Sunday, September 16, 2012

Requirement for 'superman' as next Bank of England governor highlights even how even role of head of BoE too complex

As I read the advertisement for the next governor of the Bank of England, I couldn't help but think of how complexity doesn't just exist in the financial regulations written by the regulators, but also in the role for the appointed head of the Bank of England.

From the position description,
The Governor leads the Bank of England, and plays an important role in setting monetary and regulatory policy, chairing the Monetary Policy Committee, the Financial Policy Committee and (from next year) the board of the Prudential Regulation Authority....
Please note the diverse skill sets the Governor will need.  Not only will they need to be a big picture thinker who is comfortable with abstract economic theories, but they will also need to be detail oriented. 

Big picture thinking is needed for monetary policy and a detail orientation is needed for bank regulation and supervision.

If the history of Federal Reserve chairmen shows anything, it shows that you can have a big picture thinker or a detailed oriented operator, but you cannot have both in the same individual.

Not only does the Governor need to be a big picture thinker who is detailed oriented, but the Governor also needs to be a good systemic risk manager.  The Governor has to be able to separate what is the source of risk to the financial system from what is a symptom of the risk.  

An example of this would be understanding that opacity is why structured finance securities brought down the financial system and not that the securities held high risk assets.
The Governor will work closely with the Chancellor of the Exchequer and H M Treasury, which is responsible for setting the framework under which the Bank operates. 
Yet another skill set the Governor will need is to be a politician. 
The new Governor will lead the Bank through major reforms to the regulatory system, including the transfer of new responsibilities that will see the Bank take the lead in safeguarding the stability of the UK financial system. 
Of course, the first decision the new Governor will have is how to shrink the Bank and their role to a size where they could hope to perform it successfully.

Your humble blogger would say this decision is easy if the new Governor uses the Bank's authority to require all banks to provide ultra transparency and disclose their current global asset, liability and off-balance sheet exposure details.

With this decision, the Governor has chosen to leverage off of rather than replace the financial markets.

With ultra transparency, markets will analyze each bank to assess its risk.  Using this assessment, market participants will exert discipline on each bank to restrain its risk taking.

With ultra transparency, the Bank can tap the analytical ability of the market for help in assessing each bank.

With ultra transparency, the Bank can tap the market's disciplinary mechanism to restrain risk taking.

With ultra transparency, the Bank can minimize the risk of contagion in the financial system as each market participant can adjust their exposure to each bank to reflect the risk of that bank.
The successful candidate must demonstrate that they can successfully lead, influence and manage the change in the Bank’s responsibilities, inspiring confidence and credibility both within the Bank and throughout financial markets.
And in the Governor's spare time, leap tall buildings in a single bound.
The successful candidate will have experience of working in, or with, a central bank or similar institution; or will have worked at the most senior level in a major bank or other financial institution. 
He or she will demonstrate strong leadership, management and policy skills; will have an advanced understanding of financial markets and good economic knowledge. 
He or she will be a strong communicator, have good interpersonal skills and will be a person of undisputed integrity and standing.
Please note that absent from the list was the ability to spot the current financial crisis before it occurred. This is the critical requirement if the next Governor of the Bank of England is to have any credibility on day 1 and not be seen as simply an appointment to protect the status quo.

If they couldn't spot the last crisis beforehand, why should anyone believe a) they know how to conduct policies that will get us out of the current crisis or b) they could ever spot the next crisis.

Before you assume that your humble blogger is running for Governor of the Bank of England, regular readers know that I do not have the political instincts or, because of a non-verbal learning disability, the interpersonal skills for the job.

This can be easily shown by the simple fact that I am the type of person who says that banks should be required to recognize all the losses currently hidden on and off their balance sheets today regardless of the short- and long-term damage this might do to banker cash bonuses.

Now is that anyway to get the financial markets to sing your praises?

No comments: