Governance of the Reserve Bank: an inadequate release

Just before the Easter break last week, the Reserve Bank partially reversed its position and released a few papers on the work it had been doing on possible reforms to the governance of the Reserve Bank.  I made some initial comments on that change of stance here, including noting that citing an Associate Minister’s response to an Opposition MP’s supplementary question in the House six months ago as the basis for a change of heart now was singularly unconvincing.

I’ve now had a chance to read the papers the Bank has released.  Having done so, I’m more puzzled than I was before.  Perhaps they are hoping for some brownie points for a slightly greater degree of openness than previously?  But as the project has come to an end, something rightly lamented by The Treasury, and the government has made clear that it has no intention of reforming the governance of the Reserve Bank, there should be no basis for withholding almost anything from the work done, and the advice submitted, on possible reforms to the governance of the Bank. It is official information, and there is a statutory presumption in favour of release.  It should, among other things, be a useful contribution to outsiders’ thinking on these issues.

The Bank has released a grand total of six papers.  Four are released with no omissions, one has a handful of short omissions (on “free and frank” grounds) and one omits a paragraph on another matter altogether.     In other words, processing the request for these particular papers will have taken no time at all.  And yet it took two months to refuse the initial request, and six months after the Associate Minister’s comments to release this handful of papers.  Not exactly a sign of an organization with a commitment to openness, transparency, not to speak of compliance with the law.    Now the Reserve Bank may claim – as it did back in July – that their initial (no doubt very coarse) filter produced 9000 documents inside the scope of my request.  I’m sure there are nothing like that number, but most of what is in scope has still been withheld.

What have they released?

The first paper is a descriptive note, dated 11 May 2014, by one of the young analysts in the Economics Department on “Governance arrangements: decision making committees”. It is a mildly interesting piece, with some discussion of arrangements in other countries.  It has a couple of paragraphs on decision making in other sorts of bodies, but why the author chose local councils (which are wholly elected) and DHBs (generally regarded as having one of the less satisfactory governance models in the New Zealand public sector), rather than (say) central government Crown entities such as the FMA or NZQA or EQC is beyond me.

The second paper, dated 25 June 2014, is a brief note, also from one of the teams in the Economics Department, to the Governing Committee identifying “Sections of the RBNZ Act subject to revision with a change in decision-making framework”.   There is little of note there, although it is consistent with the Governor’s apparent preference for a minimalistic reform (legislating  the role of the Governing Committee in setting the OCR).  There is no sign of the authors having stood back and thought about the larger issues of institutional design and governance.

The third paper, dated 4 July 2014, also to the Governing Committee from Economics Department staff, is headed “Best practice structure and governance of central bank decision-making committees”.  They are obviously a bit uneasy about the “best practice” description, because in a note with three pages of text and one table, the released version of the document has repeated four times the following inscription “Please note that the “best practice” referred to in this paper is as per the literature (specifically Blinder), and not subjective opinion of the paper’s authors”.    Weirdly, in a paper on (Alan Blinder’s “subjective” view of) “best practice” central bank governance, there is no sign that the authors recognize that our central bank is responsible for rather more than just monetary policy.    It isn’t an example of best practice policy analysis or advice.

The fourth document is an email to Gabs Makhlouf and Graeme Wheeler, dated 17 September 2014,  from Simon Duncan, a Treasury secondee in Bill English’s office.  It is a follow-up to a meeting Wheeler and Makhlouf had held with English a couple of days earlier.  The relevant paragraph is as follows:

On the Governance paper, I read that as the Minister being generally comfortable with the proposal as long as his concerns around the Committee model not embedding a strong independence culture on the financial stability side were addressed.  Opening up the RBNZ Act would be contingent on the political landscape following the election.

Which is interesting on a number of counts.

First, by September 2014 there was a specific proposal that had been put to the Minister, not (apparently) just orally but in the form of “the Governance paper”.    The Minister was apparently generally happy with whatever this proposal was.     And yet none of the material has been released, even though it would all have been within the scope of my request.  I’m at something of a loss to understand what anyone has to hide at this late date, when the project has been terminated.  And if the Governor simply does not want his proposal (or the supporting analysis) to get wider public scrutiny, that isn’t a good reason, in law let alone good governance in an open democracy.

