Applications for the job of Governor of the Reserve Bank closed this morning.
As I’ve noted before it is a very odd business:
- applicants don’t really know what job they are applying for (since Labour and Greens are promising material changes in the monetary policy decisionmaking model, and in the Bank’s statutory objectives, and the Rennie review may yet foreshadow changes by the current government),
- the Board, charged with evaluating and recommending a candidate to the incoming Minister of Finance, also has no real idea what the job is. The emphases of a Labour/New Zealand First government (say) would probably be rather different than those of a National-ACT government.
And yet, with still 2.5 months until the election, the Board will shortly settle down with their recruitment consultants to winnow down the list of applicants. And this is a Board entirely appointed by the current government, and although the individual Board members may each be quite capable they are likely to be a different bunch of people, with different inclinations and preferences, than a Board appointed by a Labour-led government would have been. Of course, elections have consequences – governments get to appoint sympathetic people to the (too) numerous goverment bodies – but it isn’t obvious why, if this year’s election leads to a change of government, the last election should so strongly influence the sort of person likely to be presented to the incoming Minister of Finance as the nomineee for Governor.
Board members have neither legitimacy nor expertise. They aren’t elected, don’t front up to select committees or the media, don’t even maintain proper records (as required by law), and can’t be tossed out by voters if they do a poor job. In other countries, almost every country I’m aware of, the Governor of the central bank is appointed by the Minister of Finance (or some other elected person – eg the President in the US). And in most countries, the Governor of the central bank has much less power than our Governor has.
In our system in particular, the Governor is a really consequential appointment. The Governor is the sole legal decisionmaker on monetary policy and most aspects of banking regulation (as well as numerous other less important things the Bank is responsible for). He – and it most probably will be a he – alone gets to decide how aggressively the Bank should respond to economic downturns, or how closely it adheres to the Policy Targets. He gets to decide how well-positioned New Zealand is for the next recession. He gets to decide whether banks are even allowed to lend to you by residential mortgage. He could, if he chose, stake billions of taxpayers’ money on interventions in the foreign exchange markets, and if the bet goes wrong we – not he – lives with the consequences. There is a gaping democratic deficit – too much power in one person’s hands – but is made worse by the fact that elected politicians (whom we can hold to account) can’t appoint someone in whom they have confidence to exercise these powers. They must take a name handed to them by a bunch of company directors and the like appointed by the previous government. The Minister can knock back any particular Board nominee, but in the end the Minister can only appoint someone that Board nominates. And he can’t even easily replace the Board at short notice.
So who are these enormously influential members of the Board? One member’s term expires in a week or so, and apparently he won’t be replaced until after the election. That leaves six of them.
The chair is now Neil Quigley, vice-chancellor of Waikato University. These days, Neil is an academic administrator, but earlier in his career he had a research background in banking regulation, financial history etc.
The vice-chair is Kerrin Vautier, a microeconomist by background, who has also been a company director and is a lay member of the High Court (under the Commerce Act).
The other four include two private sector company directors (one of whom is a director of an insurance company, even though the Reserve Bank regulates insurance companies), one lawyer, and one member whose roles seem to be mainly government appointments and not-for-profit positions.
I don’t want to be too critical of them as individuals. I know, and have worked with, three of them at various times, and they are each able people. But none of the six individually – or the group collectively – really seem to have the skills for making such a crucial public appointment. They are not subject experts and have no expert advisers – and yet they must presumably evaluate applicants’ monetary policy or regulatory inclinations/expertise – nor do they bear the downside if they make a poor recommendation. They also have no experience in high profile public roles. Ministers of Finance also typically aren’t experts, but (a) they have an entire Treasury to assist, and (b) they do bear the downside, since the public (reasonably enough) tend to hold elected politicians to account for the failures of public agencies.
The process is so flawed that I’ve argue before, and repeat the point today, that the Opposition parties really should indicate that, if elected, they will change the law to allow the Governor to be appointed simply by the Cabinet on the recommendation of the Minister of Finance, as is done in most other countries (perhaps with advisory quasi-confirmation hearings by a parliamentary committee). Not only would it make our system more democratically legitimate and internationally comparable, it would also put the Board in a better position to monitor and hold to account whoever is appointed as Governor. They’d have no incentive to simply back their own appointee, but could simply do the monitoring job – on whoever the Minister appointed – as agent for the Minister and the public.
