Interview: Gill Marcus

CentralBanking.com (CB) Do you have any thoughts on the regulatory reform bill that is soon to be turned into law in the US?

Gill Marcus (GM): It's very difficult to look at the dynamics of what's happening in the United States and extrapolate that out. South Africa, like a number of other countries including Canada and Australia, did not have a banking crisis. We've had the consequence of a huge European and American recession. Therefore, the issues that are being looked at not just in the United States, but by the Basel Committee on Banking Supervision, become very important for all of us. But it should not be assumed that because America had a banking crisis and had to bail out the banks, the rest of us should follow those measures when we didn't have the same problem.

Reform is needed. But it needs to be sensible, and not a knee-jerk reaction to a set of circumstances where, in many ways, there seems to be quite a lot of confusion around who is to blame.

One could say what were the measures that we all should have taken? Take Basel II. There was agreement around Basel II, but what was implemented? You had the IMF carry out financial stability assessment programmes. But when did the United States, or Britain accept their findings? It's been the emerging markets and developing countries that have faced rigorous scrutiny. We're looking for new answers, but the questions were already there, and not enough was done in terms of implementing change. We now need to be very sober and steady, look at what reforms need to be implemented, calibrate what is to be done, and make sure that we target the right things and give it the right time frame. Yes, capital is very important, as are liquidity and leverage. There's no question that those ratios were disproportionate in some countries and some sectors- but it wasn't everywhere.

CB: I take it you don't have a positive view of the politicisation of the reform process?

GM: Politicisation is very problematic, because there are different time horizons for lawmakers who think in terms of electoral cycles and central bankers who can take a longer term view. What this showed was just how important the banking and financial sector is to any functioning economy, and that it needs to be effective and working. You need the trust and confidence of the public, and you can't achieve that through apportioning blame, or looking for short-term fixes. There's no question that things need to be fixed, the system is horribly broken, but the solution should not lay the seeds for the next crisis.

CB: And you think this will lay the seeds for the next crisis?

GM: I'm not saying it will. You just have to be very careful that what we do does not, in and of itself, cause new problems. The world is very interconnected and what you think is a solution may in fact have unintended consequences. So it can't be done in a hurry.

CB: Do you think the failure of the United States, Europe, Canada and Britain to take a uniform stand on reform will be crucial? There's not been a lot of agreement in terms of what specific changes are needed.

GM: It will be if you look at things that create greater scope for arbitrage, or a dysfunctioning in the sense that, if you have a global bank that operates across national boundaries, you can't have very different standards that they have to be accountable to. At the same time you do need greater coherence, for instance, on accounting standards. So there are areas where you should work closer together, but on the other hand, there isn't a one size fits all approach. You need coordination more than complete agreement. I'm not sure that you can get complete agreement. Or that it's healthy. But you certainly don't want things that pull against each other. In the end, what is important is to be looking at the system. It's not just about banks. If you isolate the banks and put pressure on them, that could push activities outside of banking, where there are opportunities to do things out of sight. And you also create room for huge arbitrage, because you regulate the financial sector in different ways, and some things are not regulated at all. There's a balance that needs to be struck.

CB: Do you think there's a larger philosophical debate about what a bank's role is in society, and what it should be?

GM: In some ways, people are trying to put the genie back in the bottle. Technology has changed, innovation has changed, and the role of the banking and financial sector as an intermediary is very different. So yes, I think it's about identifying the different roles, and asking whether you need to ring fence some of those roles that can't be contaminated. In the end, what is it you need to protect? You need to protect the depositor, the ordinary individual. Shareholders take their chance.

But, part of it is the search for yield and a very short time horizon. So, how do you lengthen that time horizon- how do you convince investors to look at returns beyond the first or second quarter? It's the nature of the markets today. You're looking for a robust system, and that includes markets, payments and banks. You want a robustness that enables individual failure, so that it does not become systemic. That's easier said than done. The problem with Lehman Brothers wasn't that it failed- it was that the failure wasn't managed. That ability is crucial.

CB: The Sarb pushed very hard to adopt the inflation targeting framework, in the face of quite a lot of resistance from more left-leaning members of the African National Congress. What do you make the current policy debate on inflation targeting?

