Mark Carney: Global economic outlook, financial reform and UK monetary policy Remarks by Mr Mark Carney, Governor of the Bank of England and Chairman of the Financial Stability Board, at the Davos CBI British Business Leaders Lunch, Davos, 24 January 2014. *  *  *  When a banker invites a regulator to a meeting on a mountainside, the regulator gets suspicious. At 5000 feet, “cliff effect” takes on a whole new meaning. That’s one of the reasons why I am pleased to have so many distinguished witnesses here today. While Douglas Flint may have had terminal velocity in mind for me, I am more interested in discussing the prospects of the global and British economies achieving escape velocity. In physics, escape velocity refers to the speed necessary to escape from a planet’s gravitational pull. The economic analogue is the momentum necessary for an economy to escape from the many headwinds following a financial crisis. A few quarters of above-trend growth driven by household spending represent a good start, but they aren’t sufficient. It will take sustained growth, more balanced demand and a recovery in the supply side for advanced economies to break free into a more normal universe. Today, I would like to speak to the contribution of central banks to make this happen. 1. Global economic outlook  Over the past year, the global economy has picked up and tail risks have decreased.
4  BIS central bankers’ speeches  And the microprudential framework has indeed been strengthened post-Crisis. The Basel III reforms will go quite some way to make banks more resilient and financial systems safer. •  The quantity and quality of capital have been increased. •  There is for the first time, a global liquidity standard. •  There will soon be a direct cap on bank leverage. •  Systemically important banks will be subject to higher loss absorbency and more intrusive supervision. Besides these reforms, I would add that traditional microprudential limits that apply “through the cycle” are just as important in helping to maintain financial stability. If volatility in the real estate sector has repeatedly been shown to contribute to financial imbalances and distress: •  does it not make sense to put limits on financial institutions’ exposures to real estate? •  does it not make sense to require that loan-to-value ratios for property loans be less than 100%? •  does it not make sense to require the loan underwriting process to incorporate an assessment of the debt service ratio? I do not know if the Global Financial Crisis could have been avoided if interest rates in the US had been higher in the preceding years as some have argued. •  I do suspect though that if there had been prescribed loan-to-value ratios and debtservice ratios, the sub-prime problem may not have grown to such proportions.