But for now, the system is as it is, and has its own momentum. As the Board prepares for its next meeting on 20 July, they really need to start by thinking hard about:
- what the nature of the job really is, and
- about the outgoing Governor’s stewardship of the role during the last five years (especially bearing in mind that many of the current Board were responsible for Wheeler’s appointment).
It isn’t obvious the Board has really been doing the second with much energy at all. I’ve written previously about their Annual Reports, which never seem to have found any cause for concern about anything, functioning more as additional legs in the Bank’s own public communications efforts. The year just ended is the first in which the new chair, Neil Quigley, has led the Board. Perhaps this year’s report will be a bit different and a bit more open but it is difficult to be very optimistic. This is, after all, the same Board who defended the Governor over the OCR leak debacle, expressed no concern even after the event at the ill-fated 2014 tightening cycle, and so far have been totally silent about Graeme Wheeler’s highly inappropriate sustained attempts, including use of his senior managers, to attempt to censor a private sector critic.
When the advert for the Governor’s role first appeared, I wrote a bit about some of the surprising features of what they were asking for in their advert. If there are governance system changes in the period ahead the Governor’s role may change, but at present it seems that there are three broad aspects to the role:
- chief executive of an organisation with a large (but typically low risk) balance sheet, and a staff with significant policy, analysis and operational responsibilities,
- the sole legal decisionmaker on all aspects of monetary policy, most aspects of banking regulation, and personally responsible for the Bank’s policy advice and actions in other areas,
- a key crisis manager, and
- the public face of an organisation whose choices at times bear heavily on the short-term performance of the New Zealand economy.
Under current law, those are features of the role at any time. But in the current situation, there is the additional challenge of rebuilding the Bank’s capability and reputation after the Wheeler years. Monetary policy hasn’t been well-handled. Banking regulation appears to frustrate the banks (more than the inevitable tension between regulator and regulated). No one now seriously looks to the Reserve Bank for “thought leadership” in the areas of its responsibility. And, for all that the Bank likes to claim to be very open and engaged, it is perhaps akin to (say) a Singapore-government style of openness, that chooses tame interlocutors and just ignores alternative perspectives or, say, journalists who might ask hard questions. There is a great deal of rebuilding to be done, and a good Governor over the next few years – particularly with the prospect of legislative change – needs to have qualities that will enable him or her not just to steward an organisation in good heart, but to lead organisational change and revitalisation.
With so much policymaking power personalised in the Governor’s hands, it is difficult to see how the right appointee won’t need to have a significant amount of directly relevant professional expertise. Of course, monetary policy is very different from banking and insurance regulation, and quite possibly no serious candidate is particularly strong in both fields. And on the financial sector side, it is important to recognise that this is a regulatory role – some of my friends differ on this, but the Reserve Bank (despite the name) isn’t primarily a bank, even though it needs to understand banking to regulate it effectively.
Each of the three Governors under the current law has had an economics background. None was necessarily strong in the key technical dimensions (and of the three, only Don Brash had any prior experience in the public eye). Ideally, we would find someone better aligned to the role (as, say, the last three Governors of the Reserve Bank of Australia have been), but there may not be such a candidate. Really successful organisations are usually able to promote from within – again the Australian experience – but unfortunately the Reserve Bank here has been quite weak on developing people with the relevant senior experience (Grant Spencer has been both chief economist and head of financial stability, but he is retiring).
But if the appointee needs to have some significant professional expertise in the Bank’s areas of responsibility – it might be different if the Governor was primarily CEO and just one voting member among five or seven on relevant committees – technical expertise is far from all that matters. As I noted in the earlier post, I was surprised the Board made no mention of character and judgement – qualities that can take someone a long way, especially when times get tough and the Governor is under pressure. Earlier in the year I wrote
For me, I’d settle for someone with the character, energy and judgement, backed up a solid underpinning of professional expertise, to revitalise the institution, rebuild confidence in it, and provide a steady hand on the policy levers, backed by high quality analysis and an openness to alternative perspectives, through both the mundane periods and the (hopefully rare) crises. And all that combined with a fit sense of the limitations of what monetary policy and banking regulation/supervision can and should do
That still seems right.
