Bagehot on reforming the Reserve Bank Act

In a comment the other day on my post outlining a possible alternative governance model for the Reserve Bank, Andrew Coleman at the University of Otago included some quotes from Walter Bagehot’s 1873 classic work Lombard Street: A Description of the Money Market (available free here).

The quote that particularly took my fancy was some concluding remarks Bagehot made about the need for changes to the structure and governance of the Bank of England.

“There should be no delicacy as to altering the constitution of the Bank of England. The existing constitution was framed in times that have passed away, and was intended to be used for purposes very different from the present. The founders may have considered that it would lend money to the Government, that it would keep the money of the Government, that it would issue notes payable to bearer, but that it would keep the ‘Banking reserve’ of a great nation no one in the seventeenth century imagined. And when the use to which we are putting an old thing is a new use, in common sense we should think whether the old thing is quite fit for the use to which we are setting it. ‘Putting new wine into old bottles’ is safe only when you watch the condition of the bottle, and adapt its structure most carefully.”

He could have been writing about New Zealand’s situation now.

As I’ve pointed out, our Reserve Bank Act, and particularly the governance features of it, were designed in 1989.  Back then, there weren’t many modern international models to build on.  The provisions of the Act were designed to align with a vision of how core government departments would be run that has now been largely abandoned, they were designed for a conception of what the central bank would be doing that envisaged very little effective discretion, and they were designed before the Crown entities framework was developed for the many other non-departmental government agencies in New Zealand.

Those times have, in Bagehot’s words,  “passed away” and we now need a review and extensive revision of governance, transparency and accountability provisions of the Reserve Bank Act.  Discussion of the issue often focuses on monetary policy, but the governance of the Bank’s extensive powers in banking, non-bank, and insurance regulation is at least as important (and more challenging because the goals are less well-defined).  And as I have been highlighting in the last few weeks, we need to ensure much more openness from the Bank across all its functions, and some more effective structures for holding the Bank and its decision-makers to account.  Bagehot uses a biblical image, but we can go a little further: putting new wine [new expectations of what the Bank should do and how] into old wineskins [the 26 year old Act]  leaves the New Zealand system out of step, and is a recipe for some rather poor and unsatisfactory outcomes.

And with that, I’ll stop for now.  I’ll be back around 13 October,

A partial backdown from the Reserve Bank

Last week I ran a post about the Reserve Bank’s refusal to release the submissions on the new investor finance restrictions, and in particular the reliance the Bank appeared to be putting on the confidentiality provisions in section 105 of the Reserve Bank Act. Those provisions appear to prohibit the Bank releasing any information  it received from anyone “ relating to the exercise, or possible exercise, of the powers conferred by this Part” of the Act.

As I noted then

This seems like a travesty of democracy. Submissions –  on major new public policy initiatives – can be disclosed to foreign central banks or supervisors, but not to the New Zealand public. Any views banks or members of the public might submit to the Reserve Bank on monetary policy would typically be discoverable under the OIA, but those on prudential matters are apparently not. And this is so, even though for for monetary policy there is a relatively specific objective for which the Governor can be held to account, while there is nothing remotely specific about how the statutory objectives for prudential policy should be measured.

…..

A system in which the Governor can tell us as much, or as little, and then with his own slant, on the submissions he receives should be seen as simply unacceptable.  In this case, quite a simple amendment to the Reserve Bank Act would rectify the situation, making explicit that submissions on proposed changes to conditions of registration, or any other restrictions that affect all institutions, are not covered by the section 105 exemption, and should routinely be published on the Reserve Bank’s website.

And noted that.

Of course, if anyone else wants to request copies of the submissions, the Bank should presumably respond immediately declining their request and explaining why.  Unless they want to reconsider and change their interpretation of section 105, any delay would itself be a breach of the Official Information Act.

I knew then that another request had been made and had not been responded to immediately.

Today, the Reserve Bank has responded to that request, and there has been a major change of heart .

Having told me that it would be too much work to release the papers, that the summary of submissions met the statutory requirements (both laughable arguments), and that in any case much of the each of the submissions would have to be withheld, they have had a (welcome) re-think.  The Reserve Bank has now released in full, on its website, the submissions made by all people and entities who are not banks regulated by the Reserve Bank.

This is a significant step forward. It is probably the first time the Reserve Bank has released any submissions on proposed regulatory changes.  I hope that this now sets a precedent, and to check that I have requested copies of the submissions on the regulatory stocktake.

