Carney Offers Bankers 5Cs in Rebuilding Trust

Citing a significant lack of trust in major financial institutions as a major impediment to economic recovery, Mark Carney, Governor of the Bank of Canada, said in a recent speech to tomorrow’s bankers at the Richard Ivey School of Business that even the G-20 reforms will not be sufficient to rebuild this aspect of the economy.

On the ground that means that bankers must work harder to rebuild trust and reconnect with clients, in the global effort to rebuild economies.   

He offered five elements in helping leaders of financial institutions think about their institutions’ core role in society, which is to connect savers and lenders for good and sustainable growth of communities:

• Capital: Since the end of 2007, major banks in the United States and Europe have increased their common equity capital by $575 billion and their common equity capital ratios by 25 per cent. Canadian banks are setting the pace, said Carney: their common equity capital has increased by 77 per cent, or $72 billion, and they already meet the new Basel III capital requirements six full years ahead of schedule.
   
• Clarity: One of the most important initiatives to improve clarity in annual financial reporting by institutions is the work of a private sector group, the Enhanced Disclosure Task Force (EDTF), which was formed at the encouragement of the Financial Stability Board (FSB). It has made recommendations to improve reporting by banks based on seven principles:  reports should be clear, comprehensive, relevant, consistent, comparable, and timely and explain how risk is actually managed. In the current environment, the FSB has emphasized particularly the value of stressing against sharp movements in yield curves.
   
• Capitalism, Connecting with Clients, and Core Values: Carney was brutally frank in his assertion that bankers must acknowledge their industry’s role in the financial crisis and together with regulators, and other major stakeholders, take responsibility to rebuild trust in the banking sector. “Perhaps the most fatal blow to public trust has been the perception of a heads-I-win-tails-you-lose finance,” he said. “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.”

Banks can revisit core values, promoting cultures of ethical business practices and limiting compensation arrangements of top bankers, by following the FSB-developed Principles and Standards for Sound Compensation Practices, he noted. These guidelines provide core elements like deferred variable performance payments, paying bonuses in stock rather than cash, and introducing bonus clawbacks.

The separate levels of suspicion between banks, investors, debt-holders, and economies, both domestic and international, and the general distrust between the public and the financial system; together with suspicions regarding the benefits of deregulation and cross-border financial liberalization “could ultimately undermine support for free trade and open markets more generally,” Mr. Carney warned.  Introspection, in other words, is critical.

To see the full speech click here.