Global Perspectives: Mark Carney on leading the Bank of England, climate change, COVID-19 and community involvement
December 01, 2020
Mark Carney is special envoy for climate action and finance at the United Nations and U.K. Prime Minister Boris Johnson’s finance adviser for the 26th UN Climate Change Conference. Previously, Carney was governor of the Bank of England from 2013 to 2020 and governor of the Bank of Canada from 2008 to 2013, the first person to have held both positions.
While in those roles, Carney was chair of the Financial Stability Board from 2011 to 2018. He chaired the global economy meeting and Economic Consultative Committee of the Bank of International Settlements from 2018 to 2020 and was first vice chair of the European Systemic Risk Board from 2013 to 2020.
Carney is a member of the Group of Thirty and on the foundation board of the World Economic Forum, which meets annually in Davos, Switzerland. He serves on the boards of Bloomberg Philanthropies, the Peterson Institute for International Economics and the Hoffmann Global Institute for Business and Society.
Carney obtained a bachelor’s degree in economics from Harvard University and master's and doctorate degrees in economics from Oxford University. After a 13-year career with Goldman Sachs, Carney was appointed deputy governor of the Bank of Canada in 2003 before becoming governor.
The Federal Reserve Bank of Dallas recently hosted Carney as part of the Bank’s Global Perspectives speaker series. This series was launched at the beginning of 2016 with the objective of bringing leaders from the worlds of business, academia and policymaking to the Dallas Fed to share their insights on global, national and regional developments.
Carney and Dallas Fed President Robert S. Kaplan discussed climate change and central banks, COVID-19 and central banking, the complementary roles of monetary and fiscal policy, and community engagement. The following are excerpts from their conversation, edited for clarity, and presented by topic.
On central bank involvement in climate change discussions:
Carney: One of the things the Bank of England does is oversee the insurance industry, the fourth-largest insurance industry, including Lloyd’s of London. And if you oversee property and casualty insurance and certainly reinsurance, you know that those people really focus on climate change because they’re repricing their coverage and adjusting their coverage every year—because what was in the tail before, is in the central scenario in terms of extreme weather events.
That industry is dealing with extreme weather events. Three or four years ago, these were up three times over a couple of decades and insured losses up five times, inflation-adjusted.
We just kind of had to do it [become involved in climate change] because actually, that’s prudential responsibility. But our concern around climate change was twofold. One, I was asked as chair of the FSB (Financial Stability Board) to look at the risks around climate change. And there was some desire, I think, on the part of those who asked that we would come back and say, ‘OK, we’re going to change the capital ratios for banks.’ That is the charge that banks would have to set aside if they lend to a ‘brown industry,’ which would be much higher than if they lend to a green industry.
Above and beyond the likelihood of repayment—which is what a bank is supposed to figure that on—and for us as regulators, well, that doesn’t make sense. That’s climate policy, and climate policy is the policy of the government, rather.
But the risk we were concerned about is the risk that gradually if society starts to take these issues more seriously, you end up with tighter and tighter climate policy, and then you end up with very large stranded assets.
The COVID-19 crisis:
I think first in terms of the response, it was exemplary, and it was under exceptionally difficult circumstances. I started in crisis and I left in crisis. I literally handed over crisis to [Bank of England Governor] Andrew Bailey, no better person to hand the crisis to and, I must say, he has proven that out. At the time, in mid-March, the view such as it was from epidemiologists, was, ‘OK, we are dealing with a bridge. We need to get from the spring to around now. And so, let’s preserve as much of the supply capacity,’ which is a fancy word for people’s jobs and companies’ operations as possible.
You have a different perspective and mindset when you’re doing that than if you think, ‘Actually, we may be in this for a year and a half or two years or more.’ So, now it gets tougher, for a couple of reasons.
I think one is that some of the buffers have been used up, certainly within companies, within households. Some businesses won’t be coming back; unfortunately, it is becoming a little more obvious. There is a need at some point to move from support to reallocation and from emergency support to making sure we are growing the economy.
This is really more a fiscal issue than a monetary issue. But within the same amount of spending, how much are you spending on support [for] COVID and how much are you spending on capital? How much are you spending on growing the future? Are you supporting the job that may not be there, or are you supporting the worker, including supporting the worker by helping the economy find new jobs?
That’s an exceptionally difficult thing to do, but it does move into a world where there is less blanket support, support for every industry for every individual and more targeted support.
And lastly, one of the things you need as well is a sense of direction. The question is, where is the economy going? What can policymakers do to help frame that? The Fed, in my view, is doing that, in part through the new flexible average in [its] framework, where you are providing some of that direction, some of that medium-term direction. At least on monetary policy, I as an individual can think, ‘OK, I have some reasonable sense of where the Fed is going to go and what kind of support they are going to provide.’
The distinction between fiscal and monetary policy:
I am of the view that we take fiscal policy as given unless it’s absolutely extreme circumstances. I mean, it’s literally a fiscal crisis. Otherwise, we [as central bankers] are very quickly drawn into those decisions that really have to be taken by elected officials.
I think it’s important for two reasons. The responsibility for fiscal policy lies with elected officials, ultimately the government. One of the things that we all painfully learned over history, to bring it back to the monetary policy side, is that you don’t want the politicians running monetary policy, because the temptation is always to wait or always to err on the side of dovishness, if you will. But what happens over time is that people figure that out. They figure out that the politicians will wait, and then gradually that creeps into expectations and it becomes self-defeating.
The Fed has been given a carefully circumscribed amount of independence about the conduct of monetary policy. You need to be accountable, but in the end, you make the decisions. We did at the Bank of Canada. If we start talking about other people’s decisions, then they start talking about our decisions, and it creates a confusion.
I know in all jurisdictions some politicians talk about your decision, but people know that in the end it’s you. You vote, you make the decision that you think is the right decision, because you’ve looked at the numbers, you’ve gone out and talked to businesses. You understand—you think it’s the right decision, and that’s incredibly important. We start to undercut it if we don’t stay in our lane and we go into those other areas. And I think that’s one of the reasons why it’s fundamentally important.
Importance of community engagement:
If you are not rooted in the local [community], you just become detached. So being connected, always being connected to your community—to what people are living through—is very important in our roles. In the U.K., I felt that acutely because I was a foreigner there. Going up and down the country and going to the local schools, which often were in quite difficult circumstances or communities, and just explaining what we are doing is incredibly important. So that’s one [way to contribute to the community].
And then the second is, it is important to have ambition. You want to stretch farther than you might think you can get [to]. So, we will put in place for COP (the Committee of the Parties), the [United Nations Framework Convention on Climate Change] foundation, that every decision can take climate change into account, financial decisions can take it into account. That was a big stretch six months ago when we set that out. Now, actually the way the world is going, we will probably get there.
And the last thing is, we all have to keep [a sense of] humility along the way and recognize that you have got to adjust. You can stretch, not get there all the way, and if you stop and explain and understand why that’s the case, then people will stay behind you and you will get there the next time.
About the Author
Mark A. Wynne
Wynne is vice president and associate director of research in the Research Department at the Federal Reserve Bank of Dallas.
The views expressed are those of the author and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.