What the Board might (but surely won’t) say

Yesterday was the end of the year for the Reserve Bank, and attention will be turning to the annual accounts and the Annual Report.  There are two relevant Annual Reports, required by law. The Bank itself is required to produce an Annual Report, but so is the Bank’s Board.

The Reserve Bank’s Board is quite different from a corporate board, or from boards of other statutory bodies.  The Board has no responsibility for running the institution – whether in a managerial sense, or setting strategic direction or policy.  The Board, in effect, selects the chief executive, but there the similarities largely end.  The Board isn’t charged to work with the Governor to collectively deliver the Reserve Bank’s goals.  Instead, it is explicitly charged with holding the Governor to account for his stewardship of the Bank.  In that role, their primary responsibility is to the Minister of Finance and to the public.   They are given privileged access to information, but are expected to be willing to stand at arms-length from management generally, and the Governor in particular.

Of course, structural flaws in the model make this hard to do effectively.  When a Board appoints someone as Governor, they naturally have a strong desire to see their choice validated, and hence a natural instinct to “back their man”.  The superficial similarities to corporate boards probably don’t help –  since many of the Reserve Bank Board members sit on other private or government boards.    I’ve also been critical of the Board for allowing itself, over the years to get too close to management – repeatedly making former staff chair of the Board for example –  and for seeing one of its role as helping sell the Bank’s messages.    But again, under-resourcing (the Board has none) tends to reinforce this dependent relationship

Last year, for the first time, the Minister of Finance sent a Letter of Expectation to Rod Carr, the chair of the Reserve Bank’s Board, setting out what he expected from the Board (I wrote about it here). In that letter, the Minister was quite explicit in drawing attention to the different nature of the responsibilities of this Board, and he outlined some clear expectations for what he thought the Board should report on.  He certainly wasn’t just interested in a list of meetings attended or papers received –  as past Board reports have often been.  He also explicitly noted that “greater visibility of the Board’s activities would also be welcome”.

So as the Reserve Bank’s Board begins to think about how it might shape and phrase this year’s Annual Report, bearing in mind the Minister’s written expectations, I thought I’d have a go at a version of the Board’s Annual Report that I think would be more consistent with (a) the data and evidence, and (b) the Board’s actual responsibilities.    Sadly, I will be surprised if any of these points are made, or even if the issues are treated in a substantive and balanced way, while reaching different conclusions.   But here goes:

Annual Report of the Board of the Reserve Bank of New Zealand
Year ended 30 June 2016

The Board of the Reserve Bank of New Zealand has quite different roles and responsibilities than boards of most other statutory bodies, let alone those of private sector companies.  Following receipt of the letter of expectation from the Minister of Finance in November 2015, we have taken the opportunity to reflect again on how best we can fulfil the role provided for us in the Act.  That role is primarily about holding the Governor to account for his stewardship of the Bank, on behalf of the Minister of Finance and the people of New Zealand.  Doing that well involves striking a difficult balance.  We are provided with privileged access to information, and the ability to engage with and question the Governor and his staff.  But we need to maintain a considerable distance from the management of the Bank, and ensure that we are exposed to, and consider, alternative perspectives on the Bank’s performance, in reaching our own assessments.   We are not here to be cheerleaders for the Bank, and regret that at times in the past we have allowed ourselves to become part of the Bank’s outreach efforts –  which compromises our subsequent ability to evaluate management, and to be seen to do so in an objective fashion.   And equally we need to bring a professional detachment to our evaluation, and not allow ourselves to be unduly influenced by the part we or our predecessors had in appointing any particular Governor.

We are also conscious that the Board has limited resources.  The role of Board member is a part-time position, remunerated on the basis that members will typically spend no more than perhaps two days a month on Bank matters.  Few of us are experts in the subject matter the Bank in responsible for, and we have no independent budgets or staff resources.  The Governor  –  whose performance we are charged with evaluating – controls the papers that come to the Board from the technical experts on staff.  Indeed, we are dependent on the Bank for even secretarial and administrative support.  We do not think that is an adequate model to enable the evaluation task to be done well, and we have written to the Minister of Finance suggesting that the Board be provided with a limited amount of independent resource (including the ability to commission external advice) to be better able to fulfil the role that he, and others, rightly expect of us.

