Don’t legislate depositor preference

The government has underway a fairly comprehensive review of the Reserve Bank Act.  The first phase –  around monetary policy –  was pretty narrow in scope, rushed, and has resulted in not very good provisions now about to be legislated by Parliament.  I was always a bit sceptical about Phase 2, partly because of the way Phase 1 was handled and partly because the Minister of Finance had never displayed any particular interest in the issues.

But, for the moment anyway, I’m willing to revise my judgement.  Earlier last month a 100 page consultative document was released, the first of three as the Treasury and the Bank (aided by a somewhat questionable, secretive, independent advisory panel) work their way through the numerous issues involved in overhauling the Reserve Bank legislation and institutional design.

Yesterday, I attended a consultative meeting at The Treasury on the issues in the current document.  It was an interesting group of people and quite a good discussion, although even 2.5 hours is barely enough to do much more than scratch the surface on the wide range of issues in the document –  everything from the role of the Board to regulatory perimeter issues (including whether banks and non-bank deposit-takers should be subject to the same regulatory regime – most people seemed to think so).  Truly keen people can spend their summer preparing written submissions (due in late January).

What was striking –  part of what leads me to provisionally revise my view –  is just how much official resource is being put into this one review.  At yesterday’s meeting there were six members of the review team, and that wasn’t all of them –  and even they only report to their masters in the Reserve Bank and Treasury, many of whom will probably engage quite extensively on the issues. And the process has at least another year to run.  Despite having long championed the cause of reforming the Reserve Bank, I couldn’t help wishing that the same level of resource was being devoted to getting to the bottom of the causes, and compelling remedies, for New Zealand’s astonishingly poor long-term productivity performance.    There is little sign The Treasury has any resources devoted to that issue, the one that has the potential to make a huge difference to the lives of all New Zealanders.

But in this post I wanted to touch on just one specific issue that came up yesterday which surprised quite a bit and worried me quite a lot.   Chapter 4 of the document is devoted to the question of “Should there be depositor protection in New Zealand?”.  Of course, to the extent it adds in value at all, prudential regulation does help the position of depositors (reducing the probability of failure, and limiting the potential chaos if a major failure happens), but New Zealand’s legislation is unusual in that there is no explicit depositor protection mandate (the legislative goals are about the financial system, not individual institutions or their creditors).  Linked to that, we are now very unusual among advanced economies in having no system of deposit insurance.

I wrote about some of these issues, in response to a journalist’s queries, when the consultative document first came out.  But my focus then was on deposit insurance, and in particular on the realpolitik case I see for instituting deposit insurance, to give us the best chance that when a bank gets into serious trouble it will be allowed to fail, and its wholesale creditors –  the ones who really should know what they are doing –  can be allowed to lose their money.   Without deposit insurance, my view is that big banks will always be bailed out.  Perhaps they will even with deposit insurance, but by separating the interests of retail creditors from others, at least political options are opened.

But in focusing on deposit insurance, one thing I hadn’t really noticed in the chapter was the idea of providing depositors with additional protection by legislating depositor preference.  Depositor claims on the assets of a bank rank ahead of those of any other creditors.   Such a provision exists in the Australian legislation –  for Australian depositors.  It was a big part of the reason why New Zealand eventually insisted that Westpac’s retail business in New Zealand be locally incorporated (ie conducted through a New Zealand subsidiary).

To the extent I’d noticed the discussion of the depositor preference option, I’d assumed it was a bit of a straw man, there for completeness perhaps.  Surely, I thought, no one would seriously suggest that New Zealand adopt such a legislative preference.   But, going by the discussion at yesterday’s meeting, it seemed I was wrong and that officials are actually seriously considering this option.   They seem to see it as a complement to a deposit insurance scheme.  I think it would be quite wrongheaded.

In my incomprehension, I asked why  –  starting with a clean sheet of paper – anyone would think legislated depositor preference was a sensible route to consider.  The response seemed to be that it would be a way of reducing the cost of deposit insurance, and increasing the credibility of a deposit insurance scheme.  Both seem weak arguments, especially in the New Zealand context.

One argument sometimes advanced against deposit insurance is that in the event of a systemic financial crisis the cost could be so overwhelming that it would either over-burden public debt, potentially triggering a fiscal crisis, or lead to governments retrospectively walking away from the insurance commitment (simply legislating to not pay out).  In fact, we know that for reasonably governed countries that practical limits on the ability to take on new public debt are not very binding at all.   And we know that New Zealand has (a) very low levels of net public debt by advanced country standards, and (b) a banking system of only moderate size (relative to GDP) by advanced country standards.    Total household deposits with all registered banks are about $175 billion.  Not all of those would be covered by a deposit insurance scheme, even one that capped cover at a relatively high $200000.

Now lets assume something really really bad happens: banks lend so badly over multiple years that when the eventual reckoning happens loan losses are so large that 30 per cent of all bank assets are written off.   This would be absolutely huge –  far far beyond anything in Reserve Bank stress test, for beyond advanced country experience for retail-oriented banks.  But one can’t rule out by assumption utter disasters.  30 per cent of bank assets is currently about $175 billion as well.  There is about $40 billion of equity to run through, and then the creditors start bearing the losses.  Household deposits are about a third of non-equity liabilities, so in this extreme scenario the deposit insurer (and residual Crown underwriter) would face bills of up to perhaps $50 billion (a generous third of $135 billion of losses to be distributed across creditors and insurers).    And remember how extreme this scenario is: it assumes every bank in the system fails, and fails dramatically (not just slightly underwater), and that every household deposit is fully covered by deposit insurance.  In this really really bad, highly implausible scenario the bill presented to the depositor insurer is equal to less than 20 per cent of GDP.

Reasonable people can, of course, differ on whether deposit insurance is a good idea at all, just better than the likely alternative (my view), or something to be eschewed at all costs.  But in no plausible world would even a commitment of 20 per cent GDP overwhelm New Zealand public finances, or cast doubt on the ability of the New Zealand government to honour its obligations.   And none of this takes into account the likelihood that any deposit insurance scheme would be set up funded by insurance levies  Levy depositors, say, 20 basis points a year and you’ll be collecting (and setting aside) $350 million a year.  As I recall it, prudential policy (bank capital requirements) are currently set with a view to expecting systemic crises no more than once in a hundred years (the Governor the other day talked of extending that to once in 200 years).    If the really really bad systemic crisis hits in year 1, the government needs to borrow more upfront (recouped over time by the annual insurance fees).  If the really really bad crisis hits in year 150, there is a large pool of money standing ready, accumulated from those same annual insurance fees.

(Of course, in any scenario in which banks have lent so badly –  and regulators regulated so poorly –  that 30 per cent of all assets are written off, the economy is likely to be performing very badly for a while, and the public finances will be under some pressure anyway.  But those problems are there regardless of the resolution method chosen.)

The other argument I heard advanced for a legislated depositor preference is that it would reduce the cost of deposit insurance.    That might look like a superficially plausible argument, but it is almost certainly wrong in any economically meaningful sense.   Sure, if your bank is funded 50/50 by retail depositors on the one hand and wholesale creditors on the other, the chances that a deposit insurance fund will ever have to pay out to the depositors of that bank, in the presence of legislative preference, is very small (roughly speaking, losses would have to exceed 50 per cent of all the assets for depositors to be exposed to loss –  and thus the deposit insurer).    But if you don’t pay for your insurance one way you will pay for it another way.   If depositors have first claim on bank assets and all other creditors are legislatively subordinated, over time depositors are likely to earn lower interest rates than otherwise (less risk to compensate for) and other creditors more).   It might be hard to show this effect in the case, say, of the big Australian banks, but then no one seriously thinks the Australian government would do anything other than bail out those banks in the event of a crisis.  But we can see the pricing on existing subordinated debt issued by banks around the world – it yields, as you would expect, more than deposits.  It is much riskier.

Of course, it is true that legislating a depositor preference largely shifts the problem from the Crown balance sheet (underwriting the deposit insurer) to those of banks and their creditors.  That might look like a smart thing to do  –  internalising the issue and all that –  but in fact it is a subterfuge: trying to meet a public policy priority (depositor protection) by forcing banks to change their entire business model.  Much better to do things in a direct and transparent way: if you want deposit insurance, charge for it directly, and allow banks to determine how they operate their businesses (funding structures etc) given the insurance levies they face, and the market opportunities.  Doing so also operates more fairly – and efficiently – across different types of banks.  Depositor preference accomplishes nothing at all  in a bank that is 100 per cent deposit-funded, and such institutions should be competing on a competitively neutral basis with other banks with different mixes of funding.

In the consultative document, and again in the discussion yesterday, officials seemed to see a model in which wholesale creditors are exposed to more risk as a “good thing”, conducive to effective market discipline.  I’m with them on that point in so far as people -especially wholesale creditors –  who lend to banks should face a real risk of losing their money.  But depositor preference in effect says that the only way non-depositors can lend to banks is through instruments on which the losses mount extremely rapidly if anything goes wrong.  There is no good case for that (even if, as some do, you think it is reasonable to require banks to issue some tranche of subordinated or convertible debt).   It is a doubly surprising argument to hear mounted in New Zealand where for years –  and especially since 2008 –  we have been repeatedly reminded of the heavy exposure of our banks to offshore wholesale funding markets.   None of those holders has to take on exposure to New Zealand or New Zealand banks.   Legislate depositor preference and what you will do is to significantly increase the risk of those funding markets, for New Zealand, freezing, and yields on secondary market instruments going sky-high, at the first sign of any trouble, or even just nervousness.    Retail runs are one issue to think about, but as we saw globally in 2008 wholesale runs can be just as real, and perhaps more threatening (and lightning fast) –  I discussed the Lehmans story here.

I hope the legislated depositor preference option is taken off the table quickly.  It has the feel of clever wheeze intended to ease the path for deposit insurance.  Much better to make the case –  and there is a sound one –  for a properly funded deposit insurance scheme on its own merits.

