On Tuesday Adrian Orr will take up the office of Governor of the Reserve Bank and thus become, for a time, the most powerful unelected person in New Zealand. In some respects he will in fact be more powerful than the Prime Minister, albeit over a much narrower range of functions, because it is much easier to oust a Prime Minister (see Tony Abbott and Kevin Rudd) or to vote her down in Cabinet than it is to constrain, or oust, a Governor.
It is a statutory requirement that a Policy Targets Agreement, governing the conduct of monetary policy, be agreed between the Minister of Finance and any person he is considering appointing as Governor before that person is appointed. It is less than ideal that, three days out from Orr taking office, 3.5 months on from the appointment being announced, there is still no Policy Targets Agreement. Have Treasury and the Minister lost sight of the merits of predictability and certainty, and the fact that markets (and individuals and firms) operate on a forward-looking basis? But, apparently, the PTA will finally be signed/released on Monday, just a day before Orr takes office. One can only hope that there will also be a pro-active release of the background papers relating to this major component of New Zealand macroeconomic policy. If not, I will immediately be lodging OIA requests.
We are also told that information on decisions the government has made about “the new decision-making structure at the Bank” and other material on Stage 1 of the review of the Act (focused on monetary policy) will be released on Monday. If the government has done the right thing, before too long Orr will be stripped of much of his personal power, to become primarily an agency chief executive, and perhaps primus inter pares on one or more committees. That would be a long overdue reform. Perhaps the Independent Expert Advisory Panel – which, thus far, has operated totally in secret – might open themselves to questioning? Perhaps too we might get some hints as to what Stage 2 of the review – content as yet undefined – will cover? You can expect there will be several posts on these issues next week.
As for Orr himself, only time and experience will tell what sort of job he will make of being Governor. Today’s Herald has what can only be described as a puff-piece profile – they managed preferential access to the previous Governor (notoriously media-shy), and presumably are targeting ongoing good relations more than serious scrutiny. After having had monetary policy a bit too tight for most of this decade, we can only hope that their cartoon – the new Governor appearing to keep money securely locked away – isn’t inadvertently prophetic.
There was another, rather more interesting, piece – from BusinessDesk – offering some thoughts from various economists on Orr taking up his new role.
Hawkesby likened Orr to UK politician Boris Johnson. “The stereotype of a central bank governor is someone whose communication is cautious, reserved and dry. Adrian is more like Boris, with communication that appears more spontaneous and witty,” he said.
TD’s Beacher warned, however, “there is the risk that his ‘good clear communicator’ reputation means he could make a poor choice of words on occasion when explaining the bank’s stance on policy settings.”
I greatly enjoy a good Boris Johnson newspaper or magazine column, but a comparison to Boris Johnson seems a backhanded compliment at best. My own thoughts on Orr, and some of the opportunities and risks were in these two posts – here and here.).
But the main prompt for this post was an interest.co.nz column from a day or two ago by my former Reserve Bank colleague, and now consultant on things to do with financial regulation, Geof Mortlock. That website often runs to long headings for their articles. This one is headed
Ex-RBNZ and APRA official, Geof Mortlock, argues the RBNZ’s regulation of the financial sector is so inadequate this responsibility should be passed on to a new agency
The article is well-worth reading for anyone interested in New Zealand financial system regulation and supervision, or in the governance and conduct of the Reserve Bank.
A few weeks ago I outlined the case (and here) for splitting the Reserve Bank in two, and shifting the regulatory and supervisory functions into a new agency, perhaps called the Prudential Regulatory Agency. Various other people have supported that sort of change, one senior business figure commenting that, if starting from scratch, structural separation would seem like a ‘no-brainer’. My case for that reform was summarised this way
In favour of that position is that:
- it is the more common model in advanced countries today (including Australia),
- the synergies and overlaps between the various functions of the Reserve Bank are pretty slight (and probably no greater than, say, those between fiscal and monetary policy),
- structural separation would allow for clearer lines of accountability, and
- structural separation would allow for the creation of stronger, more effective, cultures – with appropriately skilled chief executives – in each of the two successor institutions.
And so I welcome the fact that Geof Mortlock is also calling for structural separation
In my assessment, the best way to achieve the needed changes is to remove the financial regulation functions from the Reserve Bank and move them to a new, separate agency. I am sceptical of the willingness or ability of the Reserve Bank to change its cultural DNA. Moving financial regulation out of the central bank was done in Australia with great success. Likewise, this has been done in many other countries, such as Canada, Germany, Japan, Sweden and Switzerland.
At present, we don’t even know whether the government is open to considering this option – since nothing is yet identifiably included in the proposed Stage 2 of the review – but they should. It would be likely to make possible – although there are no guarantees – a better monetary policy agency and a better regulatory one.
The bulk of Mortlock’s artice is actually about the Reserve Bank’s conduct of its regulatory responsibilities. On some counts I strongly agree with him, and his observations and criticisms echo points I’ve made here on various occasions
The Reserve Bank’s approach to policy formulation and consultation on regulatory initiatives is deficient. Too often, the Bank has allowed far too short a period for affected parties to make submissions on regulatory proposals. All too often the Bank has often given the strong impression that it has little interest in the submissions it receives – i.e. that it is consulting for the sake of appearance and has no intention of modifying its approach in light of submissions. It generally provides inadequate responses to submissions and insufficient justifications for any decision to reject points raised in submissions. The argumentation for policy proposals is often poorly developed. Cost/benefit analysis is typically provided to justify the Reserve Bank’s preferred option, rather than being objectively and rigorously developed at an early stage in the policy formulation process. There is very little substantive independent assessment of the Reserve Bank’s cost/benefit analysis. In stark contrast, the Australian system provides for much more rigorous independent assessment of all regulatory proposals.