The Reserve Bank has a wide range of tasks and statutory responsibilities.  That breadth of functions, and the extent of the powers delegated specifically to the Governor, is unusual –  both in New Zealand public agencies, and among central banks and financial regulatory bodies internationally.  We work within the framework Parliament has given us, but we are uneasy about how different the Reserve Bank framework now looks.  We would encourage the Minister to consider establishing a process to review whether the design of the institution and its governance model is the best possible model for New Zealand in coming decades.

The Reserve Bank has a substantial body of high quality staff.  We thank them for their dedicated input over the last 12 months.

As we reviewed the Bank’s performance over the last 12 months – and particular that of the Governor, who we are specifically charged with holding to account –  we have found a number of areas of concern.

The most obvious is the way in which inflation has undershot the midpoint of the target range –  the midpoint having been specifically identified as the focus as recently as the 2012 Policy Targets Agreement.    Many –  although not all –  advanced country central banks have been grappling with persistent surprising weakness in the inflation rates in their respective countries.  Of course, unlike many of those central banks, the Reserve Bank of New Zealand still had ample tools at its disposal –  the OCR has been consistently above 2 per cent, while in most advanced countries rates close to, or even below, zero have been more common.

We also recognize that many of the more prominent local commentators had similar, or even more optimistic, views on inflation, than the Reserve Bank did.  Perhaps there is comfort in a crowd, but unlike the other commentators, the Reserve Bank has been charged with delivering inflation at or near target.  It hasn’t done so over the last year, and unfortunately that followed several years of undershooting.  We disagree with the senior Bank manager who was recently quoted as suggesting that six years was too short a timeframe to evaluate monetary policy performance over.

It isn’t our place to second-guess specific monetary policy judgements made by the Governor.  But it is our duty to stand back and consider lessons from the patterns that start to emerge over time.  We are concerned that the Bank may have allowed itself to become too inward-looking, and too reluctant to foster or engage with alternative perspectives –  whether internally, or externally.  In an area in which there is so much uncertainty, this would be a serious weakness in the institution.  In most institutions, any such reluctance stems from signals –  deliberate or inadvertent –  sent from the top.  In this respect, we have been concerned that the Governor has not been willing to openly admit that mistakes were made in the setting of monetary policy in recent years.  To err is human.  To wish to deny error is also, perhaps, human, but unhelpfully so.  “He Knew Was the Right” is the title of one of Anthony Trollope’s novels. That character’s certainty did not end well.

We have already drawn attention to the well-known fact that most advanced countries now find themselves having exhausted their conventional monetary policy capacity.  If policy interest rates can still be cut at all, it is only by very small amounts by the standards of past cycles and shocks.  New Zealand is fortunate in that respect that the OCR is still some way clear of zero.  But that is no basis for complacency, and unfortunately we have seen little sign of the Reserve Bank taking steps to address the risks.  In typical past downturns the Reserve Bank has often had to cut interest rates by 500 basis points.  In a future downturn that can’t be done.  And yet there is no sign –  including in the latest Statement of Intent –  of any work programme to anticipate these risks and to, for example, seek to remove the near-zero lower bound on nominal interest rates.  With so much advance notice, New Zealand should not find itself unable to use monetary p0licy sufficiently in the next serious downturn.  As the Governor has rightly noted, risks abound globally.

We note, with some concern, issues that have been raised over the last year about the consistency of the Reserve Bank’s monetary policy communications.  We would expect management to take these concerns into account, but we recognise that inconsistent communication (or at least perceptions of it) has also been an issue facing some other central banks, including the Federal Reserve.  Our assessment thus far is that the communications problems are mostly a reflection of the underlying issues central banks have had with correctly reading and interpreting inflation, and inflation risks.  In the Reserve Bank’s context, they have probably been amplified by the lack of clarity around the role of house prices in the way the Bank has been conducting monetary policy.

The Reserve Bank’s second main area of policy responsibility is the regulation and supervision of various institutions in the financial sector, under a mandate of promoting the efficiency and soundness of the financial system.

As the Bank has noted in its own reports, New Zealand’s financial system is sound.  Demanding stress tests suggest that there is no credible threat to the soundness of the system, based on the lending patterns and standards observed in recent years.  Those patterns can change, and quite quickly, and the Bank needs to be closely monitoring developments, especially in the banking sector.

