ECB's Empty Chair Embarrassment Leaves Draghi in Pre-Brexit Bind

(Bloomberg) -- Mario Draghi’s inbox for personnel decisions at the European Central Bank is looking rather full.

The ECB president hasn’t picked a new second-in-command for his institution’s supervision arm, meaning the position will be vacant on Monday when Sabine Lautenschlaeger’s stint ends. There’s no indication of a plan to replace her, no evidence of progress in filling two seats on the board that have been empty since 2017, nor the one that will open up when Ignazio Angeloni leaves next month.

ECB's Empty Chair Embarrassment Leaves Draghi in Pre-Brexit Bind

The vacuum at the helm of the Single Supervisory Mechanism means the watchdog of the region’s biggest banks may wake up on Brexit day led solely by Andrea Enria, who has been in his job for only a month, and one other ECB official.

“I had hoped that the ECB would run a lot more smoothly,” said Andreas Freytag, a professor of economics and chair for economic policy at the Friedrich-Schiller University of Jena. “With Brexit, you’d want to see more continuity in supervision given we have little idea how this is going to play out for markets and banking.”

While it’s not totally clear how this embarrassment for the ECB came to pass, the empty-chairs situation showcases some design flaws. At the top, the terms of both the SSM chair and vice-chair lasted five years and weren’t staggered for continuity. That meant Lautenschlaeger finishing only a month after Daniele Nouy, Enria’s predecessor.

It’s within Draghi’s gift to allocate portfolios to members of the Executive Board, even though the Governing Council will officially nominate the SSM vice chair. (Even the European Parliament and the region’s governments will get a say.) The choice is narrow, exacerbated in this case by the mismatch of the five-year supervisory term to the normal eight-year stint for the board.

Asked in January if there was news about the next vice chair, Draghi replied “sorry, not yet.”

Lautenschlaeger was said to be unwilling to extend her term, which was officially non-renewable anyway. A Governing Council meeting originally planned for Feb. 6 was the last scheduled chance for Draghi to push for a vote, but that gathering was canceled.

ECB's Empty Chair Embarrassment Leaves Draghi in Pre-Brexit Bind

Game to Guindos

Draghi could ask his vice president, former Spanish finance minister Luis de Guindos, to take the role of vice chair. He’s the only Executive Board member whose tenure lasts long enough to completely cover the five-year term. Guindos’s experience is more in politics than supervision however, and his time in banking was spent running the Iberian operation of Lehman Brothers Holdings Inc., until that institution’s iconic collapse in 2008.

Moreover, with the vice president appearing next to Draghi in the ECB’s regular press conferences following Governing Council decisions, choosing Guindos would risk blurring the strictly enforced separation of monetary policy and supervision.

Mersch’s Move

Like his colleague Lautenschlaeger, Yves Mersch is a trained lawyer. The former Luxembourg central bank chief has less than two years left on the Executive Board, though if Draghi picked him as a stopgap, that might fill some time before other members are appointed in due course.

Two of a Kind

The remaining choices would be even more short-term. Peter Praet, currently the chief economist, is due to leave in May. Benoit Coeure, who runs the ECB’s market operations, will end his term in December.

Draghi Folds

Draghi’s balking at forcing a decision may be deliberate. If he chooses to manage without a vice chair during his own final months in office, it might be seen as a message of defiant frustration at the limited choice he has been left with.

Shuffling the Pack

Whatever the ECB president chooses, he has another issue to deal with: what will Lautenschlaeger work on now that she’s got less to do? Her remaining management portfolio includes legal services for SSM issues -- presumably less apt than before -- and statistics. Any reallocation of responsibilities will take something from someone else, while work piles up at the SSM.

“If a company behaved like this, you’d say they have really bad corporate governance,” said Hans-Peter Burghof, a professor of banking at the University of Hohenheim in Stuttgart. “Brexit shows why you need stability in banking supervision. Even if we get a last minute deal, it may be complex and faulty, potentially causing administrative chaos.”

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