The procedures used by various central banks to find new members for their policy committees have drawn attention lately, especially in the UK and the U.S. where both the Bank of England and the Federal Reserve have been operating with less than a full slate of policymakers. At their most recent meetings each bank was missing two members. In the UK, the sudden death of economist David Walton combined with the resignation of Richard Lambert three months ago has depleted the Monetary Policy Committee by two 'external' members. The Fed is down two governors with the resignations of vice chairman Roger Ferguson and of Mark Olsen. Below is a brief description of how the central banks go about finding new board members. The survey is by no means all inclusive, but covers the Bank of England, Federal Reserve, European Central Bank and the Bank of Japan.

Bank of England
In the UK, interest rate decisions rest with the Bank of England's Monetary Policy Committee (MPC). The MPC consists of nine members - five from inside the bank (including the governor) and four external members who are appointed by the Chancellor of the Exchequer Gordon Brown. But little is known about the selection process for new external members. According to shadow chancellor, George Osborn Brown is hindered by his own appointments process, which is secretive and in need of reform. External members are appointed by Brown without open application or consultation. It is a mystery - no one knows how candidates are brought to his attention or how he selects them. Bank Governor Mervyn King, who has no input in the process, has commented that the process is very informal and appointments seem to be made at the last minute. He opined that a more systematic process is needed.

It has also been suggested that the term of an MPC member should be changed from the current three-year renewable term (at the discretion of the chancellor) to a non-renewable term of perhaps five years, but longer for the governor. However, a longer term at the Fed has not prevented turnover on the Board of Governors.

Federal Reserve
The Federal Reserve's seven governors serve 14-year non-renewable terms while the chairman serves a renewable four-year term. Despite 14-year term limits, the Fed has seen rapid turnover among its members. Only Alan Greenspan served his full 14-year term in the recent past.

New governors at the Fed are appointed by the President and confirmed by the U.S. Senate. In the search for a new member, the president's staff generally solicits suggestions from a wide variety of sources including current Board members and Board staff. They also consult key business leaders at times for independent suggestions and even some in academia and at the Treasury. But they have been subject to political whims of the congressional branch of government. For example, although the Fed was perilously understaffed at the end of the Clinton administration, it remained understaffed until the new administration was in office. This was because the Republican Congress refused to confirm the President's appointees.

When a member resigns, his replacement is nominated to serve the remainder of the term in question whether it be two years or 13. For example, the newest nominee for governor, Frederic Mishkin, has been nominated to complete former vice chairman Roger Ferguson's term. It should be noted that the 12 regional bank presidents who rotate as members of the Federal Open Market Committee are not subject to term constraints since it is the regional bank itself, not the person, who fulfills the voting obligation.

European Central Bank (ECB)
Most of the six leadership roles on the ECB's executive committee were divided between the major EU member countries at its outset in 1998. And their replacements have been considered virtual fiefdoms, for the most part, of those countries ever since. For example, when Chief Economist Otmar Issing's term expired in the spring he was replaced by another German from the Bundesbank, Jürgen Stark.

The Governing Council or rate-setting body consists of the executive committee plus the governors or chairman of each of the 12 EMU members central banks (now regional or national banks). This will increase to 13 on January 1, 2007 when Slovenia becomes a member. Executive committee appointments are politically highly charged and must pass a series of proscribed steps within the EU hierarchy before approval. But approval there is generally de facto once the political agreement has been reached. Unlike the Fed, where the regional bank presidents rotate by a specified schedule (although they can all state their views), all regional national banks participate in the ECB rate making process.

NCB governors serve a minimum renewable term of five years while Executive Board members serve a minimum non-renewable eight-year term. The national governors or presidents are in the purview of the national governments. (It should be noted that a system of staggered appointments was used for the first Executive Board members other than the President in order to ensure continuity). The governor of the European Central Bank serves an eight-year term.

Bank of Japan (BoJ)
The Monetary Policy Board was created in 1949 but it was only in conjunction with the financial sector overhaul (the Japanese 'Big Bang' in 1997) that it achieved some measure of independence to set monetary policy. Prior to that, the Bank was part of the Ministry of Finance. Now the governor of the BoJ and his two deputies are appointed at the same time by the Cabinet, subject to the consent of the House of Representatives and the House of Councillors (the two houses of the National Diet of Japan). The monetary policy board consists of a total of nine members. The six policy board members serve five-year terms and are subject to the same approval process as the governor and his deputies. Members generally serve their full term.

Bottom Line
A nominee is already in place to fill one of the Fed's open positions. He is Frederic Mishkin, a former executive vice president and director of research at the New York Fed. He has been appointed to fill the remainder of the term (which ends January 31, 2014) created by the resignation of former vice chairman Roger Ferguson. (Mishkin was nominated on June 30th and has his Senate hearing scheduled for today, July 12th, surely record time. If confirmed, he would be available for the next FOMC meeting on August 8th.) But no announcement has been forthcoming from Chancellor Gordon Brown as yet. When members leave prematurely, the boards are deprived of the experience of those individuals. And what is truly surprising is how little the central banks appear to be involved in the process of naming their key officials.

Anne D. Picker, Chief Economist, Econoday