On a totally different subject there was a surprising article in the Herald yesterday in which a former MPI official was discussing openly concerns held in 2008/09 about the potential financial health of Fonterra.   I was involved in this work at the time, working at The Treasury, and have always been a bit surprised that there wasn’t more open analysis of the issue at the time.  Just drawing on public information, the combination of:

  • a quite highly indebted cooperative,
  • largely frozen international credit markets (not just for banks),
  • highly-indebted farmer shareholders,
  • a model in which shareholder farmers could redeem their shares in Fonterra when their production dropped,
  • a drought the previous year (reducing production) and
  • low product prices, encouraging some farmers to further reduce production, and
  • the potential for some highly-indebted farmers to be sold up by their banks

was a pretty obvious basis for some vulnerability.    Fortunately, the particular extreme combination of risks never really crystallised.   One aspect of the 2008/09 crisis that was always interesting was –  in the words of one investment bank CEO at the time –  “one of the few markets that remain open is the New Zealand corporate bond market”.  That was because it was, and always has been, primarily a retail market, different from the situation in many other countries (reflecting regulatory differences).  In early 2009 Fonterra was able to run a highly successful domestic retail bond issue.  Subsequent changes to the Fonterra capital structure mean that in future serious downturns, redemption risk is no longer a consideration.  That, however, leaves more of the (liquidity) risk on farmers themselves.

Inching towards greater transparency

Several years ago the then Reserve Bank Governor went public when there was some criticism around an OCR decision (more so about communications surrounding it) telling us that all his advisers had on that occasion supported his decision.   A group of senior staff provide written advice at each OCR decision.

If it was good enough for him to disclose such information when it suited him, I thought it should be fine to have the information disclosed routinely, including for OCR decisions some time in the past.  I lodged an OIA request accordingly.

Not that surprisingly, given the Bank’s approach to the OIA, I didn’t get anywhere.  They refused to release any other information about previous OCR decisions and, a bit more surprisingly, [as I recalled things, but see below] they managed to get the Ombudsman to provide cover for their refusal.

But in this morning’s Monetary Policy Statement we find almost exactly the data I requested 2.5 years ago, in the form of this chart.

OCR advice

Kudos to the Governor for releasing the information, even (a) this belatedly, and (b) only for the period to the end of 2016, which is now two years ago.  We still have no idea what the balance of advice has been over the last couple of years, most of which wasn’t even in the current Governor’s term.  But it is better than nothing.

I was among this group of advisers up to and including the March 2014 decision –  where I’m pretty sure I was the grey vote (opposed to the OCR increase).

Given that the Governor has now released so much information, I’m tempted to lodge another OIA request for the more recent information –  there cannot possibly be any market sensitivity or other problems (defensible under the Act) in knowing that (say) one advisor out of ten favoured an OCR cut six months ago –  but as the legislation is about to change perhaps I will leave it for now.

The Governor goes on to note that

Generally, there was a clear majority in the balance of advice. Should the current Reserve Bank Amendment Bill become law, our intention would be to publish the formal votes of the Monetary Policy Committee each time a vote is taken. It is envisaged that a vote would not be called for every meeting, but only when needed.

I found this mildly encouraging, Until now that rhetoric has tended to emphasise very heavily the consensus model the previous Reserve Bank management favoured (under which any differences of view –  inevitable in a well-functioning organisation dealing with so much uncertainty –  would be obfuscated and kept secret).  At least now there is a straightforward explicit statement that the formal votes will be published when such votes are taken.   It still isn’t too late for the select committee looking at the bill to amend the legislation to require votes to be taken, and require the number of votes for each position to be published.

There is still a long way to go in getting the Reserve Bank to the point of operating transparently, even reaching (say) the level managed by the Treasury through the Budget process.  I still have an Official Information Act request in, now with the Ombudsman, over the Reserve Bank’s refusal to release background papers underpinning claims it made (including around KiwiBuild) in last year’s November Monetary Policy Statement.   The Bank has long argued that it would be destabilising, undermining the effectiveness of policy, if anyone ever saw any internal background papers.    They claim, citing the OIA itself, that the substantial economic interests of New Zealand would be damaged.

Some months ago the Ombudsman advised a preliminary view that would have continued his office’s longstanding practice of allowing the Bank to keep almost anything associated with monetary policy secret.  I made a submission in response that highlighted what appeared to be a serious inconsistency in the way, for example, budget papers are treated.  This was some of what I wrote

In general, I think Mr Boshier’s provisional decision, if allowed to stand, would seriously detract from effective accountability for the Reserve Bank, and in particular would expose the Bank routinely to less scrutiny and challenge than Cabinet ministers or government departments receive.  That cannot be the intention of the Act.    That parallel doesn’t seem to have been taken into account at all in the draft determination.
Thus, Cabinet papers underpinning key government announcements are frequently released, sometimes in response to OIA requests and at other times pro-actively.  But so too is advice to a Cabinet minister from his or her department.  That is so even when, as is often the case, officials have a different view on some or all of the matters for decision from the stance taken by the minister.   A classic example, of course, is the pro-active release of a great deal of background material, memos, aide-memoires etc compiled and submitted as part of the Budget formulation process.  Many of the working papers in that case may never even have been seen the Secretary to the Treasury but will have been signed out to the office or minister at the level of perhaps a relatively junior manager.  Many will have been done in a rush, and be at least as provisional as analysis the Governor receives in preparing for his OCR decision.  I’ve been personally involved in both processes.
Is it sometimes awkward for the Minister of Finance that his own officials disagreed with some choice the minister made?  No doubt.  Do ministers sometimes feel called upon to justify their decisions, relative to that official alternative advice? No doubt.  But it doesn’t stop either the provision of such dissenting (often quite provisional) analysis and advice, or the release of those background documents.
The sorts of arguments the Reserve Bank makes, and which Mr Boshier appears to have accepted, could well be advanced by Cabinet ministers (eg clear messaging about this or that aspect of budgetary or tax policy –  all of which are substantial economic interests of the NZ government).  If they have advanced such arguments, they have generally not succeeded.  And nor should they.  Doing so would undermine effective accountability or scrutiny, even though the Minister’s formal accountability might be to Parliament (he has to get his Budget passed).
The relationship between the Minister and his or her department officials is closely parallel to that between the Governor of the Reserve Bank –  the sole legal decisionmaker (who doesn’t even have to get parliamentary approval of his decisions) –  and the staff of (in this case) the Economics and Financial Markets departments of the Bank.  One group are advisers, and the other individual is the decisionmaker.  The fact that they happen to both part of the same organisation, doesn’t affect the substantive nature of that relationship.   Manager and senior managers in the relevant departments are responsible for the quality of the advice given to the Governor, in much the same way that the Secretary is responsible for Treasury’s advice to minister (and at his discretion can allow lower level staff to provide analysis/advice directly to the Minister or his office.   I would urge you to substantively reflect on the parallel before reaching your final decision, including reflecting on how (if at all) official advice on input to the OCR is different than official advice (including supporting analysis) on any other aspect of economic policy.
Mr Boshier’s argument about potential damage to substantial economic interests itself seems insubstantial, and displaying little understanding of how financial markets (and the market scrutiny of the Reserve Bank) work.  It also appears to be based wholly on official perspectives; officials who will routinely oppose transparency (except as they control it).    All those who follow, and monitor, the Reserve Bank recognise that there is a huge degree of uncertainty about any of the assumptions the Bank (or other forecasters) make, Indeed, the Bank itself stresses that point.    Markets trade changing perceptions of the outlook all the time, each piece of new data slightly adding to the mix.   Most monitors of the Reserve Bank (many of whom have previously worked for the Bank) recognise the distinction between analysis and advice, provided as input to the Governor, and the Governor’s own final decision and communication thereof.    And since markets –  and the Bank –  know that any projections are done with huge margins of uncertainty, the pretence that economic outcomes could be substantially damaged by people knowing there were a range of views or analysis is almost laughable.  Again, there is also a distinction to be considered between possible institutional interests of the Reserve Bank and the substantial economic interests of New Zealand.   You seem to treat those two sets of interests are the same thing, but they are not.

Given that some more months have now passed I hope the Ombudsman is seriously considering these arguments.   But whether he is or not, I call on the Governor to take seriously his words about greater openness and more transparency, and put in place proactively a new regime (perhaps for the new MPC) in which staff background papers provided to the Governor and MPC are released, with a suitable lag (perhaps four to six weeks) as a matter of course.  Doing so would be a significant step forward, and should help to boost market and public confidence in the Bank.  It wouldn’t be terribly radical; it is pretty much what is done for the government’s Budget each year.  Perhaps the new Treasury observer could explain to his Bank colleagues how it works, and how Treasury continues to function, continues to offer free and frank advice, even knowing that in time the background work will most probably be open to scrutiny.  It is how open democracies, open societies, should work.

I might have some other thoughts tomorrow on more substantive aspects of the Monetary Policy Statement.

UPDATE:  Well, it seems that credit is due to the Ombudsman not to the Governor. A few minutes after putting this post, I received this letter from the Bank

Dear Mr Reddell

At the invitation of the Chief Ombudsman, the Reserve Bank has reconsidered your request for the aggregate numbers of MPC members favouring each rate option for each OCR decision since mid-2013. You made this request on 14 March 2016.

On the basis that the requested information has become sufficiently historic, the Reserve Bank has decided it can now release the information. You can find the information on pages 13-14 of today’s Monetary Policy Statement at the following web address




Deposit insurance, OBR etc

This wasn’t going to be the topic of today’s post, but I see Stuff has a story up based largely on a conversation I had late last week with their journalist Rob Stock.  (NB In the first version I saw a couple of hours ago a rather important ‘not” was omitted from this sentence “But a big bank failure was imminent, he said”).

New Zealand is being tipped to join the rest of the OECD in having a government-backed bank deposit guarantee scheme.

Under the Reserve Bank’s Open Bank Resolution scheme (OBR), depositors at a failing bank might have to take a “haircut” with some of their money being taken to recapitalise their bank, and get it open for business again quickly.

But former Reserve Bank head of financial markets Michael Reddell is tipping an end for OBR following the release of a discussion paper into the future of the Reserve Bank.

The background to this was the release last week of a joint Reserve Bank/Treasury consultative document as part of phase 2 of the review of the Reserve Bank Act.  I haven’t yet read the whole document, although a reader who has tells me it is a fairly substantive (and thus welcome) piece.  But when Rob Stock got in touch to suggest he would like to talk about the reappearance of the OBR (Open Bank Resolution), I read the relevant section (chapter 4) on “Should there be depositor protection in New Zealand?”

Stock is not a fan of the OBR option and was uneasy as to why it was appearing in the consultative document.  My response was along the lines that OBR had played a key role in Reserve Bank thinking about failure management for almost 20 years now.  Any new consultative document (especially a joint RB/Treasury effort) had to build from where policy/rhetoric had been but that, nonetheless, my read of the document suggested a clear framing pointing towards (officials favouring) New Zealand adopting deposit insurance.

