In my previous post, I noted that I had previously outlined a possible alternative governance model for the Reserve Bank. That model was buried many pages into a linked paper, so here are the key elements of a better alternative model. It has significant similarities with the approach adopted by the British government when they recently reformed the Bank of England and the organisation/governance of a very similar range of functions to those undertaken by our Reserve Bank. In this model, a Governor plays an important central role, but is not – except perhaps by the strength of his arguments – a dominant figure. A significant part of the Governor’s role is to facilitate the work of the various committees, in which he is (formally) no more than primus inter pares.
My main point in writing this note is to make the case for moving away from the current single decision-maker model. That model now suffers from an increasingly severe deficit of democratic legitimacy and lacks robustness.
However, in the interests of contributing to the debate, and providing an alternative model against which to look at the current system, I have outlined below the key features of an alternative model that seems to me best suited to the current responsibilities of the Bank, the size of our country, and practice in other areas of government.
Key elements of such a model would be:
- The Reserve Bank Board would be reformed to become more like a corporate (or Crown entity) Board, with responsibility for all aspects of the Reserve Bank other than those explicitly assigned to others (NZClear, foreign reserves management, currency, and the overall resourcing and performance of the institution).
- Two policy committees would be established: a Monetary Policy Committee and a Prudential Policy Committee each responsible for those policy decisions in these two areas that are currently the (final) responsibility of the Governor. Thus, the Monetary Policy Committee would be responsible for OCR decisions, for Monetary Policy Statements, for negotiating a PTA with the Minister, and for the foreign exchange intervention framework. The Prudential Policy Committee would be responsible for all prudential matters, including so-called macro-prudential policy, affecting banks, non-bank deposit takers and insurance companies. The PPC would also be responsible for Financial Stability Reports.
- Committees should be kept to a moderate size, and should comprise the Governor, a Deputy Governor, and between three and five others (non staff) all of whom would be appointed by the Minister of Finance and subject to scrutiny hearings before Parliament’s Finance and Expenditure Committee. There should be no presumption in the amended legislation that these outside appointees would be “expert”, although it might be reasonable to expect that at least one person with strong subject expertise would be appointed to each committee.
- The Secretary to the Treasury, or his/her nominee, would be a non-voting member of each committee.
A common argument against this sort of model is the small size of the population in New Zealand. I think this is a materially overstated concern:
- As noted earlier, ministers manage to fill countless boards and committees, covering a wide range of functions – some more important than others, some more technical than others.
- If it is difficult to find enough good people to serve as a voting committee, it is at least equally likely to be hard to consistently find a top-notch person to serve as Governor.
- No other small advanced economy has either a single decision maker, or a committee of internal management experts only.
- While I don’t generally favour using foreign appointees on policymaking bodies, it is likely to be more feasible and acceptable to use foreign appointees in a system in which the foreign member is one vote of five or seven, than in the current system (which is all or nothing). Bank of England policy committees have had foreign members appointed by the Chancellor on several occasions.
- In respect of monetary policy, the Bank has managed for 10 years or more to fill two external monetary policy adviser positions.
In the same paper, I explained why I did not the thing the model proposed by Lars Svensson in 2001, apparently similar to what Graeme Wheeler probably favours, would be the right solution.
In 2001, Lars Svensson’s report to the Minister of Finance proposed legislating for a small committee of internal experts (senior managers of the Reserve Bank26, working in executive roles in the monetary policy area, whether initially appointed from outside or within) to make monetary policy decisions.
Simply legislating for a committee of fulltime executives would have some modest advantages over the current situation. Whatever decision-making benefits might arise from committees, per se, would presumably be captured. However, without much more substantial structural change, it would represent a material further dilution of ministerial responsibility for monetary policy. The Minister appoints (and, in principle, can dismiss) the Governor, but has no involvement in appointing those in the Bank’s management hierarchy.
The Svensson solution was designed for monetary policy. In principle, there is no reason why there should not be a similar internal committee for prudential matters, probably with somewhat overlapping membership.
But it is not clear why a model of this sort it would appeal to political decision makers (Minister of Finance, and MPs). The model was rejected by Michael Cullen in 2001, and has not since been revived by any politicians.
In such a model, the Governor would clearly be the dominant figure. He or she would be the chief executive to whom the other members work. The chief executive would presumably set their salaries, and determine resourcing for their individual departments. In practice, it is not a model which would provide much additional resilience in the face of a bad Governor, and it would remain well out of step with decision-making models elsewhere in the public sector.
As a decision making model, it would also seem to confuse the important role of technical expertise as an input to the decision-making process, and the policy decision itself. To illustrate the point, consider the role ministers play in decision-making in our system of government. Ministers (individually or in Cabinet) make policy decisions in a wide range of areas, in which typically only by chance are they technical experts. They can draw on a wide range of advice, technical and otherwise, whether from the public service or from outside.
Parliament has chosen not to have ministers making decisions on many of the Reserve Bank’s areas of responsibility, but that is mostly about the incentives that politicians are perceived to face (electoral cycles). It has never been about a need to have all decisions made by executive technical experts.
It is important, and valuable, to keep a clear distinction between expert advice, and a decision-making process. Doing so helps ensure that a range of options is examined in a careful and balanced way. When the Governor and his/her own executive deputies are those making the monetary policy decisions, and are directly responsible for those generating the underlying analysis, there is a heightened risk that they will receive staff analysis tending to support their own known biases and predilections (staff respond to incentives). Similar risks arise around regulatory policy decisions. A very good Governor might be able to manage this risk, but it is not one that we generally take in public sector organisational design. In respect of fiscal policy, for example, there are two clearly separate roles – adviser and implementer (Secretary to the Treasury) and decision maker (Minister). The Secretary is responsible for the quality of the advice and analysis going to the Minister, but the Minister is responsible for the policy. There is no comparable separation of responsibilities in respect of the Reserve Bank’s activities.
In short, simply legislating a series of internal semi-expert committees would still not represent particularly good governance. It would remain well out of step with conventional practice in the New Zealand public sector. Expert committees can, and do, play a valuable advisory role in policy development, and can play a decision-making role in technical implementation decisions, but – outside the Reserve Bank – I am not aware of any area of New Zealand policy governance in which material policy decisions (as distinct from the application of policy to particular entities) are delegated to an expert panel.
 Governor, Deputy Governor, Head of Economics, Head of Financial Markets
 In the current management structure, perhaps a Monetary Policy Committee made up of the Governor, Deputy Chief Executive, Head of Economics and Head of Financial Markets, and a Prudential Policy Committee made up of the Governor, Deputy Chief Executive, Head of Prudential Supervision, and Head of the Macro-financial Department
 Otherwise, for example, there would presumably be much more stringent qualifications for a Governor laid down in the Act. Each of the three people who have held office under the current model have had a background in economics, but I don’t think any of them would have described themselves as technical experts in monetary policy or banking regulation.