Finance has rightly been in the sin bin for the last six years. And the cleanup job isn’t finished. But Mark Carney, the new Bank of England governor, is correct to stress how a large and expanding City of London is good for Britain, Europe and the world – provided it is properly organised.
Carney’s comments, in a speech last week, will seem heretical to many – maybe even to his predecessor, Mervyn King, who showed a barely disguised disdain for financiers. Would it really be healthy, for example, for the balance sheets of British banks to reach nine times GDP, double the current ratio – as Carney projected they could by 2050?
British public will have some big questions about the potential resurgence of finance. Will taxpayers be asked to swoop in again to bail out bust banks? If a rescue is needed, would the government have the wherewithal to support a gigantic sector? Is it wise for the UK to put so many of its eggs in the finance basket?
The answer to the first question is not yet a firm “no”. The job of making the financial system safe is still a work in progress. The priority is to ensure that any bank can fail without wreaking economic havoc. In theory, this can be done by “bailing in” shareholders and bondholders, rather than relying on taxpayers. But there must be enough capital to absorb all the losses and authorities across the world will have work together seamlessly.
Carney is alive to this issue, and in a position to do something about it. He’s not just governor of the Bank of England. He’s also chair of the Financial Stability Board, the body tasked by the G20 to fix the global financial system. But until more progress is made, the public cannot relax.