MONTREAL (Reuters) - Bank of Canada Governor Mark Carney delivered a blunt rebuke to the global financial industry on Monday, saying it had shown insensitivity over high compensation and calling on it to get on board with reforms.
Canada’s top central banker, himself a former Goldman Sachs executive, said the financial industry had returned to profit largely as a result of public support and urged bankers use the cash to shore up balance sheets.
“Current bumper profits can compensate employees, be returned to shareholders, or increase capital. The clear priority of the public sector is the recapitalization of the financial system,” Carney told an industry conference in Montreal hosted by Quebec’s securities regulator.
“The industry should be in no doubt that capital requirements are going up. Those who prefund will be in the best possible position over the medium term.”
Recent news that Goldman Sachs Group Inc had set aside $16.8 billion for compensation after repaying $10 billion in U.S. taxpayer money fueled concerns that global banks were returning to the lavish pay practices commonplace before the financial crisis struck.
Recalling the G20 appeal for sound compensation practices, Carney said the industry’s current windfall, dependent “on the strongest of safety nets and the policy-driven snap back from the brink, sits uneasily with that principle.”
“It would be a mistake to underestimate the determination of G20 leaders to reshape the financial services industry,” he said.
He said that risks must be returned to, and borne by, the private sector and warned the current system was awash in “moral hazard”, meaning players may still be taking risks on the assumption authorities can always bail them out.
“Policy-makers had to do many unpalatable things to save the economy from the financial system -- a financial system that begged for mercy,” he said.
“We will not remind market participants of the many oaths they swore a year ago,” Carney said. “However, we do expect those fevered battlefield vows to be respected through daily peacetime concern for, and contributions to, building a better, more resilient financial system.”
Carney questioned whether firms have a handle on their medium-term profitability, given the profound regulatory and economic changes coming. He said the financial system must change “from its self-appointed role as the apex of economic activity to once again be the servant of the real economy.”
He made clear much of his disappointment with the financial industry was with global players rather than with Canadian banks, which did not receive government bailouts.
“I’ve been a little let down. Other governors have been very disappointed. On a global scale more so than in Canada, but the problems were there,” he said.
Speaking in Montreal, Quebec’s biggest city and main economic center, Carney also addressed the contentious subject of domestic securities regulation, saying it would be preferable to have a single regulatory regime in Canada.
Unlike most countries, Canada has 13 provincial and territorial securities regulators and French-speaking Quebec has fiercely opposed efforts to create a single, national watchdog.
The federal government said this month it plans to seek the opinion of the Supreme Court of Canada on whether Parliament has the authority to put in place a single national securities regulator -- normally an area of provincial jurisdiction.
“This question of jurisdiction is very much before the relevant courts, so we’ll leave it to them to take a view. I think we’re all agreed that a single regulatory regime is preferable and there’s different ways to do that,” he said in response to a question following the speech.
Raymond Bachand, Quebec’s finance minister, told reporters he does not believe there is a need for a central regulator.
“In securities, we need a national policy and we have it. We’re harmonized, our securities commissions move together on a daily basis when necessary. We’ve got to reinforce that. It’s being done, it’s working and we should stay that way.”
Bachand stressed earlier in a speech that Quebec supports a national policy, but said “national doesn’t mean central.”
Additional reporting Jasmin Legatos, Randall Palmer and David Ljunggren; editing by Jeffrey Hodgson and Rob Wilson