Treasury has favoured such a change for some years, while the Reserve Bank had historically been quite resistant –  mostly, on my reading, because they take a rather naive wishful-thinking approach which ignores twin realpolitik pressures that ministers will face if a major bank is at the point of failure.    They believe in the value of market discipline (as, surely, in some sense most people do) and don’t want to do anything that might acknowledge that it isn’t always going to be a feasible (political) option.   In my view, in reaching for something nearer a first-best model in an idealised world, they increase the chances of third or fourth best outcomes.  A well-run deposit insurance scheme isn’t perfect, but offers the prospect of a decent second-best set of outcomes.  And, for what it is worth, would bring New Zealand into line with the rest of the advanced world.  As the consultative document makes clear, of the OECD countries only New Zealand and Israel don’t have deposit insurance, and Israel has already indicated that it is going to introduce a scheme.

As I noted, it was hard to see why any of the parties in the current government would be resistant to introducing deposit insurance (the Greens had been openly calling for such a reform) and there had been signs that although the “old guard” of the Reserve Bank had been resistant to deposit insurance the new Governor was likely to be more receptive. (And in the off-the-record speech Orr gave a few months ago, it was reported that among his comments was “deposit insurance is coming”.)   National had been resistant, but relevant context for that included the way they were landed with the aftermath –  and losses – of the retail deposit guarantee scheme after coming into government late in 2008.  The retail deposit guarantee scheme bore almost no relationship to a proper deposit insurance scheme –  being introduced at the height of a crisis, primarily covering unsupervised institutions and then knowingly undercharging those institutions for the risk being assumed.  But it is relevant (together with National’s bailout of AMI) in revealing how politicians are likely to behave under pressure in a financial crisis.

Why do I favour deposit insurance (as a second best)?   I’ve covered this ground in other posts, but just briefly again.   I see little or no prospect that, in event of the failure of a major bank, politicians will let retail depositors lose their money (reliance on OBR assumes exactly the opposite interpretation).    If so, it is better to force depositors themselves to pay for that protection up-front, in the form of a modest annual insurance premium.

At present, with the four biggest banks all being subsidiaries of Australian bank parents, the failure of a major domestic bank is only seriously likely to occur if the parent is also in serious trouble. (And the 5th biggest bank is government owned –  enough said really.) If the parent isn’t in serious trouble, there would be a strong expectation that the parent would recapitalise any troubled subsidiary and/or perhaps manage a gradual exit from the New Zealand market.

It simply isn’t very credible to suppose that if the ANZ banking group is failing, and the New Zealand subsidiary is also in serious trouble, a New Zealand government will let New Zealand depositors of ANZ lose (perhaps lots of) money while their Australian cousins and siblings (often literally given the size of the diaspora), depositors with the ANZ, are bailed out by (or covered by deposit protection by) the Australian government.   It isn’t as if there is any very credible scenario in which the New Zealand government’s debt position had got so bad that the government could claim “we’d like to help, but just can’t”, and the optics (and substance) would be doubly difficult because it is generally recognised that a concomitant to making OBR work would probably be to extend guarantees to the liabilities of other (non-failing) banks –  otherwise, in an atmosphere of crisis transferring funds to the failing bank will look very attractive to many.

My view on this is reinforced by the practical examples of bailouts we’ve seen.  Sure, the previous Labour government let many small finance companies fail without intervening, but then the deposit guarantee scheme happened. AMI policyholders were bailed out, when there was no good public policy grounds (other than the politics of redistribution etc) for doing so.  And, beyond banking, we had the bail-out of Air New Zealand in 2001. In the account of that episode that Alan Bollard (then Secretary to the Treasury) told, uncertainty about what might happen in the wake of any failure was a big part of the then Prime Minister’s decision.  It would be the same with the failure of any systemic bank.   It isn’t an ideal response, but it is an understandable one, and one has to build institutions around the limitations and constraints of democratic politics.

(The other reason why OBR is never likely to be used for big banks, is that in any failure of a major bank, trans-Tasman politics is likely to be to the fore, with a great deal of pressure from Australia for the failure of the bank group’s operations on both sides of the Tasman to be handled together/similarly.  It was a little curious that nothing of this was mentioned in the chapter of the consultative document.)

If there is no established depositor protection mechanism and if politicians blanch at the point of failure –  as almost inevitably they will –  then in practice what is most likely to happen is that everyone will be bailed out.   And that really would be quite unfortunate  – big wholesale creditors, who really should be on their own (and able to manage risk in diversified portfolios), losing along with granny.   And so one argument is that deposit insurance allows us to ring-fence and protect (and charge for the insurance upfront) retail depositors, while leaving wholesale creditors to their own devices in the event of failure.  In other words, a proper deposit insurance scheme could increase the chances that OBR can actually be used to haircut the sort of people (funders) that most agree should lose in the event of a bank failure.

There were a few things in the Stock article where I’m quoted in a way that at least somewhat misrepresents what I said.

Reddell said he expected the deposit insurance to win out and the scheme to be run by the Government.

An EQC-like fund would be created to collect insurance premiums from all depositors, with no banks allowed to opt out, he said.

The question here had been about which private insurer would be strong enough to provide the deposit insurance.  My response was that it was most unlikely such a scheme would be run through a private insurer –  they too can become stressed in serious crises –  and that what one would expect would be a government-run and underwritten fund, accumulating levies over the decades, and helping to cover any losses in the event of a major failure.

The premium would be about 10 basis points on deposits, so a deposit account paying interest of 3 per cent, would be cut to 2.9 per cent, with the rest funding the deposit guarantee premiums, Reddell said.

Here the question was mostly about who would bear the cost of the insurance. My point was that one would expect the cost to fall primarily on depositors (rather than say, borrowers or shareholders).  The size of any premium (which should be differentiated by the riskiness of the institution) would be a matter to be determined, and varied over time, but I did note to Stock that for an AA rated bank that cost might be quite modest.   I noted that although CDS (credit default swap) premia had increased since, in the half decade or so leading up to the 2008 financial crisis the premia for Australasian banks had typically been only around 10 basis points.

In other guarantee schemes each depositor only has a maximum amount of their money guaranteed. The paper mentions $50,000, but Reddell said the scheme, if introduced, would have a cap of around $100,000.

My point was that a cap of only $50000 (an idea mooted in the paper) didn’t seem particularly credible, and based on the levels of coverage in many overseas schemes (and under the deposit guarantee scheme) I would expect any deposit insurance scheme cap to be at least $100000.   Set the cap too low and it will end up being unilaterally changed at the point of crisis, with no compensating revenue to cover the additional insurance being granted.

And finally

But a big bank failure was not imminent, he said.

“Canada has gone over 100 years without a big bank failure. There’s no reason to think we will get one in the next few decades,” he said.

Of course, failures are always possible, but much of the mindset and literature is too influenced by either US examples (where the state has had far too big a role in banking), or those from emerging markets.   Canada provides a very striking contrast, but even in New Zealand or Australia the only period of systemic stress in the 20th century was in the period (the late 1980s) when a previously over-regulated system was deregulated quite quickly and everyone (lenders, borrowers, regulators) struggled to get to grips with applying sound banking practices in an unfamiliar environment.   A once in a hundred year systemic bank failure is something authorities have to plan for, and given the choice between collecting modest annual insurance premia for a hundred years to cover some (or even all) of the cost of bailing out retail depositors, and doing nothing and (most probably) bailing them out anyway, I know which second-best alternative I’d choose.

I hope the government agrees, and acts to implement a deposit insurance regime for New Zealand.  There are lots of operational details to work out if they do, and those aren’t the focus of this consultation document, but deposit insurance is the way we should be heading.

Restructuring the Reserve Bank

Seven months (and counting) into his term as Governor, Adrian Orr still hasn’t deigned to deliver an on-the-record speech on either of his main areas of statutory responsibility (monetary policy and financial stability) but he has this morning done what it seems almost all new CEOs –  public sector and private sector –  now do, and restructured his senior management, ousting or demoting several top managers, elevating one or two, and opening up a raft of vacancies.  Public sector senior management restructurings seem to generate most of the Situations Vacant business for the Dominion-Post newspaper these days.

A few people have asked my thoughts on the restructuring, so…..

As a first observation, I give credit to the Governor for resisting the temptation of across the board grade inflation (although there is at least one example, see below).  Every public sector senior management advert one sees –  I pay attention mostly because my wife has been in the market – is full of Deputy Chief Executive roles (not infrequently five or ten of them).  The Bank’s Act constrains the number of Deputy Governor positions (only one, in the bill before the House at present) but if he’d wanted to, all these SLT positions could have been designated Deputy Chief Executive roles.  As it is, having resisted title inflation, the Governor might find some potential applicants a bit more hesistant than otherwise: an Assistant Governor (even for Economics, Financial, and Banking) may sound less glamorous than a Deputy Chief Executive title.

This is the new structure, which looks a lot like those for all manner of public sector

Three of those positions are filled straight away.

Appointments to Senior Leadership Team
Geoff Bascand – (Currently Deputy Governor and Head of Financial Stability) has accepted a role on the SLT as Deputy Governor and General Manager of Financial Stability.
Lindsay Jenkin (currently Head of Human Resources) has accepted a role on the SLT as Assistant Governor/General Manager of People and Culture
Mike Wolyncewicz (currently Chief Financial Officer and Head of Financial Services Group) has accepted a role on the SLT as Assistant Governor/ Chief Financial Officer Finance.

Of those two appointments (Bascand and Wolyncewicz) seem sensible and appropriate.  Bascand currently holds a statutory Deputy Governor appointment and would have been hard to shift even if the Governor had wanted him out.  His role is slightly –  though perhaps sensibly – diminished as he will no longer have overall senior management responsibility for financial markets.

To be blunt, the new Assistant Governor for People and Culture has the feel of tokenism on two counts.   The first count relates to the current tendency for HR managers to be given glorified titles and to report directly to the chief executive (the message supposedly being “we value our people”, as if organisations never did when HR was a fairly low-level support role).  Line managers are the people who convey (by their actions mostly) to staff the extent to which they are valued (or otherwise).   And the second relates to the incumbent, who just is not particularly impressive.  As someone put it to me, perhaps she might be okay in some modest commercial operation, but she never showed any sign of being suited for a key leadership role in a significant policy organisation.  But….she is a woman, and in promoting her Adrian Orr manages –  after 84 years –  to have a woman in a top tier role (although still not in a key role in policy or operational areas, the raison d’etre for the organisation).   It will have been an easy win to simply grade-inflate the Manager, Human Resources role.  After all, as he said a few months ago

We will be working actively. We are just going to have to be far more aggressive at getting the gender balance balanced,” Orr said in a recent interview

(And before I get angry emails or anonymous comments from past or present Reserve Bank staff, I will reiterate my view –  and it is only mine –  that there are no conceivable grounds on which Lindsay Jenkin would be in the top tier of a major policy organisation other than her sex.  I wish it were otherwise.)