But the email is also interesting because it highlights the ongoing tensions between the Bank on the one hand, and the Minister and Treasury on the other hand, around just how much autonomy the Reserve Bank should have in setting financial regulatory policy.   Our Reserve Bank has an (internationally) unusual degree of autonomy on that front, with very little effective accountability, and any suggestion that the powers should move from the Governor (who at least the Minister has some say in appointing) to an internal committee, dominated by people appointed by the Governor, would further (and inappropriately in my view) weaken the Minister’s relative position.

The fifth document released is by Dean Ford, a manager in the Economics Department, dated 15 October 2014 and is “Terms of reference: Moving to committee decision making at the Reserve Bank”   It is the terms of reference for a “joint Treasury/Reserve Bank work program” on these issues.  It is a working level group of named Treasury and Reserve Bank officials, designed to lead to “a common understanding of the advantages and disadvantages of the various committee design features”.  The intention was to host various roundtable discussions (I went to several of these) as a prelude to advancing the work “aiming to produce material suitable for briefing the Minister of Finance and Cabinet, and subject to Cabinet agreement, moving the project through the parliamentary process.  This could include material for select committee or public release”.

But, reflecting those longstanding tensions over the governance of the financial regulatory functions, this working group (wholly composed of Economics Department people from the Bank side) was supposed to focus on monetary policy where “initial discussions  … revealed many areas of agreement”.  Not so much on “financial policy”.   But “to allow the insights from the work to be more easily applied to financial policy when we reach that point, it will be necessary for the project team to understand how the Bank’s policy roles fit together”.  Indeed, one might have supposed that reaching that understanding was a precondition to taking a view on the appropriate governance model for any of the Bank’s major functions.  There are important differences of view, in international practice and in the literature, on to what extent the sorts of functions our Reserve Bank undertakes should be governed jointly or separately (or with overlaps).

The final document they released is an internal memo, dated 4 December 2014, and just addressed to one of the teams in the Economics Department, on “Central bank decision making committee design” , is no more than a (slightly abbreviated) version of the 4 July 2014 paper discussed above.

My presumption is that not too long after this the Minister of Finance told the Governor that he was no longer interested in pursuing governance reforms, perhaps particularly not along the lines the Governor was proposing.  This is consistent with the fact that (a) there is no reference to governance reforms work in the Minister’s letter of expectation to the Governor dated 2 March 2015, and (b) that the Treasury’s advice to the Minister of Finance on the Reserve Bank’s draft 2015 Statement of Intent, dated 5 June 2015, noted that the governance workstream had been discontinued.

Significant amounts of public resources were used to undertake the Bank’s work on possible governance reforms.  If the quality of the analysis they’ve released is fairly disappointing, at least this material makes clear that plans were fairly well-advanced.  And yet the Reserve Bank refuses to release the paper that must have gone to the Minister on these issues in September 2014  or anything of the work that was done after the Treasury/Reserve Bank working party was set up.

When the Bank originally withheld everything I requested they invoked a laundry list of excuses, including these two provisions of the OIA

9(2)(d) to protect the substantial economic interests of New Zealand.

9(2)(f)(iv) – to maintain the constitutional conventions for the time being which protect the confidentiality of advice tendered by Ministers of the Crown and officials.

The first excuse was always laughable, and has now disappeared.  But I was also interested that they are no longer invoking 9(2)(f)(iv).  In which case, why can we not see the advice the Bank did tender to the Minister on governance issues, and file notes of any discussions with the Minister on these issues?

It just isn’t good enough, but sadly it is par for the course with the Reserve Bank –  an organization in which the culture of secrecy has unfortunately become ingrained, beyond what is helpful, appropriate, or lawful.

In this case, it is doubly unfortunate because almost everyone –  perhaps with the exception of the current Minister –  thinks that changes should be made to the governance of the Reserve Bank.  Market economists canvassed by Treasury thought so, the Treasury itself thinks so, the Governor thinks so (unlike his predecessor who was strongly committed to the current model), Opposition parties appear to think so (the Greens certainly).

We have a system that was set up 27 years ago which (a)  doesn’t adequately deal with the range of issues the Bank is now responsible for, and actively wielding power over, (b) is out of step with international practice for monetary policy and financial regulation, and (c) is out of step with how we run other central government autonomous agencies in New Zealand.    Reasonable people can differ, perhaps quite strongly, on what the best alternative model might be. Personally, I think the Governor’s own preference is not at all the right response, and I laid out my alternative model here, but these are issues where we need good quality analysis from a range of perspectives, and some considered debate and discussion drawing not just on bureaucrats (inevitably skewed towards insider models) but on external analysts and, indeed, politicians.     These debates shouldn’t be about individuals –  Don Brash, Alan Bollard, Graeme Wheeler and any successors will all no doubt have strengths and weaknesses, and none walk on water –  but about the best institutional design for the governance of these important functions in New Zealand for the next few decades.  Openness on the analysis and advice already tendered would (should?) be a useful step to advancing the necessary discussion and debate.




