Dear Board members

You’ll recall that in Sunday’s newspaper Reserve Bank Board chair Neil Quigley declared, when asked by a journalist, that

Orr’s chequered behaviour is not something on which the Reserve Bank chairman, Neil Quigley, is prepared to act.

“I have not received a formal complaint from any party about the governor’s interaction with them,” he said. “The Board has full confidence in Adrian Orr’s leadership.”

Such an underwhelming attempt to avoid any pro-active responsibility to look into concerns in plain sight, let alone those under rocks.  He hadn’t had a “formal complaint” (but had presumably heard quite a few informal expression of concern) “from any party about the governor’s interaction with them” (suggesting that if someone had expressed concern to Quigley about how the Governor had treated other people, let alone other issues or processes, it wasn’t covered by his denial.  And all that without acknowledging the difficulty many people would have in formally complaining –  even if they had any confidence in the Board itself – given the Governor’s power over numerous financial sector businesses.  But it was all too much par for the course from the Board, which consistently seems to act as if it is more interested in covering for the Governor (whichever one) than in acting on behalf of the Minister and the public.

But as I noted the other day, Quigley’s narrow comment could be seen as a bit of an invitation for people to lodge expressions of concern.   I heard that someone had written to the chair of the Board expressing various concerns and calling on them to exert greater leadership in holding the Governor to account, and that in response Quigley had indicated the issue would be discussed at the Board’s regular meeting on Friday (Orr himself is a Board member, so one hopes at least some of the discussion occurs in his absence).  I decided to add my tuppenceworth to the mix and wrote to the Board last night.  As I’ve noted here, I’ve not had any bad interactions with the Governor myself, but what I’ve seen and heard of other episodes, and the succession of issues around poor process, poor policy substance, and poor communications were, to me, ample to think that the Board really needs to start taking these issues seriously.    It is hard to think of an advanced economy where so many people have had such broad-ranging concerns about an incumbent Governor –  and our one has more power than most.

The full text of my letter is here

Letter to RB Board re Orr October 2019 FINAL

Here is some of the text

You will, no doubt, be aware of the recent series of articles by the Stuff journalist Kate MacNamara. One does not have to be persuaded by all her arguments, or those of the individuals she quotes, to be seriously disconcerted by the perspectives on the Governor’s conduct that she reports. Some of the questionable conduct – the Governor’s treatment of Jenny Ruth at a recent press conference – was visible to all. Others weren’t. Perhaps all those other stories are false, perhaps all are grossly exaggerated. You would surely want to know whether or not that was so – MacNamara clearly having talked to people who are at least somewhat well-informed and the claims having been run prominently in a major mainstream media outlet – but you cannot have that assurance yourselves, or offer it to the public or Minister, without a serious review of the allegations, and of the wider “culture and conduct” that are claimed to have characterise the Governor increasingly in recent months. And yet your chair, when approached for comment, simply fell back on the line of “we haven’t received a formal complaint” (clearly suggesting you’d heard the informal unease many are feeling) as if that meant there was thus no need to do anything more. Frankly you owe it to the Governor, almost as much as to the public, to treat these issues seriously. If there is nothing to the stories – bullying, intimidation, bad-mouthing critics in public fora etc – surely the Governor’s name deserves to be cleared? If there is much to the stories, you need to act, and – having let things drift to this point – to be known to have acted.

And towards the end

Most recently, there was the statement released late last week by the Bank’s senior management – but clearly under the Governor’s aegis and in the Governor’s personal style. Anyone I know who has read it – and fortunately perhaps it hasn’t had much coverage – has been incredulous. How could the Governor of the central bank – the most powerful unelected person in New Zealand – be reduced to so much bluster, and attempts at distraction, trying to suggest that critics were raising unfair issues about Bank staff, when almost all concerns I’ve seen or heard have been about the Governor himself and, to a lesser extent, his senior management? The fact that his handpicked senior management went along with that statement, and were fully party to it, should itself raise further concerns for the Board (including because you also have statutory responsibility for keeping under constant review the performance of the Deputy Governor).

I could go on, but won’t. But there are ample prima facie reasons why the Board should be concerned about how the Governor is conducting himself and how he is conducting public affairs, and why that concern needs now to result in some open-minded but searching investigation and some serious accountability.