In the entire restructuring, the person one should probably feel most sorry for is Sean Mills, Assistant Governor and Head of Operations, whose job is dis-established and who is leaving the Bank, having joined under a year ago.  I suppose he knew the risks –  taking on a direct report job in the hiatus between Governors, when no one had any idea who the new Governor would be or what structure he or she would prefer.  I’ve never met Mills, and have heard nothing good or bad about him, but it is always a bit tough to lose your job after less than a year.

Two long-serving key senior managers –  both in their roles for 11 years now –  are demoted as part of the restructuring, one perhaps a bit more obviously than the other.

The first is Toby Fiennes, currently Head of Prudential Supervision.  His role –  a big job –  appears to have been split in two.

Toby Fiennes (currently Head of Prudential Supervision Department) has accepted the role of Head of Department for Financial Stability Policy and Analytics.

with one of his current managers (very able) taking up the role responsible for actual oversight of financial institutions.

Andy Wood has accepted the new role of Head of Department for Financial System Oversight.

I always had some time for Fiennes (although I’ve probably criticised speeches and articles here) and thought him in some respects the best of the main departmental heads.  Perhaps it is just that the job has gotten so big that the Governor no longer wanted one person doing it, but the new role is much-diminished relative to what he has been doing for the last decade.   And Geoff Bascand already had the key overall financial stability role, so there was no possible promotion opportunity.

The bigger, and more obvious, demotion is that of (current) Assistant Governor and Head of Economics, John McDermott.

John McDermott (currently Assistant Governor and Head of Economics) has accepted the role of Chief Economist and Head of Department for Economics in the Economics, Financial Markets and Banking Group.

After 11.5 years as a direct report to the Governor, and almost as long with the Assistant Governor title, McDermott loses both.

I’m always hesitant to write much about McDermott.  He was my boss for six years, and while we had our differences we sat across from each other for years and exchanged views on all manner of work and family things.  I liked him, was looking just the other day at the personal gift he gave me when I left the Bank, and I was genuinely pleased to applaud his daughter’s award the other night at the Wellington East Girls’ College prizegiving.

Unfortunately, I don’t think he was the person for the role he has held for eleven years, and which he never really grew into or made of that position what it should have become.  He has a strong track record as a researcher, and apparently was for quite a while the most widely-cited New Zealand economics researcher, but the key senior manager for monetary policy –  effectively a deputy governor without the title – required more than McDermott had to offer.   In public view, this was apparent in speeches and Monetary Policy Statement press conferences.  And thus, sad as it perhaps is for John, I think the Governor has made the right choice.  Whether McDermott stays for much longer in the diminished position he will now take up perhaps depends a lot on who gets vacant (and crucial) new role of Assistant Governor for Economics, Financial Markets, and Banking).

Two other senior managers in core roles leaving the Bank

Mark Perry (Head of Financial Markets)…..elected to leave the Reserve Bank.

Bernard Hodgetts (Head of Macro-Financial Department, who is currently seconded as Director Reserve Bank Review in the Treasury) has also chosen to leave the Reserve Bank after he finishes his role leading the review.

The Head of Department for Financial Markets won’t be an easy role to fill –  I wouldn’t have thought there were any obvious internal candidates.

Three more comments on the review:

  • even if a role like “Assistant Governor, Governance, Strategy and Corporate Relations” is the sort of title one sees in lots of government agencies, it feels like another example of grade inflation.  Presumably this involves the communications functions, the Board Secretary, and churning out the myriad hoop-jumping documents like the Statement of Intent.  People with “strategy” in their title in public sector organisation are rarely at the heart of what the organisation do.
  • there will be a lot of focus on who gets the role of Assistant Governor, Economics, Financial Markets, and Banking.  This is (slightly) bigger role than Murray Sherwin held 20 years ago, without the benefit of the Deputy Governor title.    We will have to wait until the adverts appear to see whether the Governor is after a policy leader (someone who really knows this stuff) or a generic public service manager.  If –  as I hope –  the former, it has been speculated to me that the Governor may try to attract back to the Bank the current Treasury chief economist Tim Ng (whose talents would be better used doing almost anything than wellbeing budgets).  Another possibility is the current Treasury deputy secretary for macro, Bryan Chapple who has a central banking background and led some of the financial markets reform work at MBIE.  No doubt there will be others applying, especially as the holder of the position is almost certainly to be a statutory appointee to the new Monetary Policy Committee.
  • this restructuring also probably helps clarify who will be the four internal members of the new Monetary Policy Committee.  The Governor and Deputy Governor will be members ex officio, and it is hard to see how the other positions would not be given to the Assistant Governor, Economics, Financial Markets,and Banking) and to John McDermott, as head of the Economics Department.

Overall, the restructuring is quite a mixed bag.   There are some good appointments and some poor ones already, and quite a lot will depend on a handful of the remaining appointments (especially the quality of person they can attract to that Assistant Governor role –  which, notwithstanding my earlier cautions about grade inflation, really should be a deputy chief executive position, both for recruitment reasons and for the stature and standing of the person in international central banking circles).

If I have a caveat about the overall structure, it is probably that the Bank would be better for having at least one senior policy person –  whether as Deputy Governor or so Advisor to the Governor –  who didn’t have a demanding line management role.  Such roles aren’t uncommon in other central banks, but I guess it depends on the Governor’s own preferred operating style.

And since I have the opportunity of a post about the Bank, I should note that I have not abandoned the issue of the Governor’s total non-transparency in respect of his speech about transparency to the Transparency International AGM (at which he was introduced by the State Services Commissioner, who has responsibilities for open government).  I am pleased to see this issue has had a little bit of media attention, including this article which pointed out that 90 per cent of Transparency International’s funding comes from the taxpayer.  I have an Official Information Act request in with the Bank for any briefing notes or text the Governor used, for any recordings that may exist, and if none do for a summary of what was said (memories –  very fresh, since I lodged the request within hours of the Governor delivering his speech – are official information too.   I don’t expect much, but there is a point to be made –  all the more so given the topic, the audience, the introducer, and the funding source for the body to which he was speaking. I can’t imagine Orr said anything very controversial, in which case why the secrecy? And if what he said was controversial –  foreshadowing for example Monday’s forthcoming culture review – it shouldn’t be said only to select private audiences.  It was simply an unnecessary own-goal, some sort of silly reassertion (perhaps Wheeler like) of a Reserve Bank perception that it really should be above such trivial matters as disclosure, transparency and the Official Information Act.


A troubled recruitment process?

Early last month I wrote about the advertisements placed on behalf of the Reserve Bank Board, presumably with the acquiescence of the Minister of Finance, looking for people interested in becoming external (part-time) members of the new Monetary Policy Committee, to be established once the amending legislation –  currently before a select committee –  is passed.   Recall that under this legislation the Minister of Finance would be able to appoint only someone recommended by the Board.   Applications closed on 7 September.

I was fairly sceptical as to who would be interested in these roles –  which might seem attractive at first glance, but are much less so at second or subsequent glance.

It will be interesting to see what sort of people the Board and the Minister come up with, assuming that Parliament eventually passes legislation along the lines of the current bill (and bear in mind that we have a minority government again).  It is hard to see why the roles –  probably little more than silent adjuncts to the Governor – would be attractive to really good people, or who will really be free to take them up (even an academic –  apparently not wanted by the Governor –  might struggle to commit 50 days a years, spread over the year, not just in the long summer vacation).


And so it will be interesting to see what people they finally manage to attract, both in the first round, and a few years later when the novelty has worn off.  A smart (but deferential) semi-retired person would probably fit the bill quite well, but since the government and the Bank have been clear they don’t want people who might rock the boat, and they apparently aren’t keen on economists, and since even the externals together will be a perpetual minority, you wonder why someone good would be interested.   Pocket money probably shouldn’t be the motivation, at least if the government were serious about putting in place a strong, well-functioning, MPC.  Of course, as it is, there is no evidence of such intent.

A few days ago I was having a conversation with someone about these roles, which prompted me to wonder about progress, about what sort of applicants they had attracted, and so on.   Given that applications closed on 7 September, you’d have assumed that by now they would be well through the process of getting towards a list of names the Board could recommend to the Minister of Finance.

But apparently not.

On Tuesday I lodged an OIA request with the Board, asking for

  1. total number of applications received,
  2. the proportion of total applications received from women (as best the Board or its agents could tell),
  3. the proportion of total applications received from people currently resident in New Zealand, and
  4. the proportion of total applications received from people currently employed at a university.

and for the same information for the applications taken further (ie not immediately dismissed as unsuitable by the Board or its recruitment firm).

On Wednesday, I had a impressively quick response to the second half of the request. I was told

No applicants have been selected yet for further consideration.

It must, in that case, be one of the slowest recruitment processes ever.

As it happens, I still had the information pack provided to anyone expressing interest in the positions (which I had requested purely for research purposes), and on flicking through that I found an approximate timeline, which indicated that the original plan was for a shortlist to be presented to the Board at its meeting last week.  The Board only meets once a month, and Board papers usually go out a week prior to the meeting.  As applications had only closed on Friday 7 September, this seemed like a normal and expected timeframe –  the first Board meeting after applications closed at which names could (reasonably) be considered.   The implication of the timeline was that last week’s Board meeting would approve a shortlist, because it goes on to indicate that interviews would be occurring in late October/early November.

It isn’t clear quite what is going on.  But one hypothesis is that the pool of applicants was sufficiently small and mediocre that the Board (and perhaps the Minister) has been left in a bit of a quandary.  If there were even three or four able and impressive people applying there should have been no difficulty in drawing up a shortlist (the Minister plans to make three appointments) and sending a “thanks, but no thanks” response to the others.  Instead, they probably have a very small pool of applicants, a few of whom might at a (considerable) pinch fit the bill, but none of whom would add lustre or credibility to the government’s claims about the fresh perspectives outsiders would add to the new MPC.