Who might it be? Back in February, shortly after Graeme Wheeler announced that he would be leaving, I noted
the lists of people talked about as potential candidates as Governor, be it Geoff Bascand or Adrian Orr (probably the names at the top of most lists) or others – Rod Carr, John McDermott, Murray Sherwin, David Archer, Arthur Grimes, New Zealanders running economic advisory firms, New Zealanders who are past or present bank CEOs here or abroad etc
They still seem the most likely sort of people. For reasons I’ve outlined before I don’t think it would be at all appropriate, let alone politically feasible, to appoint a foreigner as Governor, wielding all the power that position holds at present. One foreign member of (say) a five or seven person Monetary Policy Committee or Financial Policy Committee might make sense at times. But under our current law the Governor wields at least as much power as a typical Cabinet minister, and we require our Cabinet ministers to be New Zealanders.
When people occasionally ask me who I think will get the job, I usually note that Geoff Bascand must have the inside running. He is a competent economist (albeit not mainly in macro or financial areas), knows his way around the bureaucracy, and has outside chief executive experience. He has a number of downsides, including lack of any financial sector (or related regulatory experience), but appears to have been actively promoted by the current Governor (which perhaps should be a negative, but may not be). The Board gets to see him every month. A competent internal deputy is always likely to have the inside running.
I’ve heard that there is talk around Wellington that one of the CEOs of the Australian banks might be in line for the job, and Ian Narev’s name (head of CBA, parent of ASB) has been specifically mentioned. At present, three of the group CEOs of the Australia banks are New Zealanders (one was apparently even a bank economist early in his career). One can’t rule out the possibility completely, but none of these guys has any experience with monetary policy, nor any of being a regulator. And they are used to running vast organisations, not ones of 250 staff. You have to wonder whether a left-wing government – perhaps especially one including Winston Peters – would really be comfortable handing control of our monetary and banking system to the very wealthy CEO of an Australian bank (Narev for example took home A$12.3 million last year). And, of course, if one were a shareholder of an Australian bank mightn’t the fact that the chief executive was looking to get out, applying for another job, be information that you might regard as material, warranting disclosure? It seems a more plausible option if, say, the Minister could just directly appoint someone in whom they had confidence, rather than going through a drawn-out application process.
Of the people on that list, David Archer probably now isn’t widely known in New Zealand. He holds a senior position at the Bank for International Settlements (club for central banks) but was formerly Assistant Governor and Head of Economics, and prior to that Head of Financial Markets, at the Reserve Bank. He and Alan Bollard didn’t really get on, and David went overseas in 2004. David would bring drive, energy, curiosity, openness, and high intellect. On the other hand, he has been out of New Zealand for a long time now, and that does have hard-to-pin-down disadvantages. He also doesn’t have any real experience with financial regulation – in fact, in times past was a champion of a fairly minimalist approach (and whatever the merits of those arguments, they bear no relation to current NZ law). He also has – or had – a style that works very well with some (the intellectually self-confident, perhaps even combative) but not necessarily with others.
Rod Carr remains an interesting possibility. He was Deputy Governor for five years, and missed out on becoming Governor when Don Brash left. He has direct banking experience (albeit 20 years ago). He has also been a Reserve Bank Board member for the last five years, but was apparently ousted as chair by the other Board members last year. Perhaps he will apply for Governor. But in the various Board minutes that have been released to me in recent months, there is no sign that Carr absented himself from discussions around the process leading towards advertising for and selecting a new Governor. Had he been planning to apply, to have absented himself (and documented that absence) would have seemed appropriate conduct.
Time will tell. My main point is that it is a terrible way to select a person for the most powerful unelected role in New Zealand:
- the wrong sort of people dominate the process (in principle)
- in practice, the current Board has done a poor job, and doesn’t look well-placed to find a good replacement Governor, and
- the timing is weird
At very least, the Board should have left applications open until the election result is clear. That much was in the Board’s own hands. Political leaders should have taken back to themselves the power to make (directly) such a vital appointment, as is done in other countries. There is still time.
(And, of course, far-reaching governance reform is overdue. Ideally, the Minister would be looking for someone to oversee and implement a transition to a new model.)
It is now the school holidays. Posts over the next couple of weeks will be quite sparse.