The Rennie report finally sees the light

Almost a year ago now, the former Minister of Finance Steven Joyce asked The Treasury to commission some advice on possible changes to the governance of the Reserve Bank.  We only found this out a couple of months later, and then only when hints of a review seeped out prompting a journalist to put the direct question to the then Minister.  It turned out that Iain Rennie, former State Services Commissioner (and before that former senior Treasury official) had been commissioned to write the report –  indeed, by the time we learned of the commission, Rennie had already largely completed his work.

All along the way, The Treasury has been incredibly obstructive about the review.   The terms of reference have never been released.    They eventually told us (some of) the people Rennie had talked to, and the names of the peer reviewers Treasury had used but refused to release drafts of the reports, comments made by reviewers, or the finished report itself.   They even took to arguing that it had all been Treasury’s idea, and that the report was just to inform Treasury’s own post-election advice, as if Steven Joyce had never been any part of the story.    Frankly, it was a pretty gross case of flouting the Official Information Act –  for what was, when all boiled down, a private consultant’s report, paid for with public money, on matters of organisational design and goverance of a single government agency.

But yesterday The Treasury finally (and quietly) released the report itself, along with comments from the peer reviewers (on an earlier version, itself still secret), some advice on the report from Treasury to the (new) Minister of Finance, and some recent comments from the Reserve Bank on the contents of the Rennie report (all available here).   I appreciate the pro-activity of The Treasury in at least letting me know that the report was now, belatedly, available.    The material is all now presented as background material for the current two-stage review of the Reserve Bank Act, including the contribution of the Independent Expert Advisory Panel.

The Rennie report itself is here.  It isn’t a bad report –  in fact, for a fairly short report done quite quickly, it is a bit better than I had come to expect.   In some respects, the details don’t matter that much –  it is just one person’s view (having consulted not very widely, and mostly with people inside the central bank “club”), and his report has been superseded by the wider review Grant Robertson has commissioned.  Rennie’s report will be just one input to that mix.

Then again, Rennie had been the State Services Commissioner.  And he’d been the Treasury Deputy Secretary responsible for things to do with macro policy and the Reserve Bank (at the time of the last major review, with Lars Svensson, at which time Treasury had opposed any change in the governance and decisionmaking model).

And Rennie is quite clear that:

  • the current single decisionmaker model is far from best practice, whether considered relative to other central banks/ financial regulatory agencies, or relative to the governance of other New Zealand public sector entities,
  • a single committee is not a sensible solution.  Rennie, in fact, ends up favouring three separate committees (a model very similar to the one used now in the United Kingdom –  one for monetary policy, one for (so-called) micro-prudential policy, and one for (so-called) macro-prudential policy),
  • an internal executive committee (or even several of them) is not an appropriate solution.  External, non-executive, members should be involved,
  • the Minister of Finance should have primary responsibility for the appointment of all the members of the decisionmaking committees, given that the committees exercise significant statutory powers.

And on monetary policy he favours a materially greater degree of transparency than exists at present, including favouring (on-balance) the individualistic model –  as, for example, in the US, the UK and Sweden –  where individual members are individually accountable for their advice and their votes.    Existing Reserve Bank management hates –  I don’t think that is too strong a word –  that model: they hated it when I was still at the Bank, and in recent months they have gone public with their intense dislike of it.

There are lots of other details in the report, some of which I strongly agree with (eg the Policy Targets Agreement shouldn’t be tied to the appointment of the Governor, and if the Board is to be retained as a monitoring agency, it needs some resources of its own, and the Governor himself should not be a member), and others of which I’m more sceptical of (eg the proposed role of the State Services Commission in advice on the selection of the Governor and Deputy Governors, or the idea of devising a –  meaningful –  formal charter for the prudential committees).   One of the peer reviewers –  my former colleague David Archer –  is keen on a greater formal role for Parliament in the appointments, something I’m sceptical of (it just isn’t our constitutional system).  But I would probably favour emulating one aspect of the UK system Rennie doesn’t really touch on: hearings by Parliament’s Finance and Expenditure Committee in which nominees to the various committees can be scrutinised by MPs (and reported on), although not a binding confirmation vote (as in the US).