As I suggested the other day, one problem with this (highly unusual) appointment process, in which the Minister cannot simply appoint people in whom he (in this case) has trust, is that if the Minister wants to inject names to the process he has to do so behind the scenes (a word in the ear of the Board chair), in a non-transparent (and thus not very accountable) way.    Suggest a fairly borderline political crony and so long as he can persuade the Board to recommend that person –  and the Board has ongoing battles to fight, including around its own role after the rest of the RB Act review –  the Minister is substantially immunised against Opposition attacks (“but I only acted on the recommendation of the Board”) in a way he wouldn’t be if he were directly responsible for all appointments.

Who knows quite what is going on at present.  Perhaps the Board chair has just had a prolonged illness and been unable to deal with the matter (in which case he has my sympathy).  More probably, they (Board and Minister) have found it a lot harder to interest good and credible people in the role –  the more so after the Governor was openly expressing his distaste for economists in the role –  and are now casting around trying to work out what to do next, whose arm to twist (to try to interest).   If so, it isn’t too late for them – Board, minister, Treasury –  to think again and propose amendments to the legislative model (and to official statements as to how it will work), in ways that might attract really able people, and make this reform the landmark step forward it could have been (but at present is unlikely to be).

Disagreeing with Amy Adams

Late last week, National Party finance spokesperson Amy Adams gave an interview to Bloomberg on the rather limp and half-hearted reforms underway to the monetary policy bits of the Reserve Bank Act.  The planned amendments are currently being considered by Parliament’s Finance and Expenditure Committee.

Adams isn’t too keen on the proposed amendments to the statutory goal of monetary policy.   I agree that the wording in the bill is poor, and suggests that there is room for semi-permanent tradeoffs that simply don’t exist.  But I don’t agree with the National Party’s specific concern

Adams said National has concerns about the dual mandate because the minister will have the power to dictate which goal the RBNZ prioritizes, which could result in monetary policy being looser than it should be.

Not to put too fine a point on it, but (a) elected politicians should determine the goals of the central bank, and (b) throughout most of the previous government’s term (including the whole time Amy Adams was a Cabinet minister) there is a reasonable case to be made that monetary policy was tighter than it should have been.  After all, inflation consistently undershot the target –  the 2 per cent focal point – her colleague Bill English had explicitly added to the Policy Targets Agreement.  Current inflation outcomes – core inflation still below 2 per cent –  are largely the outcome of choices made under the rules (the PTA) set by the previous National government.

More generally, it might be nice if the National Party could point to any advanced economy at present which is having problems with consistently too high inflation.  Australia perhaps, where the RBA has a statutory goal with some similarities to what the government is proposing?  But no, core inflation in Australia has also been undershooting their target for some years now.

But my bigger disagreement with Amy Adams is over what appears to be her bigger concern.  She doesn’t seem to like the proposed Monetary Policy Committee at all.  She says she isn’t opposed in principle to a committee but doesn’t like the specifics

New Zealand’s opposition party has voiced “serious concerns” about government reforms of the central bank, saying they could undermine its independence and turn it into a political tool.

“I would hate to see the Reserve Bank becoming a little bit like the U.S. Supreme Court, where it’s all about stacking it with your people,” National Party finance spokeswoman Amy Adams said in an interview Thursday in Wellington. “It’s too important for that.”

I don’t like the specifics either, but that is because they leave far too much power in the hands of the Governor (directly or indirectly) and give the Minister of Finance astonishingly little role in key appointments.

You will recall that:

  • while the Minister appoints the Governor, he can only appoint someone recommended by the Bank’s Board,
  • in future the Minister will be able to appoint the Deputy Governor, but again only someone recommended by the Bank’s Board,
  • the remaining members of the Monetary Policy Committee are also appointed by the Minister, but he can only appoint people recommended by the Bank’s Board, and
  • the Bank’s Board members are appointed to five year terms, so for most of a new government’s first term, typically a majority of the Board will have been appointed by the previous government (and thus, in the current situation, under a different mandate and legislation).

And, of course, the Reserve Bank Governor himself sits on the Reserve Bank Board.

The Minister can, of course, propose to the Board names of people he would like to see appointed –  perhaps he is already doing that, given that the selection process is well underway, even though the Act is not close to being passed (and if so, it feeds a non-transparency about the system that isn’t ideal – but he has no ability to appoint his own person to any of the direct decisionmaking roles (only – gradually –  Board members themselves).  And this is although the Minister will –  rightly, this being a democracy –  be held to account if Reserve Bank monetary policy choices/analysis turn out to have been poor.   And that most of the Board members have backgrounds that make them ill-suited to determining who our key monetary policy decisionmakers should be, suggesting that they will mostly defer to the fulltimer –  the Governor, who has long had too much barely trammelled power.

In a democracy, key appointments should be made directly by those whom we have elected.  They can take advice, can consult etc, but the choice – and the responsibility –  should lie with those whom we can toss out.  Under the Reserve Bank bill, that still won’t be the case.

Amy Adams worries –  in a totally overblown way –  about comparisons with the US Supreme Court.  On the one hand, perhaps she could turn her attentions to our own higher courts –  where the incumbent Attorney-General (a fully political Cabinet member) gets to appoint whoever he or she wants.   And on the other, perhaps she could show signs of actually understanding quite what (little) the Monetary Policy Committee –  as being established in the bill – will be able to influence.  The US Supreme Court isn’t controversial because the President nominates and the Senate confirms, but because far too much power has been given to the Supreme Court, covering almost every sphere of American life, and the members once appointed serve for life.  The comparison with the government’s proposed MPC is so overblown as to be laughable.

And it isn’t as if the National Party spokesperson can point to other countries where monetary policy committees have ended up created the sorts of problems she worries about here.  Especially not tame ones –  majority internals, inability for members to speak openly, short terms etc.   Take Australia, for example, where all the members of the Reserve Bank of Australia’s Board –  the monetary policy decisionmaking body – are appointed (unconstrained) by the Federal Treasurer.  Or the UK where most of the MPC members are appointed directly (unconstrained) by the Chancellor.  Or the US, where members of the Board of Governors (who serve on the FOMC) are appointed by the President, subject to the advice and consent of the Senate –  just like the Supreme Court, and yet not having taken the path Amy Adams worries about here (indeed, Trump quite recently nominated a technocrat who is a registered Democrat).   Perhaps Amy Adams has other problematic monetary policy committees in mind?  If so, perhaps she could let us in on her data?

The other area where Adams expresses concern is regarding the provision in the new bill for a nominee of the Secretary to the Treasury to serve as a non-voting participant in the MPC.

Treasury Secretary Gabriel Makhlouf will take the observer role and start attending RBNZ policy meetings from the end of this month.

“Treasury have wanted more control over the Reserve Bank since Adam played fullback for the apostles,” Adams said. “It also suits the government’s agenda. It’s in the government’s interest to be able to much more strongly dictate to the Reserve Bank what they should say about government policy and its effect on the economy.”

She said Treasury would effectively be “pushing the government line” in a room of policy makers appointed by the minister who “could be inclined to want to do the minister’s bidding.”

“That is an incredible weakening of the Reserve Bank’s independent and autonomous assessment” of government policy, Adams said.

Not quite sure about her biblical imagery (the story of Adam and the record of the apostles being quite widely separated in time), but even setting that to one side, is there anything to her concerns?

Having Treasury representatives on Monetary Policy Committees isn’t extremely common, but it isn’t unknown either.  In Australia, the Secretary to the Treasury is a voting member, while in both the UK and Japan (both systems overhauled in recent decades) there is a non-voting Treasury observer.  Perhaps Amy Adams can point to examples of how those systems have run into problems because of the Treasury participant?  But I suspect not.

This is one of those issues on which reasonable people can reach different views, while recognising that the final choice probably doesn’t make that much difference.  Personally, I’ve wavered on this one, but finally concluded that a non-voting Treasury observer could, on-balance, be a useful reform –  although I took that view in the context of also favouring a much more open and independent MPC, less under the thumb of an ambitious Governor.  But to suggest – on no evidence whatever –  that it  “is an incredible weakening of the Reserve Bank’s independent and autonomous assessment” of government policy” seems so overblown as to discredit any serious points Amy Adams wants to make about the legislation.  Remember, for example, that the “room full of policymakers” will mostly have been appointed by the Governor himself and his Board.  The Minister’s participation will typically be ceremonial and – to the extent it is more than that –  hidden from view.

Having said that, one transitional arrangement announced last week does concern me.  The Reserve Bank announced a few days ago that the Secretary to the Treasury himself (not a nominee) will from now on be invited to attend the monetary policy decision and deliberation meetings, in advance of the new legislation being passed and coming into effect.  I found this a little worrying on three counts:

  • first, this is a significant time commitment for one of our most senior public servants.  What won’t he be doing while he is sitting as a non-voting member of the Bank’s internal committees, at which the Governor finally takes an OCR view?   If you think he already spends too much time, say, cosying up to Beijing or promoting vapid schemes around “wellbeing budgets” and Living Standards Frameworks, you might think this distraction was net gain for public policy. But I don’t suppose his employers quite see it that way.  (As Makhlouf’s own term expires next year, it is not even as if he is going to be involved in the new committee on an ongoing basis),
  • second, the bill envisages a nominee of the Secretary to the Treasury serving on the MPC –  perhaps a Deputy Secretary responsible for macro policy or the Chief Economist (both of whom have currently have central banking backgrounds).  Makhouf, by contrast, has no evident expertise in macroeconomics or monetary policy, and
  • third, the bill does envisage a Treasury observer, but it also provides for several external voting members, who –  so we are told, although I don’t take it very seriously –  will play an important role in the new committee, including balancing out internal perspectives.  Bringing in the Secretary to the Treasury himself now –  months before the first externals appear (and the current “external advisers” do not attend Governing Committee meetings) –  does risk creating a climate in which the Treasury perspective and presence (even though formally non-voting) is prioritised over the externals.   That risk may be able to be managed, but it needs to be, including by the appointment of strong, capable, committed externals (and, as I’ve noted before, it is not clear why good people would seek the role).

Overall, this specific announcement was a mis-step.  It was probably good for the Governor, but what is good for the Governor typically won’t be good for New Zealand (nothing personal –  it is almost a precept of institutional design that the interests of the agent are often not that well aligned with those of the principal).

It is a shame that the National Party isn’t using the opportunity of the Reserve Bank Amendment Bill to push the case for a much more open, and democratically appointed and accountable, Reserve Bank.


