OTTAWA (Reuters) - Mark Carney, the next head of the Bank of England, has shaken up the stuffy culture at the Bank of Canada with his unconventional approach. The big question is will he be able to do the same at an even more hierarchical institution - the Bank of England.
Carney is known as a whipsmart central banker and financial regulator. But Reuters’ interviews with former central bank officials reveal his behind-the-scenes role in changing the way the secretive Canadian central bank is run.
Carney raised the bar for economic research, streamlined communications and brought in more financial markets expertise, the staffers say. But he also could be abrupt and dismissive when he disagreed with people or ideas.
With the Bank of England under fire for its centralized structure and the high level of power in the hands of the governor, Carney’s record in Ottawa provides clues to how he might approach those challenges in his new job.
When he took the helm in Canada in 2008, global financial markets were imploding and some said it was not the time to gamble on an organizational revamp that could disrupt operations and unsettle staff.
But he did gamble. That year, not only did he cut benchmark interest rates to 1.5 percent from 4 percent and inject billions of dollars into money markets, but also he undertook the bank’s biggest restructuring since the early 1970s.
It worked, making it easier for specialists to work together and respond to the crisis, the former officials say.
“If you remember what was going on in 2008, this was the period of the acceleration of the global financial crisis and a number of people said to me in early 2009, ‘you know, I’m sure glad we did this’,” said David Longworth, whose 36-year career at the bank culminated in a 2003-2010 term as deputy governor.
Canada, unlike Britain, bounced back relatively quickly from a mild 2008-09 recession.
None of its banks needed bailouts and the central bank never resorted to quantitative easing, which the Bank of England and the U.S. Federal Reserve both did.
Carney can’t take credit for all the successes. Prudent banking rules predate him, and all central banks had to innovate during the crisis.
But his ambitious, forceful personality helped him get things done in a way his predecessors did not, officials said.
Like the Bank of England last year, the Bank of Canada received a stinging external review of its forecasting around the time Carney became governor.
“No one could forecast inflation. No one talked about credit and money,” prior to the crisis, said a former Bank of Canada economist who joined the bank from the private sector and spoke on condition of anonymity.
Having Carney as a champion of change at the top was like a breath of fresh air. “He wasn’t like any of the other governors ... He doesn’t look like them, he doesn’t sound like them. He’s not afraid of change,” said the economist.
Many have praised the British central bank and its intellectually brilliant governor, Mervyn King, for helping coordinate the global response to the financial crisis. But some see the 300-year old institution as anachronistic with its doormen in top hats and pink tailcoats. Critics say its rigid, pyramidal structure fosters a group think mentality.
“It’s a bit like the Borg - you become assimilated,” said former Bank of England economist Rob Wood, referring to the hive-like cybernetic beings in the Star Trek television series.
Carney, who starts his new job in July, has said BoE decisions will not rely on the governor alone. British lawmakers will have a chance to question him on February 7.
Yet Carney, a 47-year-old father of four, is also a tough, demanding boss who does not suffer fools gladly, former staffers say. He set the tone early in his term when he brusquely cut off an economist making a long-winded presentation to the governing council.
“That ruffled a few feathers at the time,” recalled one former senior official.
Others, like economist Charles St-Arnaud, appreciated his directness. He recalled how Carney, then a deputy governor, ignored cumbersome chains of command to seek his opinion.
“He just knocked on my door and said, ‘Hey, can we speak about Japanese banks?’ No preparation, no anything,” said St-Arnaud, now at Nomura Securities in New York but then in his mid-20s toiling in relative obscurity.
“You kind of felt that your work mattered,” he said. “I need to be on the ball on my file at any time because you never know when he could come back with a harder question.”
Longworth noted that Carney took good ideas wherever they came from and had a wider network of external contacts than other governors.
One of the bank’s most inventive responses during the crisis - the “conditional commitment” to hold interest rates steady for a predefined period - was an idea from a close aide, said an economist familiar with the decision.
Carney listened, asked for more analysis and ultimately gave the nod. The Bank of Canada, which does not publish minutes of its meetings, would not confirm that information, saying only that decisions are taken on a consensus basis.
Paul Fenton, named by Carney in 2008 to head the newly-created Canadian economic analysis department, thinks Carney got his practical streak from his 13 years at Goldman Sachs (GS.N).
“The fact that Mark was coming from the outside and from a private sector background where one is accustomed to looking at situations, making decisions and making changes, I think that helped,” said Fenton, now chief economist at the Caisse de Depot et Placement du Quebec, a pension fund.
Carney’s push to raise the quality of research emphasized the links between financial markets and the economy.
He encouraged tweaks to the bank’s main forecasting model to better reflect the impact of financial and credit conditions and hired high-profile economists from the Canadian operations of Merrill Lynch and Goldman Sachs.
Of the working papers published on the Bank of Canada’s website in 2012, 10 were tagged with the key words “financial institutions” or “financial services” compared to one in 2007. There were nine on “asset pricing” and two on “international financial markets” versus none on those subjects five years earlier.
Since 2008 the Bank of Canada’s projections at the start of each year for annual GDP and inflation have been slightly better than the private sector consensus, according to an analysis by Doug Porter, deputy chief economist at BMO Capital Markets in Toronto.
At the Bank of England, forecasts have been marginally worse than the private sector, and the bank has consistently underestimated inflation and overestimated growth since 2007, an external review released last November said.
To be fair, few forecasters have done well at predicting the British economy, with its unusually high employment for such a moribund economy, its messed-up banking system and a major government austerity program.
There will be differences as Carney moves to the Bank of England. At the Bank of Canada the openness and debate that officials say exists internally contrasts with a highly scripted, unified public message.
The British central bank is described as the opposite - there is not enough debate internally, but public dissent is allowed. One external review suggested its policy makers were not offered enough alternative views on the economy, and former finance minister Alistair Darling called the institution an “autocratic fiefdom of the governor” in a 2011 book.
On the other hand, four members of its Monetary Policy Committee (MPC) are appointed directly by the finance minister, and they often publicly disagree with their BoE colleagues. King has been in the minority in some votes on monetary policy.
He’s in for a big “culture shock,” former MPC member Adam Posen said this week about Carney.
Fenton said Carney is probably as ready as any foreigner can ever be for the difficult job.
“The fact that he’s decided to take the job means he’s decided he knows how to deal with it. And he will.”
Additional reporting by Olyesa Dmitracova and David Milliken in London; Editing by Janet Guttsman and Claudia Parsons