Bank of Canada Governor Mark Carney
Anyone watching the rapidly deteriorating debt dramas on both sides of the Atlantic this week knows that government bonds will probably never again be viewed as the safe, predictable investments they used to be and that budget messes in one country can have an enormous effect on the financial system in others.
Bank of Canada Governor Mark Carney drove that point home Tuesday, calling on governments, financial institutions, supervisory bodies and central banks to ``act now" on steps that could help keep future fiscal crises from threatening to ripple through the global banking system.
First and foremost, governments must do a better job of keeping their finances under control, Mr. Carney writes in an op-ed for the Financial Times with Fabio Panetta, an official at the Bank for International Settlements' Committee on the Global Financial System, which Mr. Carney currently chairs.
``Governments must acknowledge that because it is not possible to protect the banking system from a distressed domestic sovereign, sound and transparent public finances are essential," the men say, adding that ``increasing financial integration means that international financial stability depends on the solidity of fiscal conditions in individual countries.''
Banks should think about diversifying their holdings of government debt so they're not overexposed to any particular country (and its fiscal troubles) and boost the amount of capital they have on hand, so they're less vulnerable to shocks, as well as ``diversifying the timing and jurisdiction of their debt issuance and avoiding clusters of maturing debt.''
Supervisors, Messrs. Carney and Panetta write, should keep better tabs on the amount and quality of sovereign debt held by banks in their countries, ``possibly through the use of co-ordinated, ad hoc disclosures" that would ``reduce uncertainty about an individual bank's assets, avoid the build-up of funding pressures for all banks, and limit contagion.'' And central banks must be flexible enough to keep the financial system liquid in the event of a crisis, but should use extraordinary funding channels ``sparingly and with appropriate safeguards" to avoid the moral hazard that comes with shifting credit risk from the private sector to public institutions.
``Fiscal authorities need to step up efforts to return public finances to more solid long-term paths," Messrs. Carney and Panetta write. ``Banks, their supervisors and central banks should act now to prepare for a sustained period of more volatile sovereign risk premiums.''
Many of those measures, of course, are either in place in some countries but not others, or are the subject of long and grinding negotiations to overhaul the international financial system and the global economy to make both more resistant to shocks. But as this week's frightening stalemates in Brussels and Washington attest, if the endless soul-searching and debate that the 2008-09 crisis spawned don't yield some concrete, lasting changes very soon, another `once-in-a-century' calamity could be on the way.