All of these deficiencies need to be rectified by imposing on the Reserve Bank much stricter requirements on consultation and cost/benefits analysis, and by bringing much stronger external scrutiny to the process. Similar arguments can be made for other regulatory agencies.
One could add that the Bank’s regulatory impact statements are typically a joke, with no independent internal or external review – and thus simply serving to provide support for whatver a particular Governor has chosen to do.
One could also add that the Reserve Bank remains highly averse to public scrutiny of its regulatory role, regularly falling back on statutory provisions – which themselves should be reviewed and refine – designed to protect commercially-confidential information obtained in the midst of a crisis, but used much more broadly than that. Thus, the Reserve Bank recently refused to release any of a consultant’s review of the director attestation regime – a central element in the prudential system. The utter lack of transparency around the Westpac capital models issue, or the stuff-up around the Kiwibank capital instrument are other examples. Perhaps more than some other government agencies, the Reserve Bank tends to treat the Official Information Act as a nuisance that really shouldn’t applied to them, rather than as an intrinsic part of our democratic system, and a normal part of being a government agency. The “but we are different” mindset is a hard one to break.
Quite a bit of the rest of the article – on the Reserve Bank’s regulation/supervision activities and rules – I disagree with. It is nearer territory Geof spent has most of his time on than it is for me. Then again, Geof has been a regulator for a long time, and appears to make his living in part from providing advice on fitting in with international frameworks and standards. Of itself, that doesn’t invalidate his views, but it is worth remembering the old maxim that
I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.
And there isn’t much sign of any cost-benefit analysis in his proposals for spending quite a lot more money (or so it would appear) on these functions. I’m certainly sceptical of governments and bureaucrats wanting to spend more of our money on ‘financial literacy’ (as Geof suggests). ‘Physician heal thyself’ comes to mind – as Geof notes, the Reserve Bank will not even produce decent cost-benefit analyses for most of what it imposes on us.
I don’t doubt that the Reserve Bank could do some things quite a bit better – process and culture included. I have also argued for removing some of the regulatory powers back to the Minister of Finance, and for more standardisation of the regime applying to all deposit-takers. But I’m more sceptical that even more supervision is likely to be the answer to anything much. A fair chunk of the global enthusiasm for more regulation, more supervision, over the last decade has been about backside-covering by politicians and regulatory agency officials after the crisis of 2008/09, with little attention to the inevitable limitations of regulation/supervision, including the incentives and constraints that face officials in regulatory agencies. Action was demanded, and action was delivered, but the analytical basis for much of that action was often thin, and not well-grounded in serious sceptical scrutiny of the causes of the crisis.
And it is perhaps worth bearing in mind that New Zealand’s track record of financial stability has been pretty good. Geof argues that
The Reserve Bank is also not well placed to proactively identify and resolve emerging problems before they become obvious or the financial institution is about to fail. The recent failure of CBL Insurance is an example of this. In earlier years, the Reserve Bank was slow to detect and respond to problems in DFC (which failed in 1989) and BNZ (which came close to failing in 1990).
I‘m not sure this is very persuasive. On the one hand it is worth bearing in mind that it appears the Reserve Bank was onto the CBL problems well before the market was – including bankers lending CBL new money – and the DFC/BNZ failures were almost 30 years ago, under different legislation in the earliest days of the Bank having any prudential responsibilities and in the immediate aftermath of far-reaching financial liberalisation (followed by booms and failures in various other countries including Australia and the Nordics). And on the other hand, we could note the crises and failures/near-failures (of regulated institutions or indeed the system) of the last decade in countries as various as the United States, United Kingdom, Switzerland, Denmark, Belgium, Netherlands, France, Greece, Italy, Spain, Ireland and so on. In many of those countries, the IMF had previously provided a tick in its FSAP reviews. Several of those countries will have – and did – prided themselves on their regulatory agencies, on-site or in-depth detailed scrutiny and all. Neither New Zealand nor Australia (nor Canada, nor Norway for that matter) ran into such problems. APRA may like to flatter itself that Australia‘s avoidance of crisis was down to their fine supervision – I’ve heard senior people run that line – and that New Zealand, free-riding on fine Australian supervision, was in the same boat. My response to that claim would be, at best, ‘case not proven’.
It is also worth bearing in mind that the Reserve Bank isn’t the principal in this business, but the agent. It hasn’t been – and isn’t – funded for more intensive regulation and supervision, and that is a choice successive Ministers of Finance – advised by Treasury over the years – have made. In a sense, the Reserve Bank has done what Parliament – and Ministers – asked it to do, and in that sense that question isn’t just about the Reserve Bank’s competence and capability but about choices our political system makes regarding the intensity of regulation.
All that said, if we might differ in emphasis, and in our confidence as to what value regulators and supervisors can add, we seem to be at one in favouring structural separation. A good part of the case for such a reform is the ability to build a culture dedicated to doing excellently, and only, the regulatory and supervisory functions Parliament delegates to the Bank. It is telling that, for a function that now bulks so large in the Reserve Bank‘s mandate, recent Reserve Bank Governors have had little background in banking or of financial system regulation (certainly true of Bollard and Wheeler, and to a lesser extent for Adrian Orr). At best, financial regulation and supervision is a part-time focus for the Governor. And the new Head of Financial Stability – an appointment made by Graeme Wheeler as he was leaving, without advertising the position – has no background in those areas at all. We can and should do better. That ball – structural reform and separation – is now clearly in the Minister of Finance‘s court.