There are also limitations to the Rennie report.   For example, he treats the current assignment of powers to the Reserve Bank as given (perhaps this was inevitable in what he was asked for, but isn’t a limitation of the current review), a particular issue in the area of financial regulation and supervision.   There also isn’t much richness to his treatment of other countries’ models –  and it remains surprising that he made no effort to engage with Lars Svensson, who was not only a former reviewer of the New Zealand system, but a former practitioner (member of the Swedish monetary policy committee) in the sort of system (open contest of ideas) Reserve Bank management hates.  And perhaps partly because Rennie seems only to have talked to insiders –  eg there was three pages of (totally withheld) material in the Reserve Bank Board minutes on his meeting with them, and no attempt at open consultation –  there is no serious attempt to evaluate how effectively (or otherwise) the Board model has worked over the years.

What of the Treasury’s comments on Rennie?  Their report is short and is mostly a summary of Rennie’s recommendation.  But it was good to see this observation

“we are strongly of the view that a committee decision-making model should be codified in the Reserve Bank Act, and agree that there should be multiple committtees which include external experts”

In the first stage of the current review the government has only committed to a committee, with externals, for monetary policy.  I hope Treasury sticks to its guns, and persuades the Minister of Finance that better governance and decisionmaking on the financial regulation side of things is at least as important, and needs it own statutory reforms.    As even Rennie noted, there is –  for example –  a stark contrast between the governance of the other main financial regulatory –  the FMA –  and that of the Reserve Bank.  In the former, a non-executive Board (all appointed directly by the Minister) has overall responsibility for the organisation and the exercise of its powers, with some specific powers being delegated the Board to the chief executive and staff.  That is a much more conventional, and defensible, model than the Reserve Bank model in which all the power is held by the Governor personally.    And the Reserve Bank exercises a much greater degree of discretion over policy itself –  especially as regards banks –  than the FMA does (where big picture policy is mostly set by the Minister on the advice of MBIE).

As I noted, in yesterday’s release there was also a short note by the Reserve Bank commenting on the Rennie report.  Even though the report was completed months ago, this note is dated 11 December, and is prepared for the Independent Expert Advisory Panel assisting the Treasury-led phase one of the current review of the Reserve Bank Act.  Presumably there are rather more substantive comments, which the Bank is keeping secret –  along with all the extensive background work  (Rennie mentions it) done a few years ago on these issues, which the Bank has previously refused to disclose.

The Reserve Bank does not like the Rennie report at all.

we believe that much of the analysis underpinning the report was insufficient, and consequently the conclusions of the report are unreliable, or would require considerable further analysis.

“Sniffily dismissive” was my own summary of the Reserve Bank’s reaction.

In hand-waving mode, the Bank loftily notes

The Report does not define the nature of the problem it is seeking to address and needs a clearer analysis of the current decision-making framework and why it needs amending. In proposing a particular set of changes to the decision-making framework, the Report fails to provide options and does not demonstrate why the particular changes proposed would result in better policy decisions for monetary or financial policy in New Zealand.

You might suppose that having a decisionmaking and governance model designed thirty years ago when

(a) few central banks had updated their laws in these areas for a long time,

(b) our own laws and practices for governing Crown entities had not really been updated,

(c) the prevailing conception in New Zealand was that monetary policy was simple, and that it would be easy to hold a single decisionmaker to account,

(d) when financial regulation was conceived as a small and largely passive part of what the Reserve Bank did and

(e) when open government was still a pretty new concept, largely unknown to central banks and related regulatory agencies

was sufficient grounds for a serious review, and the probability that better models could be designed.   One might be strengthened in that view if one was aware that (as Rennie notes) no central bank has shifted from a committee-based decisionmaking to a single decisionmaker model for monetary policy, or was aware that no other significant regulatory body in New Zealand was governed the way the Reserve Bank is.

Had a five person Commission spent a year on the report, no doubt there would have been a lot more richness to the background material.  But the case for change has come to be pretty widely accepted already, and even the Reserve Bank gives the game away by conceding that committee-based decisionmaking is generally better than that of a single individual.  Once they conceded that –  and they could hardly do otherwise –  much of the rest of the issue is about detail.

But it doesn’t stop the Bank attempting to distract the Independent Expert Panel.