GM: The crisis forces everybody to ask these questions and it's our responsibility, as central banks, to consider these issues.

In the debate, people have forgotten that inflation targeting is a tool, not a goal. You cant be wedded to a tool- you've got to be wedded to an outcome. There's no question that price stability matters. But the crisis has also shown that a single, narrow focus on price stability- which I don't think many of the inflation targeting central banks had anyway- ignores financial stability issues, which must be taken into account. That is extremely positive. A central banks mandate may be price stability, but part of your job is the provision of liquidity, managing the payments system, bank supervision if you're fortunate. Or unfortunate, some might say.

You have other responsibilities, and there's no question that what's happening in the markets and around financial stability and macroprudential issues must be part of what you look at. You may well need to use monetary policy tools to manage financial stability. It's not like they sit in separate parts of a quadrant, and never the two shall meet. The question would be to what degree you take financial stability into account when making a monetary policy decision. Is it something you do alone? How do you ensure that the independence of the central bank around its monetary policy decision is protected, while at the same time safeguarding financial stability?

That's a societal issue. The greater the understanding and the greater the cooperation, the more likely it is that you will have the ability to ensure that government is, and needs to be, involved, while recognising your independence on the monetary policy stance. Independence is not an abstract. You operate in a society, and you are part and parcel of the goals of that society. And it is part of your job to understand ,in relation to monetary policy, what you should do, but also to be part of how you see financial stability as a country. These things are possible. It's a question of how you build relationships and interactions, and ensure the delegation of responsibilities is clear.

CB: Do you think the inflation targeting regime has benefited South Africa?

GM: Yes. Part of that is a recognition that high prices and inflation are bad for the poor, and if your society understands that, then they accept the measures that you take. We've had a few spikes, but right now, annual inflation is at a reasonable level - 4.6% as of May. We don't expect it to go much lower than that- it certainly won't drop to the bottom half of the target range, and there's still the risk that it could climb to the upper half of the range. As things stands, we think it will stay within the range until 2012. But there are so many uncertainties- what happens to Europe, what happens to growth? One third of our manufactured products go to Europe, and the outlook for the continent is very grim. Imported inflation from Europe does not look a threat at all.

CB: And if Europe clamps down on banks, that could have a knock-on effect on South Africa as well?

GM: Absolutely. That is the big argument from the financial sector, and if you look at the IIF report, that's what they've said: that it will impact significantly on jobs and growth, so you have to weigh it up.

CB: The BIS has disputed that view.

GM: Sure. To me the question isn't about the need for reform. It's about the pace. You have to look at what societies can actually cope with. If you look at the austerity measures that have been imposed, it's a huge burden.

CB: Certainly an unpopular one.

GM: Part of the problem is the breakdown in trust and confidence in the banking sector. People feel that they were let down. Everything seemed fine, and then suddenly, all of those who had been in charge at all levels had significantly failed. You then ask ordinary people to carry the brunt of the austerity measures. Why would they trust you after that?

CB: Is that a problem in the way official institutions and the governments communicate, or does it run deeper?

GM: It's much deeper. It's reality. People know their pensions are worthsignificantly less than they were, and wonder whether they can still afford to retire. Whether the amount of benefits that you were receiving were justified or not is a different question- you've had them. So where do you start? You start cutting back on people who are not wealthy or receive support, and look at the wages of civil servants.

CB: What did you make of Olivier Blanchard's suggestion a few months back that inflation targets could do with being raised?

GM: He was talking about a different problem, and it's not a South African problem. He was talking about the zero bound. It did force central banks to become creative and use different policy tools. But he wasn't calling for a big increase anyway.

CB: Yes, but the reaction to his suggestion was big.

GM: People are quite defensive about certain things right now. Policy rates at zero are a problem- are you creating the seeds of the next crisis? In many ways, low interest rates over a long period proved to be a problem. And the process of normalising policy is proving difficult in many countries at the moment, certainly in the developed world.

Blanchard also raised the question of tools that we thought we were too sophisticated for. You don't have just one target, so why should you have just one tool? The debate is healthy and is a result of the kind of crisis we've had.