A bare pass mark for the Board

The Reserve Bank’s Annual Report was published yesterday.  I’m not overly interested in the Bank’s own Annual Report, although a couple of things (one an omission) caught my eye.

The first was the sharp increase in staff turnover last year

RB turnover

Staff turnover of almost 20 per cent is very high.  The Bank explains it this way

Staff turnover increased during the year to an unusually high level for the Bank, in part due to an increase in the number of retirements and staff going on external secondments for development.

But it (even the “in part” bit) isn’t a very compelling explanation –  although I suppose both the Governor and Deputy Governor retired –  and the Bank hasn’t had any material changes in responsibilities, reduced budgets etc in the last year.  It would be interesting to know what the results of their most recent staff engagement survey looked like –  probably not that good when turnover is that high.

And it was a touch surprising that the Bank’s (self-adopted) Maori name doesn’t appear in the text at all, and even more surprising that the Governor’s new enthusiasm for talking of the Bank as some mythological pagan tree god doesn’t appear at all.   The report was signed off only three weeks ago, and we know this nonsense was well underway by then.   Perhaps the Governor didn’t think it would play well with Parliament –  although I’d have thought it might be one of the few places where it might be well-received.

But my main interest was in the Annual Report of the Bank’s Board –  a separate statutory requirement.   I’ve written about these reports each year (2015, 2016, and 2017), mostly repeating the points that:

(a) the Board isn’t like a real board of a business, a Crown entity, or even a charity or sports club having few/no decisionmaking responsibilities, instead

(b) the main role of the “Board” is to monitor and hold to account (on behalf of the Minister and the public) the Governor, and yet

(c) the Board has consistently acted, and communicated, as if their primary role was to have the back of the Governor, serving his interests not those of the  public.

And so no discouraging or critical word was ever heard from the Board, even in (say) egregious instances of the Governor attacking individuals.   From reading Board annual reports over the years you’d have to suppose that the Bank was perfect –  the sort of entity unknown to humankind – or that the Board was supine, and useless to taxpayers.

Consistent with all this, the Board’s Annual Report has been buried inside the Bank’s report –  you can’t even find it separately on the Bank’s website.  There is no press release from the chair about the Board’s report, and no mention of the Board’s annual report in the Governor’s own press release.   It still has the feel of a tame appendage of the Bank, working mostly in the Governor’s interests  (even if this year, for some reason, the Board’s report this year features first in the combined document itself).

But there has been some improvement over recent years.  A few years ago, the Board’s report was a mere two pages, and now it is five pages (with some other relevant descriptive material –  eg around conflicts of interest and remuneration of directors –  included in the Bank’s report).     There is also still a (relatively minor perhaps) factual error.   But there are some signs in this year’s report suggesting that just occasionally the Board thinks for itself.  Perhaps this isn’t unrelated to the fact that the second stage of the review of the Reserve Bank Act is looking at, among other things, the role of the Board and whether it adds any real value in its current form.

What in this year’s report makes me just slightly encouraged?

It certainly isn’t the treatment of monetary policy.  Reading the report you wouldn’t know that core inflation had been below the midpoint of the inflation target for eight years, even after the midpoint was made the explicit focus of monetary policy (by agreement between the Governor and the Minister) in 2012.  Instead, there is simply heartwarming praise of the policy processes, and if there are any issues at all about inflation they are, apparently, all the fault of the “global environment”.  Then again, none of the Board has any particular expertise in monetary policy.

But there were several positives.

First, while backing the inquiry into banking conduct and culture in New Zealand being undertaken by the FMA and the Reserve Bank, they explicitly note that

“conduct concerns are formally within the remit of the FMA”

which is a point I’ve been making for months, but which the Governor has never been willing to acknowledge, preferring to be the most visible face of an issue that really isn’t his responsibility.    It is a small acknowledgement, but they didn’t need to say it, and yet they chose to do so.  That deserves credit.

Second, the Board’s report explicitly refers to the damning survey results on the Reserve Bank published earlier this year in the New Zealand Initiative’s report on regulatory governance.  This was the report which summarised the results thus

In the ratings, the RBNZ’s overall performance across the 23 KPIs was poor. On average, just 28.6% of respondents ‘agreed’ or ‘strongly agreed’ that the RBNZ met the KPIs and 36% ‘disagreed’ or ‘strongly disagreed’. These figures compare very unfavourably with the FMA’s average scores of 60.8% and 10.3%, respectively.  They also compare unfavourably (though less so) with the Commerce Commission’s averages of 39.9% and 25.8%, respectively.

The Board writes

The Bank’s own relationships with regulated entities came under scrutiny with the publication of an independent review of regulatory governance in New Zealand. The Board met with the Chairs of the Boards of the four large trading banks as a means of gauging whether the opinions expressed in the review are widely held. Both the Board and the Governors are looking for continuous improvement in how the Bank interfaces with the regulated entities, specifically how it assesses the soundness and efficiency of its own regulatory actions (including the risks of unintended and inefficient consequences); how it assesses any tradeoffs between these two objectives; and how it reports on efficiency as well as soundness.

Pretty tame stuff, but better than nothing, and at least a recognition that there has been a problem.    The Governor’s own statement, by contrast, explicitly mentions the IMF FSAP and questions about the handling of CBL, but doesn’t mention at all this heavy criticism from well-informed locals, and the body of the report appears to brush off the NZI report results as largely resulting from one particular disputed policy (which frankly seems unlikely –  well-regarded and trusted institutions don’t score that badly when there is simply one specific thing that happens to upset people).

On CBL, however, the Board seem mostly in the mode of covering for management.

Given the public comment that was associated with the Bank securing interim liquidation of CBL Insurance Limited,  the Board requested information on the legal advice obtained and the reasons why the Bank’s investigation was not disclosed prior to court action being sought. The obligation to make disclosures to the share market rests with company directors, and a statutory requirement for confidentiality applied to the Bank’s investigation.

It is good that the Board asked the questions, but the answers don’t seem very satisfactory.  It was, after all, as I understand it, the Reserve Bank that compelled CBL not to tell shareholders (or, indirectly, creditors) what was going on.

My third small positive related to how the Board tells the story of what it does.

In the past, the Board has talked about cocktail functions it holds (for local elites) around various Board meetings this way

With most Board meetings…the Board hosts a larger evening function to engage with representatives of many local businesses and organisations, and to enhance our understanding of local economic developments and issues……. This outreach is a longstanding practice of the Board to ensure visibility of its role among the wider community, and to facilitate directors’ understanding of local economic developments, and the wider public’s understanding of the Bank’s policies.

But here they are this year

The Board met with business representatives and other important stakeholders over lunch at many of its meetings, and also hosted functions for local stakeholders following its regular meetings in Auckland and Wellington. These functions provide an opportunity for stakeholders to discuss issues with the Board and Governors following a presentation by Governors. The Board pays particular attention to any feedback on the messaging, transparency and accountability of the Bank, and is looking to the new Governor to ensure that there are improvements in some key stakeholder relationships in the next year.

If they still seem to tie themselves too closely to the Governor, there is a clear shift of emphasis – at least in how they sell themselves in public –  recognising a little more that their job is not to promote the Bank’s policies, but to ensure that the Governor is doing his job.  The explicit final sentence is the sort of thing one should expect, from time to time, from the Board, but which has been notably absent over the previous fifteen years of reports.  It is a welcome step forward and thus –  credit where it is due – I’d give them a (bare) pass mark this year.

Under the amending bill currently before Parliament the Board’s powers are to be beefed-up further, as regards the new Monetary Policy Committee.  I regard that as quite inappropriate: the Board members have no relevant expertise, and no legitimacy in their role determining who will set macroeconomic policy for New Zealand.  But the bigger questions are still to be addressed in the second stage review of the Reserve Bank Act, and so no doubt the Board needs to be seen on its best behaviour, at least looking as if it is adding some small amount of value.

But the institutional incentives, and resourcing (lack of it) mean that any improvements are unlikely to be durable or amount to much, even if individual board members were well-intentioned.

Thus, welcome as the small improvements in this year’s report are, I remain of the view that the Board in its current form should be dis-established,  If, as I would favour, the Bank is eventually split in two, there should be proper decisionmaking boards for each of the monetary policy and financial regulatory agencies.  That is how most Crown entities –  large and small, visible and not –  are governed.   Scrutiny and review mostly always will –  and probably should be –  done by those outside the Bank: the Treasury, MPs, financial markets participants, academics, and independent commentators, supported by pro-active practices and statutory provisions around the release of relevant documents .  In support of those efforts, I will continue to argue that the proposed independent fiscal monitoring agency should be broadened to include responsibility for providing independent monitoring and commentary on monetary policy and the Bank’s financial stability responsibilities.   Board members, sitting with management every month and with the Governor as a Board member, resourced by the Bank itself, simply can’t hope to be able to provide the level of detached scrutiny the public deserves of such a powerful public agency.

A bouquet for the Government

They don’t deserve many, but this announcement this morning is unambiguously positive.

Cabinet papers will be proactively released, Minister of State Services Chris Hipkins announced today.

The move is part of the Government’s wider plan to improve openness and reflects its commitment to the international Open Government Partnership.

The Cabinet papers will be released no later than 30 business days after a Cabinet decision. This process will be in place for Cabinet papers lodged from 1 January 2019, Chris Hipkins – who is also responsible for Open Government – said. ……

“Cabinet papers will be released within 30 business days of the Cabinet decision unless there is good reason not to publish. If we can publish it, we will.”

It will, almost certainly, end up less good than it sounds.  But it is a start.    The official papers upon which our governors make their official decisions should be open to public scrutiny, with only a short delay.  As the Minister’s press release notes

“This change is consistent with the spirit of the OIA which states that information should be made available unless a good reason exists for withholding it.

“Proactive release of official information promotes good government and transparency and fosters public trust and confidence in government and the public agencies.”

Of course, only time will tell how (a) this government chooses to run the system, and (b) whether future governments regard themselves bound by the newly-established practice (the law isn’t being amended to require pro-active release, but it probably should be).  I don’t suppose we will ever see any Cabinet papers that might deal with awkward issues around the relationship with the People’s Republic of China, or PRC interference in New Zealand public and commercial life.   Perhaps we shouldn’t either.  Some things – a few –  need to be not only deliberated in secret, but to able to have the relevant considerations and supporting evidence kept under wraps for a longer period.  And, reasonably enough in my view, they won’t be releasing papers relating to recommendations for honours (they say they will withhold papers relating to appointments as well, and that is more concerning).