The Report makes no attempt to document the processes that the Bank actually uses to support its decision-making, beyond the high level parameters established by the Act. Nor does The Report attempt to evaluate the mechanisms that the Bank currently has in place to help ensure that its decision-makers confront a broad range of policy perspectives, including a wide range of views of those outside the Bank. There is, for example, no mention of the role of the broader group of MPC members in providing policy advice to the Governing Committee, the use of external advisers on the MPC, the Bank’s programme of business and financial sector liaison, its active public outreach programme, or its participation in the international financial and economic community. These are all ways in which the Bank considers a diversity of external views and perspectives ahead of its monetary policy decisions.

But so what?   All central banks do this sort of stuff in one form or another, and yet almost all of them also have the respective country’s Parliament specify a statutory committee as the basis for monetary policy decisions.  And if it is good enough for the Governor to invite a couple of outsiders into his second-ring of advisers (these days: it was the first tier when the system was established) why shouldn’t Parliament mandate the involvement of external members?   Moreover, the case for reform has rarely been about the problems with an individual Governor, but about a core principle of institutional design –  resilience.  We don’t want a system that works adequately only when a decent Governor is in place, but when that is resilient to bad choices and bad individual appointees (because in human systems there will be some of those).

I don’t disagree with all the Bank’s comments.  They oppose establishing two separate statutory committees for the different aspects of prudential policy, and I agree with them on that (apart from anything else, the whole thrust of bank supervision –  in particular-  is systemic in nature).

Rennie’s report recommended leaving the precise composition of statutory committees as a matter for negotiation through time.  I think that is wrong.  That balance is sufficiently important that it should be specificed in legislation (as, I understand it, is the near-universal practice abroad).   The Reserve Bank is clearly opposed to any suggestion that external members should out-number internal or executive members.

There is a strong argument that external members should not be able to out-vote the internal members if the latter are in agreement. Such an occurrence could severely undermine the influence of the Governors and the credibility of the institution.

I disagree, and was pleased to see that external reviewer Archer took the same view.  He argued  –  noting that the “probability of groupthink increases with the presence of hierarchy”  –  that “the law should restrict the proportion of executive insiders to below half by a big enough margin that these tendencies have a chance to be offset.

On the Reserve Bank’s argument:

  • if the Reserve Bank insiders, with all the resources and professional expertise at their disposal, can’t persuade enough outsiders to their point of view, it suggests they haven’t got a particularly compelling case (and may in turn struggle to convince outsiders),
  • if the system is set up with, say a 4:3 mix of outsiders and internals, it is explicitly designed by Parliament not to make the Governor a dominant figure (let alone any deputies).  The Governor and Deputy Governors have important executive roles in the management of the institution (generating advice and research, implementing decisions etc) and there should be no automatic presumption that the holders of those offices should play the key role in deciding the OCR outcome,
  • other countries have managed situations in which the Governor has been outvoted, without undermining the institution, and finally
  • even if there were such concerns, the Governor (and other executive staff) always have the option of voting tactically, such that there is no a straight insider/outsider split.  In a number of overseas models, the Governor chooses to vote last.

Perhaps anecdotes aren’t worth much, but it is worth recalling that the senior managers of the Wheeler bank were unanimous in their support of the 2014 tightening cycle.  And wrong.   Groupthink among internals is one of the problems reforms should be trying to overcome.

The Reserve Bank is also pushing back against Rennie’s proposal that all members of the decisionmaking committees (all three of them in his case) should be appointed by the Minister of Finance.

As in any other senior management context, it is essential that the Governor has confidence in his or her senior staff. There are few examples where a Chief Executive has no input into the selection of the senior management team.   It is also surprising that the Report does not confront the dangers that could arise in a system where appointments to the Policy Committees were made by the Minister of Finance. While the Report’s recommendation appears to be made largely on the grounds of ensuring decision-makers have democratic legitimacy (as per the discussion in para 102), the potential risks of political appointments are not considered.

The first of those arguments might look superficially plausible, at least in a corporate context.  But this is a situation where people are exercising considerable statutory powers.  And in central banks it is not at all uncommon for senior figures (often “deputy governors”) to be appointed directly  by Ministers with no formal role for the Governor in that decision (in practice, no doubt there is often consultation).   That is the way things work at the Reserve Bank of Australia (although the Governor then gets to appoint all the actual department heads, which seems appropriate), and at the Bank of England (for deputy governors), and at the Federal Reserve, and at the ECB.  It is pretty much the norm in fact.     Things are different in more conventional models like the Financial Markets Authority, where power vests with the Board, not with management (even the CEO, let alone his/her deputies).

