Bureaucrats are mostly rather predictable.

I’d been conscious that the Reserve Bank had not yet released the results of its “regulatory stocktake”, even though submissions had closed three months ago.  The Friday before Christmas seemed like a good day for a release by an institution that might want as little coverage as possible of its decisions.  So I kept an eye on my email yesterday, and sure enough at 4.35pm up popped the results of the so-called stocktake.  As far I can see, there has been no media coverage so far, and even if any of the relevant journalists are still around, readership interest in anything serious is rapidly waning.  NBR had covered the issues earlier, and it has already published its last paper for the year.

The stocktake was never a very serious exercise. I was still at the Reserve Bank when the terms of reference was determined, and the Governor was clear then that he did not want any serious issues addressed.  It seemed that it was as much an exercise in appeasing the Minister, to show that the Bank was willing to look afresh at its stock of regulation and perhaps even tidy up some small stuff.

There were, in my reckoning, three main issues dealt with in the consultation document:

• Refinements to the disclosure regime, generally with a view to reducing public disclosure
• Refinements to the “fit and proper” regime
• Some reflections on the Bank’s own policy processes for bank regulation.

I made a submission to the stocktake, along with many of the banks and variety of fairly well-informed individuals including the former Governor, Don Brash.

As far I can tell from reading the document the Bank released yesterday, it had no real interest in any submissions other than those of the banks and of a single rating agency.    It does report the gist of some of those individual submissions, but there is no sign that any of them had any impact on the Bank’s thinking, nor an attempt to explain why the Bank regards the arguments made as unconvincing.   That is one of the problems in having a regulatory agency set policy as well as implement it –  insiders will tend to be defenders of the status quo, and if they are responsive to outside input at all it will tend to be to submissions from those they have most to do with (in this case, the regulated entities, the banks).

The Reserve Bank has been putting progressively less emphasis on public disclosure by banks over the last decade or so.  The Bank itself has been quite open that it does not now use the information in the disclosure statements for supervisory purposes, having replaced it with a variety of ‘private reporting’ returns that no one else has access to.  Note that the Bank is very enamoured of what it describes as a “non-zero failure regime” –  that is, the system is run to allow for the possibility of bank failures (rather than to prevent them all), and with the aim of ensuring that any losses fall, as far as possible, on shareholders and creditors (including depositors).  There is no deposit insurance in New Zealand, and the Bank is staunchly opposed to the introduction of deposit insurance.  In other words, in their vision the risks from any failure of a bank fall first and foremost on creditors, not taxpayers.  And yet those creditors do not get access to the information that the Reserve Bank regards as vital to assess the health of banks.  The disclosure statements are really, in effect, just a legacy of history –  probably of no real value to creditors (since it isn’t the information the supervisors themselves use).

I pointed this out in my submission, and suggested a rather simpler and cheaper approach which would better reflect the risks the system is designed around –  ie providing creditors much the same information as the central bank gets, when the central bank gets it.

The Bank has canvassed an option somewhat along these lines in its consultative document, raising the option of a “continuous disclosure” model, something like what stock exchanges impose on listed entities, for periods between six-monthly disclosure statements (at present, disclosure statements are quarterly).

The Bank did not respond to my suggestion at all.  It did respond to the partial continuous disclosure idea.  The first argument advanced against it was “banks did not support this option”, but with no statement of why –  and recall that we don’t have access to submissions made to the Reserve Bank.  The Bank’s own concern seemed to be that it might lead to “confusion in the market”,  but quite why it should lead to such confusion, and among whom, is not made clear.

The Bank appears to have settled on a halfway house, that might be workable, but continues to maintain a charade –  a disclosure regime that forces banks to disclose some information, but not the information that the Reserve Bank itself uses for supervisory purposes, and only then with a considerable lag.  Perhaps there is a good reason for maintaining this distinction, but in its release yesterday the Bank gives no sign of having thought hard about the issues at all.

