Mark Carney on Bank Turmoil, Interest Rates and the Climate Transition

Mark Carney returns to Harry Stebbings’s show in May 2023 as US regional banks face pressure. Carney has spent much of his career at the intersection of private markets and public policy: after Goldman Sachs he led the Bank of Canada and then the Bank of England, and worked on financial reforms after the global financial crisis.

Carney now works with Brookfield on transition investing, sits on Stripe’s board and works with climate-focused companies including Watershed. He also serves as a UN special envoy, working to mobilize private finance for climate action. These roles give him a direct commercial and policy interest in the transition he discusses.

Carney describes boom and bust through the Minsky cycle. A real innovation can attract investment, then euphoria, and finally lending against the asset on the assumption that its price must keep rising. When that assumption fails, panic follows. He sees crypto and decentralized finance as having reached that phase at the time of the interview.

A bust can also create opportunities, Carney argues: the underlying innovation may survive, while prices fall and competing capital becomes scarce. He points to mortgage-backed securities, whose assumptions became extreme before 2008, but whose core financial innovation persisted in a more robust non-bank credit system.

Hydrogen is another example of repeated cycles of enthusiasm. Carney believes the current cycle is more solidly grounded and commercial deployment may become mainstream in the next few years, but acknowledges that this remains a forecast rather than an accomplished example.

On banking, Carney prefers the word turmoil to crisis, and says the turmoil is not over. As they speak, First Republic is under strain. He estimates that almost one in ten US regional banks would fall below minimum capital requirements if all assets were marked to market.

Many banks hold high-quality but low-yielding assets, he says, which will weigh on earnings unless rates return to very low levels for a long time—a scenario he considers unlikely. If rates stay high and deposits move to perceived safer institutions, he expects more consolidation.

Carney sees a major difference from 2008: he says the system has over six times the loss-absorbing capacity, more liquidity and fewer direct interconnections. In his assessment, contagion now comes more from similar business models than from a chain of institutions directly bringing one another down. He nevertheless expects a tougher credit environment as growth slows.

Stebbings asks about Bill Ackman’s proposal to guarantee all bank deposits. Carney says the existing framework is proving time-inconsistent: authorities have effectively guaranteed all deposits in certain failures, inviting the question of whether the rule should be explicit. He adds that a blanket guarantee in the US would require congressional authorization and would not happen quickly.

Carney invokes Bank of England governor Andrew Bailey’s distinction between bank-created ‘inside money’ and central-bank ‘outside money’. People generally treat them as interchangeable and may implicitly assume their deposits have the same safety. In his view, it is unrealistic to expect ordinary depositors or small businesses to continuously monitor their bank’s health.

If deposits were fully backstopped, Carney argues, someone else must bear substantial risk and discipline banks. Equity and non-deposit debt, including contingent capital that can absorb losses or convert in a failure, should stand ahead of taxpayers, alongside management, boards and supervisors.

He explains that these loss-absorbing instruments are held largely by institutions such as insurers, pension funds and asset managers, rather than other banks, so losses are less likely to spread directly through the banking system. He notes the Credit Suisse case, where contingent capital holders had been wiped out under the Swiss authorities’ action as then understood.

Stebbings has seen funds shift to the largest banks. Carney says consolidation weakens competition for service and credit and can make dominant institutions even more indispensable, increasing moral hazard. Still, he understands why entrepreneurs want dependable banks so they can concentrate on their businesses.

For regional banks, Carney’s shorthand is ‘go small or go home’. He sees a difficult middle for large regional institutions with substantial uninsured corporate deposits, which may flee quickly. Small local banks with mostly insured deposits may have steadier funding but limited growth, while others may be absorbed by larger institutions.

He expects another wave of consolidation, accelerated by competition from fintech. Technology can allow providers to place customer funds efficiently in money markets and offer better returns, pushing the system toward forms of narrow banking alongside conventional fractional-reserve banks.

Asked about Silicon Valley Bank and Credit Suisse, Carney begins with the responsibility of management and boards. For SVB he also sees a substantial regulatory and supervisory failure: US rule changes in 2018 reduced certain stress-testing and liquidity requirements for banks below $250 billion, and supervisors, he says, did not act sufficiently on visible mismatches.

Credit Suisse, in his account, had long-running cultural and risk-management problems. Authorities had worked to reduce the risk to others and prepare for a possible failure. He says the outcome was imperfect and painful for shareholders and contingent-capital holders, but the preparations gave authorities more options to protect depositors and fold the franchise into UBS.

Carney attributes more responsibility for First Republic’s predicament to its own business than to macroeconomic contagion. Both it and SVB had built large, low-yielding books suited to a long period of low rates and volatility. Borrowers have little reason to reprice favorable loans, leaving a substantial headwind when the rate regime changes.

Risk managers and regulators, he says, must consider plausible tail risks, not just the most likely outcome. A departure from the low-rate environment was always possible; assuming it could never occur was imprudent. Equally, he regards a return to that environment after inflation subsides as an unrealistic assumption.

Carney estimates that banking turmoil could reduce US growth by roughly half to three-quarters of a percentage point, potentially tipping an economy on the margin into recession. This is his assessment at the time, not a confirmed outcome.

He distinguishes emergency liquidity support from monetary policy aimed at inflation. Before SVB’s failure he thought the Federal Reserve might need a 6% policy rate; after the banking shock he expected it to stop around 5% to 5.25%. Regional banks’ role in consumer, commercial property and business lending means reduced credit availability itself tightens conditions.

