OTTAWA - The Bank of Canada is warning that its own low interest policies and those of central banks around the world are adding another layer of risk to the already stressed global financial system and economy.
The Canadian central bank says near record level interest rates in place since the 2008-09 recession are taking their toll on insurance companies, pension funds and even increasing the appetite of investors to take risks in search of higher returns.
In Canada, they have been a prime mover to the other major domestic risk — an overheated housing market and high levels of consumer debt as Canadians take advantage of cheap money to buy real estate.
Bank governor Mark Carney has warned about the dangers of low interest rates — which many Canadians consider a good thing — sporadically in the past, but this time the bank's governing council has thought the concern grave enough to add it to the list of risks facing Canada and the world.
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Mark Carney may have been born in a tiny Canadian town but the man, who bears a distinct likeness to movie star George Clooney, is unlikely to fail the Britishness test when he makes his application for UK citizenship. Read more...
When you look in the round at what Mr Carney has taken on, it is easy to see why he fled when originally wooed by Mr Osborne - because it is reasonable to ask whether any mortal can do this job. Read more...
Today the chancellor confirmed that there will be no real change at theBank of England. There will be no change to the Treasury and Bank of England's obsession with inflation targeting and "price stability". Above all, he confirmed that there will be no reining-in of the banks; that banks will not be re-structured - to separate the retail and investment arms, and ensure that banks are no longer too big to fail. He confirmed this by appointing an ex-Goldman Sachs banker, Mark Carney, as governor of the Bank of England. Read more...
The scale of the job facing Mr Carney is enormous. The independent Bank of England as established by Gordon Brown in 1997, was to be a narrow, monetary and interest-rate-setting body. The financial crisis of 2007-08 and recession that followed changed all of that.... The borrowings on the balance sheets of London-based banks are four times the size of the country's total output - giving an indication of the size of the task that lies ahead. Indeed, it was the sheer scale of the challenge that finally persuaded Mr Carney that it was worth doing. Read more...
Is there any stopping Carney-mania? Those of us who 24 hours ago couldn't have identified Mark Carney, even if he was wearing a T-shirt emblazoned with "I'm the Governor of the Canadian Central Bank" in 110pt type, now stroke our chins and swap our best Carney insights. He was voted the most trustworthy Canadian in a poll conducted by Readers Digest (Canada). He has four children. He paid $800,000 for his house in Ottawa, apparently, although he undertook $95,000 of improvements. Did they extend out the back or convert the attic? I don't know, yet. And Canada didn't have a banking crisis, you know. Only it did, in the 1990s, and the recovery and reorganisation put it in place afterwards left it in good shape ahead of the much bigger financial crisis which hit the US and the UK particularly hard. And Canada knows how to regulate its banks, only that wasn't actually Carney's job. This is most of what we know so far. Read more...
The new governor's problem now is that he is bound to disappoint. Unless by some miracle the British economy soon heads towards the sunlit uplands, those now so keen to lavish praise on Mr Carney will start asking whether Britain has got what it paid for. The media will ask awkward questions about his pay and perks; MPs will criticise him at once for not being tough enough on the banks and for choking off credit to small businesses. Read more...
So who are the City getting in Mr Carney? On paper he's an outsider, although he will seek British citizenship, but a look on his CV shows that the Square Mile is getting one of their own. A 47-year-old former Goldman Sachs veteran of 13 years, doing stints in New York, London, Tokyo and Toronto, he will have no trouble speaking to the bankers in a language they understand. After 10 years of Sir Mervyn and "the MA way", in reference to the monetary analysis unit which held sway as the central bank took on a decidedly academic bent, Chancellor George Osborne is drawing a stark line in the sand and setting a new course for the Bank of England. Read more...