What worries me a little more is that

Individual ministers will have responsibility for releasing Cabinet papers, which will be subject to an assessment to decide if there are good reasons to withhold any of the information.

If individual ministers are making the decision, how will we be confident that all ministers are applying more or less the same standard?  There is no suggestion of a central monitoring process, and there will be more or less ornery ministers, more or less politically uncomfortable issues, weaker and less confident ministers, and –  as our arrangements have developed –  ministers who hold ministerial warrants but aren’t part of Cabinet, or even of the government itself.  Will, for example, the Greens ministers be bound by this new Cabinet practice?

But if the principle is that the official papers upon which our governors make their official decisions should be open to public scrutiny, with only a short delay, shouldn’t this principle be extended –  either voluntarily, or mandatorily –  to other state agencies that make major policy decisions, that attract considerable public interest and scrutiny?

One could readily extend the principle to the boards of all Crown entities (subject to similar specific exclusions as the Cabinet will apply to itself).

But, of course, the entity I particularly had in mind was the Reserve Bank.   The Bank’s longstanding line has been that, even though they make vital economic decisions that can materially affect the short to medium term performance of the economy, it would be costly, damaging, and confusing to release the background papers that the Governor receives prior to making his or her decision.  After all, they tell us, there is the MPS or the press release, and the Governor holds a press conference once a quarter.  What more do we need to know, they argue?   They simply generally refuse to release background papers –  although I did once manage to get them to release some that were ten years old (to make the point that, at most, there is a time dimension to any decision on whether material can be released under the OIA).

But those arguments apply –  if at all –  just as much to decisions made by Cabinet, often on much more complex and sensitive issues than those the Reserve Bank deals with.  Cabinet decisions are announced by ministers, the PM holds press conferences, and ministers are generally pretty accessible to the media  (more so than most Governors).  But the Cabinet has rightly decided to release (most) Cabinet papers, and recognises that doing so is right and proper in a free and open society, and will over time enhance confidence.

The same should go for the Reserve Bank.  If the Governor is serious when he talks about being open and transparent –  as he seems to be on all matters that he isn’t responsible for –  he’d take the lead on this issue, and announce that in future the big folder of background papers prepared going into each Monetary Policy Statement, together with the (anonymised) written advice of his advisers on the OCR decision, would be routinely released (perhaps with a small number of redactions) six weeks after the OCR/MPS announcement to which they relate.  Six weeks is long enough that plenty of new data will have emerged since the papers were written (indeed, it will be close to the next OCR decision), and short enough to still be of use/interest to analysts in understanding the Bank’s thinking (recall that we still have no idea what analysis they used last year when they announced they were assuming half of the building associated with Kiwibuild houses would be offset by reduced other residential building activity).

And if the Governor won’t take the lead, the Minister of Finance should insist on this sort of approach as part of the legislation and procedures around the establishment of the new statutory Monetary Policy Committee.

Most likely the Bank will continue to fall back on spurious arguments about potential damage to the “substantial economic interests of New Zealand” (an OIA ground that hasn’t been well-tested), or risks of confusion.  Those arguments are just wrong, and risk sounding (or perhaps are) self-serving: powerful bureaucrats protecting their particular monopoly on information/advice.  Cabinet has been willing to step beyond those arguments, and we should expect the Reserve Bank Governor –  a very powerful unelected policymaker –  to be even more ready to do so (being, after all, unelected and thus with less legitimacy).  If he doesn’t do so willingly, he should be left with no choice.


Reserve Bank Amendment Bill – a submission

Submissions to Parliament’s Finance and Expenditure Committee on the Reserve Bank of New Zealand (Monetary Policy) Amendment Bill close today.  Despite my scepticism about the value of the process –  given that the Bank and the Minister are already actively recruiting members of their tame Monetary Policy Committee –  I did lodge a submission this morning.

The full text is here Submission to FEC Reserve Bank of NZ Amendment bill Sept 2018

Most of it covers ground I’ve dealt with here over recent months, albeit in more abbreviated form. There are two main aspects to the bill:

  • the proposed change in the statutory goal of monetary policy, and
  • the creation of a statutory Monetary Policy Committee.

On the former

The case for having active discretionary monetary policy is – and always has been – about cyclical stabilisation.   We don’t need an active Reserve Bank to deliver broadly stable price levels over the longer-term.  And nothing monetary policy can do makes any difference to unemployment in the longer-run.   But there is a strong case for active monetary policy to limit the short-term downsides from severe adverse shocks – the Great Depression was the most stark modern example (and, indeed, it was the backdrop to the establishment of the Reserve Bank of New Zealand) but the argument holds in almost serious downturn.  Monetary policy should do what it can to stabilise the economy, subject to a longer-term nominal constraint (eg price stability).  And Parliament should be upfront with citizens about this (which is the way central banks typically try to operate in practice).

The formulation in the bill at present has a number of problems:

·       the whole point of what discretionary monetary policy can do (not just here but around the world) is to avoid (or keep to a minimum, consistent with price stability) periods of significant excess capacity.  Despite the attempt to argue otherwise in the Explanatory Note, “maximum sustainable employment” is not a measure of excess capacity.  Unemployment is much closer to an excess capacity measure.  It also has a considerably greater degree of historical and public resonance.

·       the proposed wording treats employment as good in itself, whereas labour is an input (a cost, including to those who supply it).  A high-performing high productivity economy might well be one in which people preferred to work less not more.    By contrast, lower unemployment (people who want a job, are searching for it, are ready to start, but can’t find a job) is unambiguously desirable, to the extent possible.

·       the wording makes no attempt to integrate the two dimensions of the goal, and

·       it continues to suggest that active monetary policy is primarily about medium-term price stability.  But we do not need monetary policy for that goal (a Gold Standard or something similar would do fine).  Instead, medium-term price stability is more like a constraint (a vitally important one) on the use of monetary policy to keep the economy operating close to capacity.

Accordingly, I argue that goal should be worded as something like:

“Monetary policy should aim to keep the rate of unemployment as low as possible, consistent with maintaining stability in the general level of prices over the medium-term.”

It isn’t anywhere near as radical as it might seem to some.  The working definition of “stability in the general level of prices over the medium-term” (1 to 3 per cent inflation, with a midpoint focus on 2 per cent) could be kept exactly as it now.  But it is clearer, and better aligns with what we should look for from the Bank and from the new MPC.  Keeping unemployment as low as possible really matters for individuals and their wellbeing.   But this formulation also keeps clear that the Bank cannot go pursuing its own views on what the unemployment rate can or should be if medium-term price stability is jeopardised.

As for the proposed MPC

Establishing a statutory Monetary Policy Committee is a sensible, well overdue, reform.  The New Zealand model, innovative in its day, was not followed anywhere else, and the existing model is also out of step with how we run almost every other public agency (and most private ones).

Nonetheless, the Monetary Policy Committee provisions of the bill as drafted are likely to achieve relatively little. They retain a far too dominant position for the Governor –  out of step with the typical chief executive role in other Crown entities –  including enabling the Governor to be very influential in the selection process for all other MPC members.

This legislation is an opportunity for more far-reaching reform, enhancing transparency and accountability and better aligning the governance of monetary policy with practice in open democracies abroad.  Doing so would strengthen confidence in the institution, and would also increase the chances of attracting consistently good potential appointees.

There are a number of detailed suggestions to improve the bill, including

In the bill (proposed new section 63C(3) the internal members of the MPC must be a majority. It would be very unusual for a statutory decision-making body for a government agency to be comprised largely of executive staff.  It confuses roles and risks undermining the value in creating a committee.  It is also an unusual –  although not unknown –  in central banks abroad (in some cases, outsiders fill executive roles during the term of their appointment).  A better model for New Zealand would be to have the Governor and Deputy Governor and three externals as members of the MPC.  The Committee would, of course, be expected to draw on staff expertise, but as advisers (in the same way that, for example, experts in Treasury advise the Minister of Finance)

In the bill, all appointments (internal and external) to the MPC would be made by the Minister on the recommendation of the Board. This is a very unusual model in New Zealand public life, where the standard procedure – for many important and very sensitive roles – is for direct ministerial appointment (Governor-General on advice of the Minister).  That model should also be adopted for the MPC, including for the positions of Governor and Deputy Governor.  Again, such an approach is typical in other countries.  It is consistent with the fact that members of MPCs collectively wield a great deal of power, and although voters have no way of holding them to account directly, they should be able to hold to account directly those who appoint the MPC.


As presently worded, the role of the MPC looks to be quite narrow (“formulating monetary policy” – a term not substantively defined, and possibly not even including OCR decisions). The MPC should be given explicit statutory responsibility for all aspects of monetary policy (including advice on the remit and, for example, foreign exchange intervention, liquidity provision, issuance of notes and coins), even if some operational aspects are then delegated by the MPC to the Governor.   This issue may appear arcane, but will assume considerable salience if the effective lower bound on the OCR is reached in some future recession.


The transparency provisions around the MPC should be considerably strengthened, to require the publication of substantive minutes (including at least the numerical balance of any votes) and, with a suitable lag, the pro-active release of the staff papers submitted to the MPC.   At present, aided and abetted by the Ombudsman (over decades), the Bank consistently refuses to publish any background papers until many years have passed (a striking contrast to the pro-active release of papers relating to each year’s Budget).    Making these amendments would largely remove the need for the proposed Charter (which implies direct ongoing ministerial involvement in how the MPC is run, and could in future be used to degrade transparency provisions), and allow the MPC to evolve its own processes and culture over time.

I touch on provisions such as the proposed abolition of the age restriction on the Governor, provisions to avoid last year’s (almost certainly unlawful) “acting Governor” appointment while dealing effectively with the substantive issues, and the role of the Board.

The bill retains the Reserve Bank Board as the entity principally responsibility for holding the Governor to account, adding responsibility for holding the MPC to account. Successive boards have done this job quite poorly (more because of incentives and institutional design than because of individuals), and have tended to act as if their role is to defend and champion the Governor.  It will be difficult to change that dynamic, and yet more important to do so with the addition of a statutory MPC and the potential tensions between the Governor and other members.   The bill usefully provides for a more normal system in which the Minister directly appoints the Board chair.  However, other helpful changes that could be considered include:

  1. providing the Board with specific (limited) financial resources of its own (at present it relies on totally on the Governor),
  2. removing the Governor as a member of the Board,
  3. renaming the Board the Monitoring and Accountability Committee (MAC), to be clear that the entity is a quite different sort of beast than a corporate board or a typically Crown entity board (the mindset most Board members bring to the role),
  4. making clear in legislation that the MAC is not itself part of the Bank, and is primarily responsible to the Minister and the public, and
  5. requiring the timely publication of the minutes of Board meetings and the pro-active release of (most) papers presented to the Board.

