[R]eforms of domestic banking are far from sufficient for a global hub like London. Now is the time for a greater focus on what’s needed for resilient international banking and robust global markets.
London is the home of global markets as well as global banks. And London’s markets serve a vital role as Europe’s window to global capital, as well as a center of emerging market finance. Mark Carney, Governor of the Bank of England and Chairman of the Financial Stability Board, believes that in order for the UK to continue to be a global financial hub, the UK’s reform agenda must extend well beyond domestic banking. That is why Mr. Carney is urging greater international cooperation and a renewed focus on what’s needed for resilient international banking and robust global markets. Accordingly, Mr. Carney has introduced the Bank of England’s new and outwardly focused Financial Stability strategy.
Mr. Carney does not believe, however, that the early focus on reforming domestic banking practices was misplaced. Rather, it was entirely necessary. Going forward, however, the threat of financial fragmentation arising out of the financial crisis must be met head on by cooperative cross-border efforts.
[S]uch engagement would be timely because globalisation itself is under siege. Cross-border capital flows have fallen sharply since the crisis. Multilateral trade liberalisation has stalled, to the detriment of global prosperity. If we are to stem this tide towards financial fragmentation we must make global finance more resilient. That serves both national and global interests.
The Bank of England’s Financial Stability strategy consists of three parts:
- creating resilient global banks,
- building robust markets, and
- conducting central banking for global markets.
In each part, Mr. Carney expects the UK to lead the way. In doing so, Carney expects to keep the UK’s financial sector both a global good and a national asset.
The most noteworthy aspects of the new Financial Stability Strategy are the proposals potentially opening up the Bank of England’s lending facilities to non-banks, and possibly offering liquidity in other currencies than sterling.
First, should the Bank of England allow non-banks to have access to our regular facilities? After all, our responsibilities for financial stability run much wider than the banking sector. Institutions that play a central role in markets, like broker-dealers, are obvious first candidates. We will also consider the case for opening them to other participants including financial market infrastructures. If the scope of access to central bank facilities increases, the scope of regulation can be expected to expand in a proportionate manner. Backstopping the collateral management of a range of institutions should reduce the need for the Bank to act as a Market Maker of Last Resort.
Second, given that we host an international banking system and global markets, to what extent should the Bank of England provide liquidity in currencies other than sterling? As markets evolve, banks and markets here may need backstops in other currencies in our time zone before business opens for the Federal Reserve and after it has closed for the Bank of Japan.
Although the Bank of England can supply limitless quantities of sterling, we rely on other central banks for access to their currencies. In response to the crisis, a network of swap agreements between advanced economy central banks was established giving us the ability to provide a range of currencies to UK-based institutions.
These two moves, if applied, certainly would keep the Bank of England at the center of global finance, effectively making the Bank of England the liquidity backstop for the world. This would, indeed, make the UK financial sector an indispensible global asset.