Special report: Mark Carney - the making of a governor

The new head of the Bank of England, has a great reputation after his performance in Canada. Nikhil Kumar looks at whether he deserves it or is just lucky

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The Independent Online

When the financial crisis struck in 2008, Canada's central bank governor, Mark Carney, had a lot to thank Paul Martin for. Nearly a decade earlier, Canada's then finance minister had been faced with ruling on merger plans put forward by four of the country's big banks.

A green light would have resulted in the creation of two giants with combined assets at the time of well over $600bn (£390bn). But public opinion was clearly against the deals: in December 1998 Mr Martin rejected the plans. His reason? The deals would have "led to an unacceptable concentration of economic power in the hands of fewer, very large banks".

Fast forward to 2008, and Mr Martin's decision was among the crucial factors that helped to keep the worst of the storm that was wreaking havoc in Wall Street and the City of London at bay. It also made the job easier for Mr Carney, Bank of Canada's governor throughout the crisis, and the incoming head of the Bank of England.

Beginning with the Chancellor, George Osborne, who, when he announced the 48-year-old as his choice to replace Sir Mervyn King, said he had "done a brilliant job for the Canadian economy … avoiding big bailouts and securing growth", Mr Carney has been showered with praise for the way he steered the Bank of Canada. But even his supporters acknowledge that, able and bright though he is, Mr Carney was dealt a much better hand than his counterparts in London and his colleagues charged with steering monetary policy in the other G7 nations.

Blocked from merging, the banks didn't have the ammunition in the boom years to undertake the kind of misadventures that ultimately hobbled so many lenders in the US, the UK and elsewhere. The Canadian economy did not have to deal with a Royal Bank of Scotland-style collapse. Local lenders were also forced by regulators to hold more capital – and greater amounts of higher-quality capital – than mandated by international rules. Net result: no bailouts.

In late 2008, a World Economic Forum survey ranked Canada's banks the soundest in the world. Britain's banks, which had once been in the top five, were ranked 44th.

Then there was the huge natural resources industry, kept in business by demand from abroad as the crisis struck. That gave Canada precious economic strength at a time when other sectors were hit by global shocks.

"When Governor Carney came in he was blessed with remarkable timing, because whereas parts of our economy in Canada were incredibly damaged by the same crisis as parts of the US, Europe and the UK, [other] parts of our economy continued to grow through the recession," Armine Yalnizyan, a senior economist at the Canadian Centre for Policy Alternatives, an independent think-tank, said.

The Canadian government's finances, too, were in much better shape. The country boasted an 11-year run of budget surpluses by the time the financial crisis and the attendant economic slump arrived on its doorstep, shoving it into a deficit.

Mr Carney himself acknowledged the difference between Canada's position relative to what was going on in other major economies.

"For us, the global financial crisis was an external rather than internal shock," he said in a valedictory speech before the Board of Trade of Metropolitan Montreal last month. He added: "As painful as our recession was, Canada suffered less. By the start of 2011, all of the output and all of the jobs lost during the recession had been recovered."

None the less, despite Canada's fundamental strengths, the external shocks did necessitate action. Mr Carney was appointed to the top job at the Bank of Canada at the start of February 2008. By then, his predecessor, David Dodge, had begun cutting rates. It was up to Mr Carney to manage the economy as the global crisis reached its peak.

In this he has been credited with resisting the temptation of following other central banks in printing money. The Bank of Canada did, however, step in to support lenders, flooding the system with liquidity in concert with other major central banks.

"Relative to other central bankers, I'd put him right at the top of the pack," Craig Wright, the chief economist for the Royal Bank of Canada, said. "Canada through the crisis has outperformed all the major economies. It's not all due to Governor Carney, but he was one of the players."

In particular, Mr Wright gives the incoming Governor of the Bank of England high marks for leading the way with forward guidance. In April 2008, the Bank of Canada provided markets with a "conditional commitment [on its key policy rate] with an explicit date", as Mr Carney put it in a recent speech.

"With our key policy rate reaching one-quarter of 1 per cent, the lowest it could effectively go, we provided further stimulus by committing to hold rates at the effective lower bound, conditional on the outlook for inflation, through the second quarter of 2010," he said.

According to Ms Yalnizyan, Mr Carney's skill at communicating policy is a key strength that was displayed throughout his tenure.

"Without question he is an enormously competent man, [and] part of his competence is not just smarts when it comes to all things economic but his competence in communicating what the bank is doing and why," she said.

So, did he do anything wrong? Given the peculiar characteristics of the Canadian economy going into the financial crisis, it may be too early too tell. Mr Wright said that, based on the data at hand, it would be hard to be critical – but he added that, as with monetary policy around the world, "it's a long horizon".

"The one area of concern has been the household debt level in Canada, which had continued to move to record highs," he said.

Mr Carney, he explained, had not done anything other than "verbal tightening", sounding the alarm from his platform, but resisting raising interest rates, given that "it's a blunt tool".

The fate of the indebted Canadian consumer could, in the months and years to come, ultimately define Mr Carney's legacy. On that, Mr Wight said, "the jury is still out".