However, the Reserve Bank is still refusing to release submissions made by banks.  It asserts that these are protected by the confidentiality provisions in section 105 of the Reserve Bank Act.  I describe it as an “assertion” because there is no supporting argument or evidence in the letter to Jenny Ruth as to how section 105 protects bank submissions but not those made by other submitters.  Here is what the Act says:

  • This section applies to—

under, or for the purposes of, or in connection with the exercise of powers conferred by, this Part:

    • (b) information and data derived from or based upon information, data, and forecasts referred to in paragraph (a):
    • (c) information relating to the exercise, or possible exercise, of the powers conferred by this Part.

There is no hint I can see of any legal differentiation between material supplied by banks, and material supplied on the same issue by other parties.

If the Bank has a strong legal case, they should let us see it.  I’m certainly not suggesting that they should break the law and release bank submissions if they are legally prohibited from doing so, although I suspect  that they may be doing so by releasing any submissions at all

Whatever the law currently says, is there a case for withholding bank submissions?  I think the answer is no, and if anything it is much more important that bank submissions are discoverable than that those of other submitters are.  After all, banks are regulated entities and the idea that regulated entities should be able to lobby the regulator in secret, and we (citizens) have no ability to see what arguments they have made goes strongly against the principles of open government.   Those concerns about regulators and the regulated getting too close were what motivated Ross Levine to write an entire book, The Guardians of Finance (which I wrote about here).  If anything, there is probably a case for more material on banks to be made public, as I noted in yesterday’s post, but certainly their submissions on policy proposals should not have legislative protection.

In conclusion, I wanted to make two other observations.

First, the Bank has asserted that the “summary of submissions we’ve published accurately and fully summarises the responses received from banks”.  If that is so, it would certainly be welcome, but as their summary certainly didn’t accurately or fully summarise my submission, we have no reason to be confident as to how they have reported bank submissions.

And second, I received a letter from the Reserve Bank this afternoon attempting to rationalise their refusal to release anything to me when I sought the same material.  Here is what they had to say:

Subsequent to publication of our summary of submissions and response to submissions for our consultation on adjustments to restrictions on high-LVR residential mortgage lending, the Bank received another Official Information request seeking copies of all submissions. The timing of these two equivalent requests is a differentiating factor in the Bank’s responses to these requests.

  • Your request was made prior to us doing the necessary work to collate, assess, and consider our response to the submissions and then publish our summary and response. 
  • The subsequent request, from a newspaper, was made on 24 August, after we had completed our assessments and published the summary and our responses.  

The difference in timing is significant because one of the primary reasons for declining to provide information to you was, as envisaged by section 16(2)(a) of the Official Information Act, that doing so would impair efficient administration due to the need to repeat the work assessing submissions for their primary purpose while also assessing them to respond to your request. With the primary assessment work completed, we do not need to repeat it for the Official Information request made on 24 August. Accordingly, our response to the request we received on 24 August is that we are releasing submissions made to us by individual and by non-bank organisations that we do not regulate,

Again, this simply not persuasive, and appears to be a rather desperate ex post rationalisation for what is clearly a change of view.   For any OIA request, the Bank has 20 working days to respond, and can (and has previously, and regularly, done so) extend that time by another 20 working days if necessary.  There was no need for any repetition, or any disruption to their deliberations (especially as they had openly signalled that they intended to turn the submissions around, and announce the Governor’s decision, quite quickly).

I don’t hold it against people when, having reflected more fully on the issue, they change their minds.  I’ve welcomed the partial step forward reflected in the release of the material today.  But it would best not to pretend that the two requests were so different that they had good legal grounds to refuse my request altogether, but were also legally required to release today’s material .  One decision was a mistake –  hopefully not a wilful one.

As I noted last week about section 105

Like so much about the Reserve Bank Act, it is past time to reform these provisions.  Good access to official information is vital if we are to ensure that such a powerful institution is to be robustly accountable.  At present, there is far too little effective accountability and scrutiny.  A system in which the Governor can tell us as much, or as little, and then with his own slant, on the submissions he receives should be seen as simply unacceptable.  In this case, quite a simple amendment to the Reserve Bank Act would rectify the situation, making explicit that submissions on proposed changes to conditions of registration, or any other restrictions that affect all institutions, are not covered by the section 105 exemption, and should routinely be published on the Reserve Bank’s website.