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Jan. 24 (Bloomberg) -- Bank of England Governor Mark Carney said banks must change their behavior as regulators overhaul benchmarks such as the London interbank offered rate in the wake of manipulation scandals.
“Banks must recognize that only exemplary behavior can confer social license to global financial capitalism,” he said in a speech today at the annual meeting of the World Economic Forum in Davos, Switzerland. “For the system to operate with integrity, penalties for misconduct cannot be seen as a cost of doing business.”
As banks rebuild their capital buffers and respond to tougher international rules intended to make them more resilient to shocks, they are still battling with the reputational damage stemming from the manipulation of benchmarks. Regulators on three continents are investigating allegations that traders at some of the world’s biggest banks sought to rig key rates in the foreign-exchange market.
“While regulators will fix the mechanics of benchmarks in markets ranging from Libor to FX, only private individuals and institutions can reform the behavior that has made such changes necessary,” Carney said at the event hosted by the Confederation of British Industry, the U.K.’s biggest business lobby.
Carney, who is also chairman of the Financial Stability Board, took charge of the Bank of England in July. He is the first foreigner to run the 319-year-old institution.
“Fundamentally, integrity cannot be legislated, and it certainly cannot be bought,” Carney said. “Only a perspective which takes into account the wider implications of actions can guide proper behavior.”
The governor said that “much has been achieved” to repair the banking system, citing increased capital requirements. He said the BOE will begin stress tests this year to assess institutions’ strength and that the central bank is at the “forefront” of efforts to ensure governments and taxpayers aren’t left on the hook when lenders collapse.
“To make the system fairer, the days when banks privatized gains but socialized losses must end,” he told the audience of business leaders. “Firms that take excessive risks will bear the full consequences of the market; consumers, businesses and taxpayers who rely on critical banking services will not.”
Carney also said the BOE won’t be a “champion” for bankers, but will help to put in place the right environment for the industry’s growth.
“By making it safer and fairer we can put in place the conditions for it to thrive,” he said. “But whether or not it thrives will rest on the efforts of individuals and organizations to re-establish the system’s reputation for integrity.”
--With assistance from Gavin Finch in London. Editors: Craig Stirling, Eddie Buckle