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Speaking on the sidelines of the Sydney G20 meetings, Carney rejected outright claims from Goldman Sachs and others that proposed standards being discussed in Sydney were so strict they could lead to an explosion in shadow banking and sow the seeds of the next crisis.
"Not at all", he said. "Banks went into the financial crisis carrying de minimis levels of capital - for example, less than 2 percentage points relative to their risk-weighted assets, let alone their actual assets. They carried basically no liquidity protection and they were reliant on the state to insure. The consequence was that we had a crisis where even countries that did the right thing in advance, such as my native Canada and here in Australia, had to take extraordinary measures to support the banks. We can't have a system - and G20 leaders have made that clear here - we can't have a system where some of those institutions that are pushing back on this are still reliant ultimately on the state and are getting a massive subsidy from the taxpayer.”
But requiring more capital is just the start, because it could never be enough. The governor wants the world's biggest banks to be backed not just by shareholders funds but by "bail-in-able bonds". "Then the bondholders would know - not depositors, but the bondholders - that, if one of these banks made mistakes and needed to be recapitalised, the bondholders would become equity holders", Mr Carney said. "It has two advantages. One is it is more efficient and builds buffers in the banks. Secondly, it means the bondholders actually pay attention to what the banks are doing. Into the crisis and quite frankly throughout the crisis, the lesson has been that the bondholders have a free ride, because basically they own government debt."
Mr Carney's aim is to protect depositors and governments to the greatest extent possible. The exact size of the bail-in-able bond requirement would be decided by the Financial Stability Board, most likely at the next G20 meeting in Brisbane. It would only apply to the 29 "globally systemic" banks whose failure would have worldwide consequences.