We should have a right to expect a Governor who is temperate, who displays gravitas, who demonstrates rigour, who recognises that every one of us has blindspots and is prone to making mistakes, who is open to genuine debate and challenge, who exercises a judicious authority, and models this sort of behaviour to the staff in the organisation he leads. You were responsible for Adrian Orr’s appointment. You need to act to ensure he operates in a manner consistent with those reasonable expectations. If you don’t, the Bank will be diminished – substantively, and in the eyes of domestic and foreign observers – the conduct of policy will be impaired, whatever potential Adrian has to be good Governor will never be realised, and your own standing as guardians of the public interests in the Bank will rightly -and perhaps irretrievably – be stained.

I gather from Neil Quigley that my letter will also be discussed by the Board on Friday.

I also wrote this morning to the Minister of Finance, partly to send him a copy of the letter to the Board, but also to highlight to him his responsibility for the Bank and for the Governor.

In many areas of the Bank’s operations the Governor operates independently of the Minister of Finance, and the Reserve Bank has day-to-day responsibilities for monitoring the Governor’s stewardship and conduct. But none of that diminishes your responsibilities as Minister of Finance. You appoint the Governor (on the Board’s recommendation) and the Deputy Governor, you appoint Board members (and now, specifically, the chair) and it is only on your recommendation that, if things got particularly bad, that either Board members or the Governor (or the Deputy Governor) can be removed from office. Moreover, you are the only person referenced in the Reserve Bank Act who is directly accountable to Parliament and to the public. If serious issues or concerns arise it is not satisfactory for a Minister of Finance to fall back on lines about operational independence or about leaving the Board to do its thing. You are responsible to ensure that all these appointees are doing their jobs to the high standards the public should expect from public officeholders.

and

These are serious matters and need to be addressed as such by both you and the Board. To the extent that concerns raised are either ungrounded or exaggerated, it is important that the Governor’s name be cleared. But to the extent that those concerns are warranted, it is important that they are addressed and issued remedied, for the sake of the Bank itself (including its staff), for the sake of good quality policymaking, in the interests of good governance in New Zealand more generally, and (frankly) for the Governor’s own sake. It isn’t good enough for the chair of the Bank’s Board – who is directly responsible to you – to suggest that not having received a “formal complaint” there is no need for the Board to do anything. Anyone charged with a monitoring responsibility needs to be much more pro-active than that.

One of criticisms of the Governor has been the lack of any serious or substantive speeches from him on topics he is responsible and accountable for.  As I noted to the Board, apart from anything else, such speeches can be one way of benchmarking the Governor’s performance.    As it happens, late this morning the Bank issued a speech by the Deputy Governor. I haven’t yet read it –  so reserve the right to disagree and criticise specifics (good serious speeches create the basis for intelligent discussion and debate) – but flicking through it it simply looks like a serious speech, of the sort a thoughtful central banker would give anywhere in the advanced world.  Of the sort unseen from Adrian Orr.  Bascand has his weaknesses (I’ve written about some of them here, including his apparent reluctance to make a stand) but back in 2017 he told media that he had applied to be Governor (which I wrote about here).  He missed out.  But whatever his other weaknesses, it is impossible to imagine that anyone would be raising the range of concerns –  process, substance, conduct –  had the Board and Minister appointed Geoff Bascand as Governor.

 

 

Annual Report time

The Reserve Bank’s year ended last week on 30 June and it will, thus, shortly be time for the Bank’s Board of Directors to turn their minds to preparing their Annual Report.

Most of the powers of the Reserve Bank rest with the Governor personally, although late in the year the new Monetary Policy Committee picked up responsibility for the conduct of monetary policy.  The Bank’s Board has no day-to-day (or strategic for that matter) decisionmaking powers.  The job of the Board is, primarily, to hold to account those who do have decisionmaking powers.  In an ideal world, their Annual Report should be a masterpiece of real accountability –  these people are paid (not that well admittedly) to act on our behalf in evaluating the performance of the Governor and the Bank.

This is what the Act requires

board report.png

Section 53(1) simply tells the Board, in slightly more detail, that their job is to “keep under constant review” what the Governor, the MPC, and the Bank are up to.

In many respects, this framework has long been a bit of a joke.    The Board has limited expertise for some of its responsibilities (basically none re the monetary policy requirement above), has no resources, has the Governor himself sitting on the Board, and has been minded to set its role more as having the back of the Governor, rather than providing serious scrutiny (behind the scenes, let alone through the statutory Annual Report).   And this has finally been recognised in the circles that count: the government’s consultative document on the Reserve Bank Act review proposes that in future the Board should be turned into a decisionmaking body, with monitoring and accountability responsibilities moving elsewhere.