7 thoughts on “Governance of the Reserve Bank: an inadequate release

  1. I am more interested in how Alan Bollard was allowed to push interest rates to 9% decimating an entire building industry, decimating 61 plus Finance companies with a loss of $6 billion in investor funds, destroying hundreds of families and individuals lives and easily let off the hook by blaming it all on the GFC?


  2. We can, and do, disagree on that specific issue, but it is a quite different issue than the appropriate governance model. Committees will make mistakes do, or pursue their own agendas – albeit perhaps slightly less often than over-powerful individuals


    • It is easy to disagree sitting in the cushy chair in the plush and comfortable offices of the RBNZ reading the newspaper with a cup of tea in hand and wondering what all the fuss is as interest rates hit 9%.

      I was in the hot seat mate, having to deal with mortgagee sale after mortgagee sale with businesses going broke and relationships in tatters, having to sit there in front of families watching them tear apart. Building project after building project was in tatters as development finance dried up and Finance company after finance company collapsed under the weight of interest rates going as high as 15% to 20% for development finance as Alan Bollard pushed for 9% OCR.


  3. Actually, I’m disagreeing with you, even with hindsight. And since this was a post about committees, it would be fair to note that – if anything – Alan was more reluctant than the consensus of his advisers to carry on raising rates in 2007 (one time we waited 2 or 3 days for him to finally decide to accept our advice and do what was – from memory – the second to last hike).

    The OCR is a blunt instrument and its effects inevitably fall disproportionately on one sector or another (at present, cuts are falling disproportionately on savers, and esp the retired reliant on interest earnings. But the underlying inflation picture in early-mid 2007 was one that then, and even now (since no one could know what would happen globally in late 08), seemed to warrant higher interest rates.


    • In other words Alan Bollard should have listened to what was actually happening in the real economy and real people rather than have paid attention to advisers in their comfortable seats and plush ivory tower of the RBNZ drinking tea with exorbitant wages pushing for an impossible goal. NZ household savings and NZ household debt is finely balanced. Interest rates up or down would not have a immediate impact on spending in general. It is only when interest rates starts to affect businesses and jobs that’s when interest rates have an impact.

      Labour is correct that we need to factor in the impact to the economy as as well keep inflation under control as an objective. It is completely illogical to crush the economy completely to control inflation. No point killing the patient to cure his illness.


  4. Well, as it happens, I agree that the OCr decisionmaking committee should be dominated by outsiders (as in the UK and Aus), but do bear in mind that the unemployment rate in 2007 was around 3.5 per cent (ie extraordinarily low). The issue in 2007 is that there was a big difference between pressures in the provinces – rapidly rising dairy prices notably – and in Auckland, where the big boosts to growth has passed some time earlier.

    And, Alan was only doing what Michael Cullen and Helen Clark had told him to do when they wrote the PTA. I think we should have a more serious look at how the PTA is written, than say English and Makhlouf appear to have in mind, altho I’m yet to be persuaded of the case for material substantive change.


  5. Sounds like you are moving to a much better understanding of why we are going backwards.
    The world is business and without us doing business nothing the RBNZ nor the Govt. do is worth a tin of soup.
    Inflation fighting was and remains a foolish target.
    Creating wealth on the other hand benefits everyone.
    All this is showing through in our real income per capita, which fell 0.4 per cent in the 2015 year, despite a 2.5 per cent rise in total GDP for the year.

    “We added more people working longer hours and plenty of natural resources with a bit more capital, but didn’t actually produce much more per person per hour worked.

    Business investment fell 1.1 per cent in the December quarter and rose just 0.9 per cent from a year ago.

    It’s the same old story. New Zealand has avoided tough decisions on taxation, investment and competition and has bought growth by adding more resources – people, hours, land and water. We’re not working much smarter or using technology to make us richer.

    The economy is getting bigger, but productivity has stalled. That is not a recipe to make everyone richer in the long run.”

    so pretty sad stats for NZ and the people who live here.
    We are measuring and worrying about all the wrong stuff.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s