New Central Bank governor will have to pick fights and win friends
For Honohan’s replacement the job of restructuring the financial sector is far from over
We are likely to hear this week who will replace Patrick Honohan as governor of the Central Bank.
Chief executive jobs always require a mix of skills: the top two requirements are typically an ability to manage and a knowledge of how to “do” the key tasks the business performs. If you look at big industrial firms, you will often find the boss was once an engineer. The head of an advertising agency needs to have some idea of how to put together a campaign, along with the ability to keep the creative staff in check.
But the range of skills required in the ideal governor of a central bank is particularly wide. The governor needs to be a credible player in Frankfurt, where all the key decisions will be taken. They need to have the nous to oversee financial regulation in Ireland and to do so independently of Government and the industry. And they need to be a top-class manager, heading, in Ireland’s case, a complex organisation of some 1,500 people.
None of the final four candidates is going to be the winner on all these grounds. This means the choice made from the four-person shortlist of two men and two women will depend on the criteria chosen and where the priority is seen to lie.
If the key is to have a highly qualified economist, the outcome will be different than if the emphasis is on getting somebody with experience of managing a large and complex organisation.
It is an important choice.
Rightly or wrongly, central banks are defined in the public mind by their leaders. When you think of the European Central Bank, you think of Mario Draghi, the US Central Bank is now “Janet Yellen’s Fed” and Mark Carney is the face and voice of the Bank of England.
Whoever it is will have two immediate tasks. The first will be to stake out the ground at home. A key part of the job is regulating the Irish financial institutions, under the supervision of the regulators in Frankfurt.
On key issues, such as tracker mortgages, the future of credit unions and the treatment of mortgage arrears, the new boss would do well to pick a few early fights with both the banks and the Government. And make sure to win them.
Perhaps the key “X” factor for a central bank governor is to be seen to be independent, particularly in Ireland after our recent economic history.
The second key job will involve getting on a plane. To succeed, a governor has to quickly become a credible player in Frankfurt. This is where the big decisions on monetary policy are taken and from where the regulation of Irish banks is now run. We are used to having our interest rates set from Frankfurt. Now it is also Frankfurt which decides how much capital our banks must hold and under what rules they operate.
There may be times – there will undoubtedly be times – when the new governor will have to fight the cause in Frankfurt, too. We have seen during the “burn the bondholders” dramas just how rough the game is at international level. Indeed, a profile of former IMF chief economist Olivier Blanchard in the Washington Post recently outlined again just how the ECB outflanked the IMF and forced Ireland to avoid imposing losses on bondholders before the November 2010 bailout.
Since then Honohan has rebuilt relations with Frankfurt, getting a green light, for example, for ending the promissory note deal in an arrangement which has saved Ireland cash in the short term and could yield significant longer term gains.
So you could say the new governor might start by picking a few fights at home and winning friends abroad.
A job of restructuring is also required within the bank. Whoever gets the job, the public verdict – rightly or wrongly – will quickly form on whether Ireland is going back to the old days of a central bank “captured” by Government and the banks, or whether the institution’s independence is underpinned for the future.
We must hope the new governor does not face the “wartime” conditions through which Patrick Honohan navigated us. But the job of restructuring the financial sector is far from over, a new regulatory regime run from Frankfurt is only settling in and the problem of mortgage arrears remains to be dealt with, affecting thousands of households.
In its final months, this is one of the most important jobs this Government will fill.