Was the pace of rate increases irresponsible? Carney says it was necessary but had consequences. Changes in finance are not always linear: after enough tightening, a credit channel can stop rather than merely become more expensive. Authorities must account for the risk of sudden stops when policy moves quickly.

If he had led the Fed, Carney says, he would have avoided the pandemic-era commitment that made its decision rule too backward-looking. He believes it cost six to nine months in which tightening could have started more gradually. Global inflationary forces would still have raised prices, he cautions, but earlier action might have reduced financial strains; the counterfactual cannot be known.

Carney also predicts trouble for the prevailing stablecoin model. In his view it relies on flawless asset-liability matching over decades, while authorities have struggled to supervise even money-market funds and relatively simple banks. A failure at the heart of payments could affect more than the holders of one deposit.

He argues that backing a stablecoin one-for-one with the central bank balance sheet would make it effectively a central-bank digital currency by another name. At the same time, he expects more narrow banking and wholesale funding, with bank funding becoming more volatile and differentiated, potentially giving monetary policy more traction and customers better rates and service.

Turning to climate, Carney says in 2023 that the world is beginning to get on track. He cites estimates moving from roughly 3.5°C of warming at the Paris agreement to below 2.5°C around Glasgow and 1.8°C under subsequent country commitments. These are his descriptions of projected outcomes conditional on commitments, not observed warming or a guarantee that targets will be met.

He points to policies in the US, Europe, Canada, Japan and Korea and says a key 2030 waypoint involves emissions reductions of roughly 40% to 50%. He estimates clean-energy investment tripled over the preceding five years and forecasts a further quadrupling by the end of the decade.

Carney also cites electric vehicles rising from about 4% of new global car sales three or four years earlier to a projected near 20% in 2023. He expects them to exceed half of new sales in most advanced economies by the decade’s end. He calls these signs of an inflection rather than grounds for complacency.

Stebbings challenges the assumption that China’s leadership will prioritize climate over growth. Carney disagrees with the premise: he believes China has tied future growth and competitiveness to decarbonization and AI. He sees similar industrial and employment motives behind the US Inflation Reduction Act and other governments’ responses.

Carney says China accounted for around $550 billion of $1.1 trillion in clean-energy investment in the preceding year and had leading positions in EVs and solar and wind supply chains. His interpretation is that the transition offers China growth while encouraging other economies to compete in those industries.

Asked to choose a ten-year investment in the US or China, Carney chooses the US, citing skills, immigration, finance, creative destruction and market access. He also notes concerns about property rights and policy consistency in China. He predicts US climate investment could overtake European efforts in a few years; this is an investment judgment, not a certainty.

Carney rejects the idea that Europe is weaker than ever. Despite the war and energy shock, he considers its banking system relatively solid, fiscal policy less of a permanent headwind, and its climate framework supportive of investment. He believes Europe’s response to the war could strengthen it over the medium term.

On climate action, Carney praises Walmart’s work with suppliers on value-chain, or Scope 3, emissions across a vast assortment of products. He also sees an underappreciated shift in Australian government activity. Conversely, he believes major oil companies’ investments in future energy are generally too small relative to conventional spending and their public statements.

Carney illustrates the investment challenge with Brookfield’s bid for Australia’s Origin Energy, a company he says has roughly 4.5 million customers and significant coal generation. He describes a proposed investment of more than A$20 billion in clean power and coal closure, with dividends forgone, and says Brookfield had offered a 50% premium to the undisturbed share price. This was a bid and investment plan at the time, not a completed transaction or realized return.

In Carney’s view, a shareholder base focused on near-term dividends can trap an energy company in an aging business and impair its longer-term value. He thinks challengers often exploit such transitions faster than incumbents, although he cites Netflix, Amazon and Microsoft as exceptions. Established firms must be willing to invest existing cash flows in uncertain new businesses.

As UN envoy, Carney says the UK needs its next phase of climate action. He cites the independent Climate Change Committee’s assessment that the government had not yet put everything in place to meet its medium-term targets and had received hundreds of recommendations. He frames this as a relative judgment after other countries increased their efforts.

Carney misses being at the center of events as a central-bank governor and influencing them directly, but not the moments when events spiral beyond control. Asked why he is not in politics, he says he wants to help address climate change through whatever means work: ‘politics if necessary, but not necessarily politics.’

Carney argues that net zero cannot be achieved without nuclear power and says global nuclear capacity needs to grow by 50% by 2050. He has changed his mind toward believing fusion will be commercialized. These are his views and expectations, not established future outcomes.

He names Craig Broderick at Goldman Sachs, Mario Draghi in central banking and Brookfield CEO Bruce Flatt as mentors. Their shared lesson, he says, is to understand both the broad forces and the operational detail: getting the direction right does not eliminate the need to do the work.

For climate finance, Carney wants a large pool of concessional capital to bear foreign-exchange risk in emerging economies, where he says private investors often lack exposure and currency hedging can be uneconomic. He estimates that emerging economies, including China, account for about two-thirds of global emissions and says designing such a mechanism is one of the issues he works on.

Looking five years ahead from 2023, Carney hopes the work of incorporating carbon competitiveness into investment decisions becomes routine, with capital flowing naturally toward the transition. That, he says, would be a sign of success for his special-envoy work. The hosts close with a joke about exchanging jobs.