There is further consultation to come on the Bank’s preferred “dashboard” option for 0ff-quarter disclosure, but a strong hint in the document that the Bank wants to consult only with banks.  The Reserve Bank needs to remember that banks are the regulated entities, regulated in the public interest.  Registered bank perspectives on cost and workability should be welcomed, but the rationale for supervision is that banks represent a risk to the rest of us, not those in whose interests regulation is undertaken.

On “fit and proper”, again the Bank showed no interest in asking or answering some of the more fundamental challenges some submitters posed (eg straightforward ones such as “is there any evidence that fit and proper tests, applied discretionarily by bureaucrats, have done any good, in promoting the soundness of the financial system?”.  I proposed a much simpler and cheaper option than what the Bank has been doing (or will be doing in future): ban anyone with a conviction for dishonesty in the past 10 years and require senior officers and directors CVs to be listed on the website of the regulated entity.  I’d be surprised if the Reserve Bank, with the best will in the world, could improve on that option, not being granted the gifts of insight or foresight greater than those of mere creditors and shareholders.    Again, the Reserve Bank gave no hint of why it thought this (quicker and cheaper) approach would lead to worse outcomes.

But there was modestly encouraging stuff to come out of the stocktake.  In their, still secret, submissions several banks (or perhaps the Bankers’ Association, to protect individual banks) had raised concerns about the Bank’s policy processes.

Various banks had complained that the typical consultation period was far too short, for often rather complex issues.  The Bank has agreed that in future its normal consultation period will be 6 to 10 weeks,   but this looks like a rather small gain as the Bank reserves the right to ignore this guideline when it suits them (eg when the Governor wants to rush in new LVR restrictions, on very limited evidence).

Various banks also appear to have raised concerns about the robustness of the Reserve Bank’s cost-benefit analysis in support of regulatory changes (unsurprisingly I’d have thought, as I don’t recall any quantitative cost-benefit analysis for this year’s investor finance restrictions) and of the Bank’s regulatory impact statements.  Of course, RISs are mostly a sick joke around much of the public sector, but it is good to keep the pressure up on individual agencies –  especially independent ones –  to improve their game.  The Bank doesn’t offer anything very specific in response, but seems conscious of the concerns.

One bank “asked for a requirement that the Reserve Bank publish a summary of submissions and responses (including rationalise) to viewpoints not accepted.”

The Reserve Bank responded that “we currently aim to publish summaries of submissions that take into account responses to viewpoints not accepted.  We would welcome specific feedback from industry in cases where they feel this insufficient.”.  As I noted, none of the views I and other expressed in this consultation were responded to specifically.  Then again, I guess I’m not “industry”.  The Bank  might want to note that “industry” are not the (only) stakeholders –  they are the regulated entities.

Dearer to my heart was this comment:

One bank also suggested that submissions should be available online, in addition to the Reserve Bank publishing the summary of submissions. This bank noted that this is the standard practice for public consultations run by other government departments (e.g. the Ministry of Business, Innovation and Employment).

This is a point I’ve made repeatedly.  And it isn’t only government departments. Submissions to Select Committees are public, submissions on City Council consultations are public, and submissions to the Productivity Commission are public. It is simply good practice, taking seriously the idea of open government.  Such submissions are not just public after all the decisions have been made, but while deliberations are going on.  The Bank has always been very resistant to such openness.  However, they have now shifted their ground somewhat:

Our current approach is based on our understanding that respondents prefer to keep their submissions confidential. Prior feedback indicated that banks, in particular, were reticent to share cost information and the Reserve Bank is concerned that the publication of submissions would impact the quality and detail of the submission feedback. On the other hand we also recognise the importance of transparency in the policy-making process, so we will return to this issue and consult on a revised approach under which the default position would be that all submissions are published on our website (although submitters could ask to have any confidential information in submissions redacted). We will add this issue our register of “Future Policy Work.”

