Sir Mark the Talented (aka Bank of Canada Governor Mark Carney) has tossed a gauntlet at the feet of the dark knights that stalk the City of London.
Mr. Carney in four months will take charge of the Bank of England, an honour that will come with the double challenge of delivering one of the world's biggest economies from recession and cleaning up one of the world's bigger nests of scandalous bankers.
Canada's central bank chief has demurred on how he will approach monetary policy in Britain, which is appropriate, given Mervyn King still is in charge at the Bank of England, and Mr. Carney is getting paid for a few more months to mind the store at home.
But financial regulation is less delicate, and Mr. Carney on Monday shed some light on how he will approach oversight of London's bankers, a group responsible for the rigging of the Libor interest rate, among other scandals. He will expect better behaviour, but he won't seek to regulate it.
"You cannot legislate virtue, you can't enforce integrity," Mr. Carney said at a press conference. "Even the most intense supervision can't guarantee absolute adherence to basic ethical norms."
As head of the Financial Stability Board, the international body that is shaping the overhaul of global banking standards, Mr. Carney is at the centre of the rule making that is frustrating bankers almost everywhere. The FSB is responsible for new standards that force the world's biggest banks to hold more capital than their smaller rivals, and a broad embrace of the need to match capital standards with limits on how much banks can lend relative to their size. And those are only two examples. There is much more in the works.
But in a speech at the University of Western Ontario's Richard Ivey School of Business, Mr. Carney acknowledged the limits of regulation. He noted that compensation packages tended to reward short-term profits, creating an obvious incentive to take on risk. The FSB has published principles meant to guide financial institutions to reward longer-term performance. Yet Mr. Carney is under no illusion that payment schemes will be enough to rid the financial system of bad behaviour.
"To think that compensation arrangements can ensure virtue is to miss the point entirely," Mr. Carney said. "Integrity cannot be legislated, and it certainly cannot be bought. It must come from within."
Mr. Carney is opening himself up to ridicule. Virtue in banking? This is the industry that made greed good. To even articulate the thought invites charges of naivety.
But Mr. Carney seems willing to use his shining reputation to effect change the old fashioned way: By exercising moral authority. He left investment banking to work for the public good. He now seems intent on instilling some of that ethic in the finance industry, not only because it's the right thing to do, but because it could foster a more efficient economy. Bankers who are more interested in lending to companies than personal enrichment would lead to a wealthier society.
"When bankers become detached from end-users, their only reward is money, which is generally insufficient to guide socially useful behaviour," Mr. Carney said. Later, he added: "Employees need a sense of broader purpose, grounded in strong connections to their clients and their communities. To move to a world that once again values the future, bankers need to see themselves as custodians of their institutions, improving them before passing them along to their successors."