In recent years, however, the Governor has articulated concerns that house price developments, especially in Auckland could –  if left unchecked –  develop in ways that could pose a systemic threat. In turn, the Bank has used several unprecedented regulatory interventions –  unprecedented in New Zealand, even in the decades of direct controls – to attempt to influence access to housing finance.  In recent months, the Bank has signaled the possibility of yet more controls, when only three years ago it was explicitly talking of the first wave of controls as “temporary” in nature.

In his letter of expectation, the Minister indicated that he expected us to explicitly address both the soundness and the efficiency dimensions of the Bank’s responsibilities.  We are concerned that the Bank has not been giving sufficient attention to the way in which direct controls impede and impair the efficiency of the financial system. Recent FSRs, for example, have given efficiency little or no attention.

In a wider sense, we are uneasy that the Bank has been adopting successive waves of controls with too little robust analysis or research underpinning them.  Here we have in mind two particular types of research. First, the Bank has published nothing in recent years looking carefully at the experiences of the countries which did, and did not, experience financial crises or systemic stresses following the last credit boom prior to 2007.  And there has been nothing looking carefully at New Zealand’s own experience during that period –  a a huge, widely spread, credit and asset boom, and no serious or systemic stresses followed.  For an institution provided with a substantial amount of research resource, we don’t think that is a satisfactory state of affairs.  And second, we have seen no research from the Bank reviewing literature on government failure, or examining the various regulatory failures and knowledge gaps that plague well-intentioned efforts to use regulatory restrictions in all sorts of sectors.

Again, we do not see it as our role to reach different conclusions than the Governor on specific interventions.  But we are concerned at signs that the institution is insufficiently skeptical and self-critical.  That is often a recipe that leads over-confident regulators into sub-optimal policy responses.  We think the Bank, and those monitoring it, would also benefit from some more structured published research around its wider financial regulatory activities.

Relatedly, we would urge the Bank and the Governor to recognize that, under their current mandate, house prices are not something the Bank is responsible further.  That is quite clear in respect of monetary policy –  the Policy Targets Agreement charges the Bank with focusing on the CPI, and the Bank has long been of the view that house prices should not be in the CPI.  But it is also true of the financial stability responsibilities.  The current level of house prices appears to be a serious national issue, but it isn’t one of the Reserve Bank’s responsibilities.  We have not been presented with evidence over the last year, and nor has such research been made public, that direct interventions in the housing finance market are a better response –  better balancing soundness and efficiency concerns, and the knowledge problems facing all regulators –  than, say, requiring larger buffers through higher capital requirements and more demanding leverage ratios.

The Board’s responsibilities do not simply involve the Bank’s prime policy roles, but also involve monitoring the handling of administrative and management matters. Two in particular have come to light during 2015/16.

The first was the OCR leak that occurred at the March 2016 Monetary Policy Statement.  The  inquiry into this, established expeditiously by the Governor, highlighted not just that there had been a deliberate leak, but that the Bank’s system were sufficient weak (reliant on trust) that it was almost inevitable that at some point a leak, deliberate or accidental, would occur.   We endorsed the decision to discontinue lock-ups –  a practice adopted in few other central banks now –  and believe that the penalty imposed on the culprit (MediaWorks) was appropriate, if belated.  We are concerned, however, by evidence that the Bank’s senior management, and our own Chair, allowed apparent personal animus to colour their reaction to the events, and how they were brought to light.  We appreciate the actions of the person who alerted the Bank to the possibility of a leak.

The second relates to the Reserve Bank staff superannuation fund.  The Board is required to approve rule changes to this scheme, and appoints two of the five trustees (the Governor is a third). We have been seriously disconcerted to learn about substantive errors and at least one breach of the law that occurred around rule changes undertaken some time ago.  The trustees have already had to apologise to members for one breach of the law, and we are now aware that one major rule change –  which benefited the Bank financially, potentially at the expense of members –  was done illegally.  That would be concerning enough in itself, but we have now learned that this information was known to trustees (including senior Bank management) 25 years ago and it was neither acted on nor were members informed.  In fact, members were asked to consent to other subsequent rule changes – which did materially benefit the Bank financially – where knowledge of that past error would have been material information for some members in deciding whether to consent.  Other important rule changes appear to have been made without member consent; changes which could have materially disadvantaged members.  These are not standards of management or governance which we find acceptable, especially in a scheme dealing with the life savings of many of our former (and current) staff.  We apologise for the mistakes of our own predecessors in this area, and we have urged the Governor, and the other trustees whom we appoint, to act expeditiously to remedy past wrongs.