I think this statement tells one a lot about the extent to which the Reserve Bank sees its clients as primarily the institutions it regulates, rather than the public the institution exists for.  I’m sure that banks would generally prefer to keep their submissions confidential, and it is precisely for that reason that their submissions, in particular, should be made public.  It is too easy for a cosy relationship to develop between the regulator and the regulated (Ross Levene among others have written extensively on this topic) ,and although I don’t think it has really happened to a great extent in New Zealand it is a risk that constantly needs guarding against.

In any case, kudos to the Bank for a modest step forward.  I’ll look forward to their consultation document on this issue to see whether it represents a serious move to the sort of consistent transparency other agencies adopt.  And I’ll be interested to see how they plan to get around the limitations of section 105 of the Reserve Bank Act –  which, as I noted a few months ago, really needs amending.

In the meantime, I lodged an OIA request months ago for the submissions on this consultation. I agreed with the Bank to delay the request taking effect until the results of the stocktake were published (otherwise they would just have declined it), so in the new spirit of openness I will look forward to a fairly comprehensive release  –  not just private individual submissions – in the New Year.  Given that they have had the submissions for months already, if they were serious about transparency they could release them right now (“as soon as reasonably practical” is what the Official Information Act says).

I will take some convincing that they are serious about transparency. Recall that in the course of this year they have already:

• Refused to publish many of the submissions on the investor finance restrictions consultation (all of them initially)
• Refused to publish most of the background material to the 2012 PTA (under threat of heavy charges)
• Have still not published their forecasting model  [UPDATE: a commenter points out that the model has now been released, something I had missed]
• Have refused to publish any of the substantive papers as part of their work programme on reforming governance of the Reserve Bank
• Have refused to publish any minutes of meetings of the Governing Committee
• Have refused to publish any material provided to the Bank’s Board as the basis for the Board’s evaluation of the September Monetary Policy Statement.

And then I had an email from them the other day about another request.  I had asked for copies of minutes of the Bank’s Board’s meetings for a couple of years in the late 1980s.  I wanted them for two, quite unrelated, pieces of work I was doing.  I assumed this would be uncontroversial –  it is material that is almost 30 years old, and not conceivably withholdable.  Actually, I had made a similar request for a couple of other years’ Board minutes when I was still at the Bank, and was told I was free to photocopy the relevant papers, which I did.

The Board papers are all nicely bound and properly stored, so there is no research or collation involved in meeting my request.  I deliberately just asked for all the minutes –  perhaps five pages a months, 11 months a year, rather than excerpts, to minimise any effort in meeting the request.  All it required was some undemanding photocopying or scanning, taking no more than hour in total.

But the Bank first took almost 20 working days to respond (“as soon as reasonably practicable”?), and even then has not determined whether the information is releasable at all.  And it is demanding $276 as a deposit to even begin determining whether the material could be released.   Note, by contrast, the easily availability of historical Board (equivalent) minutes at the Bank of England.

The Reserve Bank has announced:

The Reserve Bank has a policy of charging for information provided in response to Official Information requests when the chargeable time taken to provide the information exceeds one hour, and charging for copying when the volume exceeds 20 pages. Our charges are $38 per half hour of time and 20c per page for copying (GST inclusive).

Their stance appears to be technically legal, but hardly in the spirit of open government[1].  I’m curious how many people have been charged by the Reserve Bank under its policy, and am wondering whether I should now expect a bill for (a) the request for submissions on the regulatory stocktake, and (b) the request for information on the Reserve Bank’s volte face on the short-term impact of immigration.

The institution needs serious reform. Among other things, it needs to take on board the spirit of pro-active release.   It remains a bit puzzling why the Minister of Finance has closed down work on even reforming the governance provisions.  Occasional sideways or mildly critical comments about the Bank’s recent monetary policy mistakes are all very well, but they don’t seem to lead anywhere.

 

[1] And I’d happily come in to the Bank and photocopy the pages myself, and even cover the photocopying costs.