Mark Carney, the incoming Governor of the Bank of England, has attacked Andy Haldane, one of its most senior regulators and a rising star, for failing to have a "proper understanding of the facts" on bank regulation... Mr Carney, who is chairman of the global regulator the Financial Stability Board (FSB), criticised Mr Haldane, the Bank's executive director for financial stability, for proposals he made to simplify bank regulation and encourage banks to break up. [Haldane's] proposals ran counter to Mr Carney's work at both the Bank of Canada and the FSB. In an interview last month with Euromoney, Mr Carney said: "I thought Andrew Haldane's speech was uneven... Basle I was simple and it drove us off a cliff. Andrew Haldane's conclusion is not supported by the proper understanding of the facts." Read more...
The appointment of Mark Carney is a political coup. The decision is imaginative while also being safe. It is unusual but not unprecedented to appoint a foreign national to be head of a central bank. Stanley Fischer, Governor of the Bank of Israel, took Israeli nationality and renounced his American citizenship on his appointment. Mr Carney will similarly take British citizenship. Read more...
If this appointment is a celebration of Britain's willingness to scour the worldfor people to run our great institutions - from football clubs to car companies - it is also an acknowedgement of our failures. In central banking this is in theory the third most important job in the world, for the US Federal Reserve and the European Central Bank naturally rank higher. But in practice it is arguably more interesting, partly because it is more wide-ranging, combining bank supervision with monetary responsibility, and artly because London's central role in international finance gives it global significance. Read more...
"The low interest rate environment in major advanced economies represents another risk to the financial system, both in Canada and globally," the bank's governing council says in its semi-annual financial systems review paper issued Thursday.
"This risk involves increased vulnerability for financial institutions with long-duration liabilities (life insurance companies and pension funds), and increased incentives for excessive risk taking in a search for yield, which could distort the pricing of both real and financial assets."
Risk-taking, a major contributor to the 2008-09 financial meltdown, remains moderate, but is increasing, the bank says.
"Evidence of excessive risk-taking behaviour by pension funds and life insurance companies, and in global financial markets more generally, remains limited, although there have been some indications that investor tolerance for risk is increasing."
Insurance companies are impacted, the report states, because they are forced to reinvest cash flows at a lower yield that they thought would be the case. Canadian insurance firms are affected more than those in the U.S. because of the higher accounting standards here, the bank said.
The solvency of defined-benefit pensions funds are also jeopardized because "as long-term interest rates decline, the present value of the plans' future liabilities increases."
The council says central banks have kept interest rates low because the alternative is worse — that is increasing the cost of borrowing and undermining an already fragile recovery. What's more, it says it expects rates to remain low for an extended time.
Earlier this week, the Bank of Canada kept its overnight rate at one per cent for the 18th consecutive policy announcement meeting, a stretch that goes back to September 2010.
Although Carney kept in place his mild tightening bias, most economists believe neither out-going Carney, nor his successor who takes the helm in June, will be in position to make good on the bias until 2014, and then only to implement very modest hikes.
Meanwhile, the U.S., China and some other important countries continue to ease in an effort to keep their economies from falling back into recession.
But the bank warns that policy-makers must also be wary of the side-effects of the medicine they are administering, especially since those super-low rates are likely to stay in place for some time.
Overall, the Bank of Canada's new financial systems review finds that the risks in the world remain "very high," as they were in the last report in June.
"Although global financial conditions have improved since June, largely reflecting important announcements by major central banks and European authorities, the level of uncertainty is elevated," the review judges.
Despite the headwinds, Canada's financial system remains robust, the Bank of Canada says. But the country is also in a sense prisoner to external circumstances, including whether the U.S. is able to resolve its budget impasse early next year and Europe can keep muddling along without triggering a new crisis.
The next big challenge is the so-called "fiscal cliff" due to kick in on Jan. 1 unless the U.S. Congress can come to an agreement to extend a series of tax cuts and spending measures that represents about four percentage points of U.S. gross domestic product.
"Such an outcome would undermine the still-fragile state of private domestic demand and push the U.S. economy into recession," the bank says. Canada too could be pushed into a period of economic contraction if the U.S. crisis lasts long enough, economists believe.