All New Zealand institutions are small by international standards, but the concentration of expertise on matters macroeconomic and financial (unparalleled anywhere else in New Zealand) and the Bank’s typically high standards in recruiting staff should enable the Bank to be at the forefront of engagement on the relevant policy and analytical issues, shaping the debate by the quality of the research and analysis, and unafraid to engage, including openly, with alternative perspectives.  Unfortunately, that has often not been the case in recent years.  We don’t think that is because the quality of the staff has deteriorated.  We note concerns that have been expressed in some quarters about the Governor’s apparent reluctance to participate in serious searching interviews.  Given the extensive powers the Governor wields, we think this choice has been unwise, and would encourage the Governor to adopt a more open approach.  Similarly, the Bank’s reputation for being highly obstructive in handling Official Information Act requests seems neither good policy consistent with the law, nor consistent with the approach to forward-looking transparency in monetary policy that the Bank has done so much to foster over the years.  Transparency can’t just involve telling people what the powerful want them to know.

In recognition of some of the weaknesses in how the Board has fulfilled its role in recent years, we have decided that it is time for a change of Chair. The Board will shortly elect a new Chair. In future we will aim to ensure that the role is not held by former Reserve Bank staff.

The Reserve Bank is a powerful and important organization in New Zealand.  But it has fallen short of what the public should expect from it in a number of major areas.  The Governor recognises this and has committed to work to lift performance over the remainder of his term.  We appreciate that.  As we move towards the appointment of a new Governor next year, we are committed to identifying candidates who would continue to lift the performance of the institution, producing the right blend of sound judgement, analytical excellence, operational efficiency, and a commitment to transparency and accountability and two-way engagement, of the sort the country deserves.

Rod Carr, Chair

Keith Taylor, Deputy Chair


As I say, I don’t expect to see even a substantive discussion of these issues in the Board’s actual report.  But time will tell.

In the meantime, while I’ve been writing this post and in and out this morning, responses from the Board and the Bank to several longstanding OIA requests about the OCR leak have turned up, on the very last day of the long extension the Bank gave itself.  I haven’t yet looked at the contents (now available here), but the lengthy delays just reinforce the point about the Bank’s lack of any serious commitment to institutional transparency.


10 thoughts on “What the Board might (but surely won’t) say

  1. One day you’re going to run into Graham Wheeler at Boulcott St Bistro and he’s going to bound over the tables and go you…


  2. Walked past him in the street a week or two ago – I think he saw me first, as he head was kept very low and I was only sure it was him when we’d passed each other.

    Technically, we still actually sit on the same committee – the trustees of the RB super scheme (he’s ex officio and I’m an elected member’s trustee), For better or worse, he doesn’t come to meetings.


  3. That would be fun and then he could resign.
    Ain’t the place just a typical old fashioned Govt. Dept. with no clear goals and no accountability.

    Don’t understand why key and English put up with it. Well I do, neither of them have any idea what it’s all about.

    How much difference a better set of goals and a better Governor would make.


    • Frankly I am of the opinion that Graeme Wheeler has performed far better than the previous 2 RBNZ governors, Don Brash and Alan Bollard.


  4. Other than an insane episode of raising interest rates when globally central bankers were dropping interest rates, Graeme Wheeler has done well in keeping a buoyant NZ economy sensibly growing and using macro prudential tools quite effectively. He certainly has done better than his predecessor, Alan Bollard who pushed interest rates to 10% decimating an entire building industry, which resulted in the collapse of 61 plus finance companies funding the building sector with the subsequent loss of $6 billion in investor savings driving a buoyant NZ economy into a deep recession.


    • Michael I think you were one of the key advisers that drove Alan Bollard into decimating the NZ economy with sky high interest rates and now pushing the blame onto migrants for NZ poor productivity performance. I would pin the blame largely on over hawkish and trigger happy interest rate rises that have decimated NZ industry and also sapped tge will of entrepreneurs to take on risk resulting in our industries being small and insular.


      • don’t know about “Key”, but yes I certainly sat on the advisory committtee over 2005-08 and consistently recommended the OCR increases that occurred during that period, and especially the last 100 bps in 2007. I still think that was the correct stance to have taken. Happy to debate it though. In a sense, the key point of my post was not that my particular assessmnent of Wheeler is right (although of course I happen to think it is) but that the Board should be producing reports the take seriously the alternative arguments and angles even if they eventually end up concluding that the RB has been doing fine.


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