As for the second argument, yes of course there are risks with political appointments.  There are risks with democracy in fact.  But if the Reserve Bank criticises Rennie for not covering that issue in great depth –  he touches on it, and to some extent takes it for granted –  the Bank itself never acknowledges that direct political appointment is the norm in other countries, and seems to work.  Certainly, they cite no evidence suggesting that the New Zealand system has produced superior results to those abroad.  As it happens, Rennie does touch on and speaks favourably of consultation by the government with other political parties for some of these appointments (as is apparently required  by the NZ Superannuation Fund board).

The final Reserve Bank concern that I want to touch on today is the one that seems to concern them a lot: the idea (endorsed by Rennie) that individual members of the statutory Monetary Policy Committee should be individually accountable for their views: that votes, and views, should be minuted and disclosed, and that individual members should be able to openly voice their views (in, eg, speeches or interviews).     It is pretty much exactly the model that has been used in the UK, the USA, and Sweden for quite a long time now.

But here is the Bank.

The proposition that members of the monetary policy committee would be able (and expected) to highlight their individual policy views in public is problematic. While this approach is clearly adopted in some countries (notably the UK, US), we believe such an approach could be destabilising in a small open economy like New Zealand. Any perception of a rift between committee members would be likely to add unhelpful noise to the communication of policy as well as inviting outside lobbying around particular views. There are more constructive ways of conveying divergent viewpoints and the balance of risks around monetary policy decisions.

Neither here nor previously has the Bank –  Spencer, Bascand, McDermott, the existing senior management –  ever sought to clearly articulate what it is about the model used in other countries that would not work well here.   I gather they aren’t even able to do so effectively in private and they floundered in an earlier press conference when they tackled the topic.

What makes New Zealand so different from, say, Sweden –  another “small open economy” –  or in these respects different from the US or the UK (UK economists often like to claim it too is a small open economy)?    The Bank makes no effort to tell us.    They never grapple with notions of open government –  as Rennie notes, the principles of the Official Information Act bias towards openness –  but perhaps as importantly they never really grapple with the huge uncertainties that face monetary policymakers everywhere and always.  Differences of view among policymakers shouldn’t be seen as problematic –  and they don’t seem to create great problems in other countries –  but as, if anything, reassuring.  Groupthink is one of the perils of any institution, and it is perhaps particularly risky where so little of the relevant future is known with any confidence.

Here is David Archer –  former chief economist of the Bank, and now head of central bank studies at the BIS.

Apparent unanimity is quickly shown to be untrustworthy spin. The essential reason is that the future is largely unknowable, and it is foolish to pretend otherwise. Consider the records of the few central banks – including the RBNZ – that publish forward policy interest rate paths. Forecast paths are almost always poor predictors of reality, even in the RBNZ case where unanimity about the outlook exists by construction. Being honest about the limited predictive powers of even highly paid specialists is likely eventually to increase their trustworthiness, at least relative to the results of repeated false marketing
of ostensible consensus.

I’d agree with every word of that.  He argues for timely release of good and transparent minutes, which reflect the individual differences of view.

I don’t like to think that the existing management of the Bank are just trying to protect their own position –  although bureaucrats will tend to protect themselves and their bureau, often to the detriment of the public –  but without a more robust articulation of their specific concerns, grounded in the international experience, it is hard to conclude otherwise.    Policymaking is typically better for dialogue, debate, and challenge –  inside the institution, outside in, and across the boundaries between the two.    Where there is so much uncertainty, and no institutional monopolies on wisdom or knowledge, it is perhaps as important in these functions as in any other areas of government.  It might not be comfortable for the bureaucrats, but that isn’t the goal of policy or institutional design.  And excellent officials –  as excellent outsiders –  should thrive on the opportunities that open and transparent contest of ideas and analysis throws up.

For now, I urge Treasury and the Independent Expert Advisory Panel –  not a group of individuals I have huge confidence in –  to reject the Bank’s apparently self-serving arguments, and to make recommendations that would lead to the redevelopment of a leading open, transparent and accountable central bank.