HE HAS spent much of the year on Westminster’s naughty seat, after a poorly received budget in March. But George Osborne is still capable of guile and surprise. On November 26th the chancellor of the exchequer announced that Mark Carney, the head of Canada’s central bank, will take over as governor of the Bank of England when Sir Mervyn King completes his term next June. “He is quite simply the best, most experienced and most qualified person in the world to do the job,” gushed the chancellor.
There was a strong case for hiring a foreign star. The bank’s powers are growing. Next year it will resume the task of supervising individual commercial banks. It will have new “macroprudential” tools, such as raising capital requirements for any sort of lending that might threaten financial stability. And it will continue to set monetary policy to control inflation. Mr Carney is familiar with all these tasks. He chairs the Financial Stability Board, a body that co-ordinates financial regulation for the G20, and whose previous chief was Mario Draghi, head of the European Central Bank. Like Mr Draghi, he has worked for Goldman Sachs, an unloved investment bank. But he is also known for a run-in with Jamie Dimon, boss of JPMorgan, over the need for stricter banking rules.
Mr Carney’s other virtue is that he is an outsider. Paul Tucker, who had been favourite for the job, was the home-grown candidate closest to matching Mr Carney’s pedigree. But as one of the bank’s executives, he is linked to its past failings, including its slow reaction to the financial crisis.
By contrast, Mr Carney has been lauded for his decisive response. Canada has come through the crisis largely unscathed. Its GDP is 5% higher than before the crisis; Britain’s is 3% lower. None of Canada’s banks had to be bailed out. It is telling that politicians on all sides, as well as the bigwigs of Bay Street (Canada’s version of Wall Street), are sorry to see Mr Carney go, if proud of the positive message it sends about their country. Jim Flaherty, the finance minister, described the news of his departure as “bittersweet”.
Yet having a skilful central-bank chief is not the only, or even the main, reason for Canada’s resilience. A bigger one is the conservatism imposed on Canada’s lenders following the collapse of a few small regional banks in the 1980s. When crisis struck, the country’s banks held capital well above the levels prescribed by Basel 2, a set of international rules. The supervisor imposed an absolute ceiling on the loans—even those classified as low-risk under Basel 2—that each bank could make for a given capital base. Lenders are required to insure mortgages with the government if the downpayment is less than 20% of the home’s value.
The decision in 1998 to stop Canada’s four biggest banks from merging into two proved crucial, too. The banks said they needed muscle to compete globally. As it turned out, by being forced to stay smaller and largely domestic in focus, they were shielded from the foreign adventures that crippled the Royal Bank of Scotland. Yet Canada’s success is a riposte to those in Britain who fear its concentrated banking system is a source of trouble. Canada’s biggest five banks account for a whopping 87% of lending.
What lures Mr Carney to Britain? In part, a bigger job. Britain’s economy is not so much larger than Canada’s, but its central bank has greater influence in global forums such as the G7 and G20. Mr Carney will have less sway over monetary policy than he did in Canada—Sir Mervyn has been outvoted several times on interest-rate decisions. But he will have greater control over credit: in Canada, the government sets mortgage-lending standards.