, noting that the central banker once worked for Goldman Sachs for 13 years.

"I am not asserting and do not believe that this has anything to do with the issues at hand,'' he writes. But he adds Carney certainly has the wrong idea about the Volcker Rule.

"The more serious assertion made by the Bank of Canada is that disallowing proprietary trading by a handful of American megabanks would negatively affect the market for Canadian sovereign debt in a significant fashion,'' Johnson says.

"Writing in the Financial Times ... Paul Volcker delicately but deliberately demolishes this absurdity,'' he adds, pointing that Volcker cites that in the 1970s and 1980s proprietary trading was prohibited in the U.S. without complaints from foreign governments.

"Relative to the nuanced dialogue that usually takes place between current and former central bankers, this is a slap in the face,'' Johnson asserts. "And Mr. Volcker is right to be confrontational.''

Volcker does not mention Carney in his defence and hardly Canada at all, except to praise it as a place where ``large banks have been much less committed to proprietary trading.''

The new dispute delves deeply into the byzantine regulations that governs the practices of financial institutions, and even the letters by the two Canadian policy-makers make it clear that they are not dealing in certainties.

Carney's letter on Monday argues that trading in Canadian bonds ``may be impaired'' and that market-making and risk-management activities by Canadian banks ``may be limited.''

In essence, Carney tells his U.S. counterpart Ben Bernanke that Canada has the means to regulate its own banking sector, which has been judged the soundest in the world by international regulatory bodies.

"The proposed rule should rely on Canadian regulators to ensure the soundness of Canadian institutions and their trading practices,'' Carney wrote.

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Filed by Daniel Tencer  |