The search for a successor to BoE Governor Carney kicked off
last week, ahead of his contract expiry next January, whilst jockeying for the
top job at the ECB has also got underway with Mario Draghi due to stand down in
November. Naturally the press has had a field day looking at the possible
candidates for both positions. But less attention has been paid to the
qualities necessary to be an effective central bank governor.
Over the last 30 years there has been a tendency to appoint
economists to the top job. It has not always been the case, of course. Whilst
former ECB President Trichet and BoE Governor Eddie George both had academic
qualifications in the subject, neither would be regarded as front-line
economists. But compare them to contemporaries such as Alan Greenspan, Ben
Bernanke, Janet Yellen, Wim Duisenberg, Mervyn King and Draghi it is clear that
a strong economics background has been viewed as an advantage. The reason for
this is simple enough: Over recent years, central banks have been given a
mandate to target inflation which means that they have a much closer focus on
economic issues than has historically been the case.
However, I do wonder whether the unwillingness to raise
interest rates – particularly in Europe – reflects the overly cautious nature
of a policy-making body in which economists hold the upper hand. It was not for
nothing that President Harry Truman reputedly demanded a one-handed economist
in order to eliminate their tendency to say “on the one hand … but on the other.” More seriously, since the
financial crisis central banks have acquired additional responsibility to
manage the stability of the financial system which means that a macroeconomic
background may not be the advantage that it once was.
Perhaps the most important job of any CEO, whether of a
central bank or a listed company, is institution building. Mark Carney promised
to be the new broom at the BoE who would bring the bank into the 21st century,
getting rid of many of the arcane practices which had become institutionalised
over the years and improving diversity. I am not qualified to say whether he
has succeeded in this goal but we hear good things about the working
environment within the central bank. More importantly, perhaps, the BoE has
taken on the regulation and supervision of around 1500 financial institutions
over the past six years as the responsibilities of the central bank have
evolved and the head of the Prudential Regulation Authority occupies one of the
most senior jobs in the BoE.
One of those touted to succeed Carney is Andrew Bailey, head
of the Financial Conduct Authority, an institution independent of the BoE which
is charged with ensuring that “financial markets work well so that consumers
get a fair deal.” Bailey is a former BoE official who has worked in an
economics function, but crucially has a very strong background in regulation.
It is an indication of the extent to which the BoE’s role has changed in recent
years that Bailey is even in the running for the job.
The experience of the ECB President has been rather
different since Mario Draghi took over in 2011. He is – probably rightly –
credited with holding the European single currency bloc together during the Greek
debt crisis by promising to do “whatever it takes,” despite opposition from
representatives of other member states, notably Germany. Like the BoE, the ECB
has also taken on greater responsibility for the regulation of financial
institutions although unlike the BoE there is no suggestion that the potential
successor to Draghi will need a background in financial regulation.
Interestingly, this paper by Prachi Mishra and Ariell Reshef makes the point that the personal
characteristics and experience of central bank governors does affect financial
regulation. “In particular, experience in
the financial sector is associated with greater financial deregulation [whilst]
experience in the United Nations and in the Bank of International Settlements
is associated with less deregulation.” They go on to argue that their
analysis “strengthen[s] the importance of
considering the background and past work experience before appointing a
governor.”
This is an important point. In 2012, when the BoE was
looking for a successor to Mervyn King, the Chancellor of the Exchequer cast
his net far and wide. Mark Carney got the gig because the government wanted an
outsider to take over a central bank which was perceived to be too close to the
institutions it was meant to regulate. Moreover, he had previous experience of
running a central bank. But whilst Carney has done a good job over the past six
years, I still believe it wrong to think (as the Chancellor George Osborne did
during the hiring process) that filling this role is akin to finding a CEO of a
multinational company, whose place can be filled by anyone from an (allegedly)
small pool of international talent. They are an unelected official who holds a
position of key strategic importance, enjoying unprecedented powers to
influence both monetary policy and the shape of the banking system. In that
sense it has never been clear to me that the interests of an outsider with no
experience of UK policy issues are necessarily aligned with the UK's national
interest.
Contrast this with the way the ECB process works. There are,
in theory, 19 candidates for the top job amongst the central bank governors of
EMU members, all of whose interests are aligned with those of the euro zone. In
addition, there are another five potential candidates amongst the members of
the Executive Board. Admittedly there is a lot of political horse-trading
involved in the selection process, but there is no need to look for an outsider
who may not necessarily be up to speed with the complexities of local issues,
not to mention local politics which is increasingly a problem for central
bankers (I will come back to this another time).
For the record, this is absolutely not an issue of economic
nationalism – it is simply to remind those making hiring decisions that just
because someone has done a similar job does not necessarily make them the best candidate
for a position elsewhere. Indeed, if the evidence from the private sector is
anything to go by, the continuity candidate may be the best person for the job:
In the private sector, “firms relying on internal CEOs have on average higher profits than external-CEO firms”. And for anyone who doubts that the search for
an external candidate will necessarily be an improvement over the local
options, just ask the English Football Association about their experiences with
Sven-Göran Eriksson and Fabio Capello.
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