I conclude

The Monetary Policy Committee provisions of this bill are unambitious and disappointing, especially when set against the expressed aspiration of a once in a generation update to the legislation to reflect the way in which the world (including central banking) has changed since 1989.  Among the features of our age are a much degree of openness, a greater recognition of uncertainty and of the benefit of an open contest of ideas, and less willingness to build institutions based on a deference.  This bill reflects almost none of that.

In considering the bill, I would urge the Committee to look closely at the experiences of open central banks in the United Kingdom, the United States, and Sweden (in particular).  All are more open than anything envisaged in this legislation, and in the way the Minister has described his intentions for how the proposed New Zealand system should work.  Each of those central banks has had strong individuals willing and able to challenge consensus views, and to debate monetary policy issues thoughtfully and openly.  They do so in part by avoiding designing a system where the Governor (chief executive) has a too-dominant formal role.  The current bill does not really address that glaring weakness in the New Zealand system.

Officials, especially those at the top of the Reserve Bank, appear to find a more open model threatening, and have made various arguments against moving towards such a model here. But the interests of officials – including the protection of their own position – are rarely that well aligned with the interests of New Zealanders.    New Zealand has the opportunity to learn from the successful models abroad, in three very different countries, adapting the insights to the specifics of New Zealand (system of government, size etc).  By doing so, Parliament would, over time, greatly strengthen the institution itself, and New Zealand processes around the design and conduct of monetary policy.  We would all be better for such change.

This shouldn’t be a particularly partisan issue.  Everyone should want a better, more resilient, better-governed institution handling monetary policy, and for the regime itself to command confidence across the political spectrum.  I hope the select committee deliberations do finally prompt the Minister of Finance and the government to reconsider, to give up their small ambitions, and to embrace the idea of more far-reaching change and improvement in the way monetary policy is governed, contested, and accounted for.

Towards an MPC

A week or so ago, advertisements appeared in the major newspapers inviting applications from people wishing to be considered for appointment as external (non-executive) members of the Monetary Policy Committee.   Should you wish to apply, the advert is here, with applications closing on Friday.

All of which is quite remarkable.  The Monetary Policy Committee is to be created by legislation currently before Parliament,  and not expected to be passed until the end of the year (the select committee isn’t due to report back until early December). The appointments are not expected to take effect until April next year.  In fact, submissions on the Reserve Bank of New Zealand (Monetary Policy) Amendment Bill themselves also close on Friday.   The select committee process is supposed to involve members looking carefully at the details of the legislation, considering public submissions, and recommending any refinements or amendments the committee considers appropriate.  But you would have to wonder what the point of submitting is, at least on the MPC structure, powers etc, when the appointment process for members is already well underway.

As I’ve previously highlighted, one of the bizarre aspects of the proposed model is that the Reserve Bank Board (no doubt heavily influenced by the Governor, who is a member of the Board) get to control the appointments.  Appointees will, finally, be signed off on by Cabinet and appointed by the Minister of Finance, but the Minister will only be able to appoint people nominated by the Board.  Most of the Board members have no, repeat no, expertise in monetary policy (including its governance), and all but one of them were appointed by the previous government.  It is a weird abdication of responsibility, for a key aspect of short-term economic policy, not seen (as far as I’m aware) in any other major government appointments.  It is extraordinary that the Minister of Finance cannot directly appoint people he has judged appropriate to the role –  people who can, by their choices, have a big influence on the short-medium course of the economy.   The Minister of Finance (and his colleagues) are, after all, the only people we citizens can actually hold to account –  kick out – if things go wrong.

We’ve seen this sort of rather premature process from the Board previously.  Last year, they were advertising for candidates for a new Governor, with applications closing well before the election, even though the Board –  like everyone else –  knew that the then Opposition parties were promising reform of the Reserve Bank, including legislative change.

This time one must presume they have the approval of the Minister of Finance for kicking off the recruitment process.  After all, the advert is quite specific that there will be three external appointees, and that is a decision only the Minister can make (the legislation specifies only a range (2 or 3 externals)).  That, incidentally, guarantees that there will be four internal members –  the maximum allowed in the legislative provisions, and the bill requires an majority of internals.

That said, the process seems to have been rather rushed.  Applications are open for only two weeks, and when I contacted the recruitment firm the Bank’s Board is using to ask for the information pack and related detail, the initial response was that they didn’t yet have all the material from the client.  It took six days before the material finally arrived.

There was some interesting material in the advertisement

External MPC members need not have expertise in monetary policy or macroeconomic theory.

This is the more moderate version of what I was told the Governor had said the other day at the INFINZ function, that he didn’t want “you economists” (last I looked that was the Governor’s own background) because “we need different thinking”.

The bill itself says

The Minister may only appoint as an internal or external member a person who, in the Minister’s opinion, has the appropriate knowledge, skills, and experience to assist the MPC to perform its functions (for example, in economics, banking, or public policy).

Which is fair enough I guess, but I would hope that when the Minister finally comes to make appointments he insists that at least one of the externals in fact has a fairly strong background in monetary policy and macroeconomics.   Even the Bank’s Board –  which has no power over monetary policy at all –  has usually had such a person.  If there is no such person on the MPC, it will simply confirm from the start even more strongly what I have been arguing, that the new structure is likely to be ineffective, governor-dominated, and resembling in many ways the sort of system the Bank has had in place for the last 15 years or so (when a couple of externals  –  almost always with no economics background –  have participated in monetary policy deliberations, and provided an OCR recommendation, but have had little real influence most of time, and no accountability: any value was mostly in passing on a specific class of business anecdote).

What sort of people is the Board looking for?

External MPC members will require:

  • Exceptional intellectual acumen and communication skills
  • Experience exercising sound judgement to make effective decisions, in environments reflecting high levels of complexity and uncertainty
  • Capacity to engage with complex economic issues and make contributions which draw upon a range of relevant professional, educational and life experiences
  • Absolute integrity, reflecting genuine independence, rather than solely acting as a ‘voice’ for specific sectors or interest groups
  • The ability to operate in a manner consistent with the highly confidential nature of MPC decisions.

On the second to last of those, even the bill is a bit stronger

A person must not be appointed on the basis that the person represents a particular industry sector.

It would be quite concerning if anyone appointed to the MPC saw themselves as a representative or voice of a sector (even if not “solely”).  All members must surely be expected to operate solely from a national perspective.

But what of the first set of criteria?  I’m always a bit sceptical of adverts seeking “exceptional” anything, as there are very few people with such “exceptional” qualities anywhere.  Of the Reserve Bank’s existing senior management and Board, of those I’ve had anything to do with there are plenty of moderately capable people, but none whom I’d describe as having “exceptional intellectual acumen”.  Why does the Board think they are likely to attract such people to a part-time role, in which they will have little ability to influence policy, no independent resources, and (from what we’ve been told previously) no ability to articulate their views openly?  Oh, and not to mention people willing/able to devote 50 days a years in a part-time capacity at public sector board remuneration rates?

I’m also puzzled at the suggestion that MPC members should need “exceptional communications skills”.     Again, of management or the Board, only the Governor could possibly be considered to have such skills, and even he is often rather a loose cannon.  But more importantly, the Reserve Bank fought hard –  and the Minister sadly endorsed – a model in which MPC members will not be free to articulate anything other than an agreed MPC position on policy.  They won’t even be able to have their personal perspectives clearly recorded in the minutes of the meetings, let alone make speeches or give interviews that might seek to advance thinking or articulate a minority position, That is quite different from the situation in more open systems, notably those in the UK, the US, and Sweden: systems which function well, without any of the problems the Reserve Bank management (protecting their personal position) have tried to worry people with.

It will be interesting to see what sort of people the Board and the Minister come up with, assuming that Parliament eventually passes legislation along the lines of the current bill (and bear in mind that we have a minority government again).  It is hard to see why the roles –  probably little more than silent adjuncts to the Governor – would be attractive to really good people, or who will really be free to take them up (even an academic –  apparently not wanted by the Governor –  might struggle to commit 50 days a years, spread over the year, not just in the long summer vacation).

Potential conflicts of interest have always been a bit of an issue, and the main reason I asked for the information pack was to see how they proposed to handle that issue.  Frankly, the material I received –  which included a draft Code of Conduct –  suggested they haven’t really thought sufficiently hard about it yet.   The conflict of interest provisions look a lot like those I used to be subject to as a staff member participating in the OCR Advisory Group, but don’t really grapple adequately with the situation of part-time externals, presumably earning their living (or occupying their time) mostly doing other, non Reserve Bank, stuff.  For example, there is (reasonably enough) a prohibition on

Members must not be personally or professionally involved, directly or indirectly, in regular trading in financial markets in which the Bank has, or might have, a significant influence. This includes domestic wholesale money, bond and foreign exchange markets, interest and exchange rate futures, options and swaps markets, instruments linked to such markets, equities listed on New Zealand exchanges and prediction markets related to those issues in which the Bank might have a significant influence.

(If only the predictions market had not, in fact, been killed off by the previous government).

And under the legislation public servants and directors/employees of entities regulated by the Bank will be probibited.

But there is no sign that, say, someone in my position would be disqualified or conflicted (in terms of this specific policy), despite being a trustee of two superannuation schemes and devoting a fair chunk of my time to, at times quite vocal, commentary on aspects of economic policy.  I’d certainly regard both of those sorts of involvements as disqualifying –  even scrupulously observing confidentiality –  and I would expect most Monetary Policy Committees in other countries would do so too.

(And in case anyone is in any doubt, I have no interest in the MPC positions myself. They are set to be ineffectual figleaf positions.)

And so it will be interesting to see what people they finally manage to attract, both in the first round, and a few years later when the novelty has worn off.  A smart (but deferential) semi-retired person would probably fit the bill quite well, but since the government and the Bank have been clear they don’t want people who might rock the boat, and they apparently aren’t keen on economists, and since even the externals together will be a perpetual minority, you wonder why someone good would be interested.   Pocket money probably shouldn’t be the motivation, at least if the government were serious about putting in place a strong, well-functioning, MPC.  Of course, as it is, there is no evidence of such intent.