The additional feature that made it unlikely that the Board would really provide serious scrutiny was their involvement in appointments.  On paper, the Minister of Finance appoints the Governor and MPC members. But he can do so only on the recommendation of the Board.  The Board –  with no real expertise or democratic mandate –  controls the appointments and –  as is human nature – will want to validate their own choices and judgements.   Perhaps it might be different four years into a Governor’s term, but the current Governor has been in office for little more than a year, and the MPC members only three months.  There is some turnover on the Board, but the majority of the current Board members collectively made all thse appointments.

Each year since starting this blog, I’ve done a post on the Board Annual Report, sometimes one in prospect and one in retrospect.  Possibly there has even been some useful impact.  As I noted in last year’s post, the Board Annual Reports have improved somewhat over recent years.    In my view, last year’s report even warranted a (bare) pass mark.    But it was easy last year.  The new Governor had been in office for only three months – honeymoon period and all that – and his predecessors, lawful (Wheeler) and unlawful acting (Spencer), had gone.  If there were issues, mostly they were still the responsibility of the departed.

It will be interesting to see what the Board comes up with this year (we won’t see the published version until October).  There are a lot of issues they really should be addressing.  And as I was pondering the other day writing a post like this, my old Reserve Bank colleague –  now a consultant – Geof Mortlock sent me a copy of an open letter he had sent to the Board chair, Neil Quigley, copied to the Governor, the (acting) Secretary to the Treasury, and to Grant Robertson, Paul Goldsmith, James Shaw, and David Seymour (but not to the other Associate Ministers of Finance, Shane Jones, David Clark and David Parker).  In his letter, Geof outlines a series of questions/issues he believes the Board should be addressing in this year’s Annual Report.  I’m reproducing it here.

Mr Neil Quigley
Chairman
Board of the RBNZ
Dear Neil,
Further to my previous emails, I have given thought to the types of questions I would be addressing if I were a director on the RBNZ Board. Given that one of the Board’s main roles is to assess the performance of the Governor and the RBNZ across all of its functions, I would expect the Board, in its forthcoming annual report, to address a number of key matters that call into question the adequacy of the RBNZ’s performance in the last year.
Previous Board reports have been fairly light in content and uncritical of the RBNZ’s and Governor’s performance.  This has been a contuining weak point in the RBNZ governance arrangements.  I am hoping that this year’s report will be much more substantial and probing, given the rather troubling performance issues that have arisen in the past year (and indeed in prior years, for that matter). If the Board is to have value in the RBNZ governance process, it needs to demonstrate in its report that it has asked probing questions and held RBNZ senior management to account. It also needs to identify, in its report, the matters on which it has given advice to the Governor.  In addition, I would expect to see in its report a summary of the extent to which the Board has sought the views of external parties to provide it with supplemental information with which to assess the RBNZ’s performance and that of the Governor. This is important, given the need to avoid excessive dependency on the views of RBNZ management and staff in performing the Board’s assessment function.
In this context, I thought it might be useful to set out the types of questions I would expect the Board to enquire into and to report on in its annual report.  These are set out below.  I would be happy to elaborate on any of these matters if that would be helpful.
Questions the Board should be asking and forming a view on
Below is a list of the main questions I believe the Board needs to ask and form a publicly reported view on.
Monetary policy
–  Given that the inflation rate (on a range of measures) has been consistently below the mid point in the target range, why has the RBNZ not lowered the OCR to a greater degree and earlier than it has?  Is the Board satisfied on the analytical processes undertake and judgements made by the RBNZ in this regard?
–  Is the Board satisfied with the degree of transparency that has been revealed to date in statements made by the new Monetary Policy Committee, particularly as regards the possible divergence pr differences of views on the Committee and the capacity for individual members of the Committee to have their respective views publicly revealed so as to enhance transparency and accountability.
–  Is the Board satisfied that the Monetary Policy Committee is operating on the basis of a free and frank exchange of view and not hindered by undue dominance from the Governor?  Has the Board spoken one-on-one with members of the committee in this regard?
–  Is the Board satisfied that the RBNZ is giving sufficient attention to how it would seek to respond to a significant economic recession, having regard to the fact that the OCR is already very low and, in all likelihood, may be further reduced in coming months, and hence there is reduced scope to use the OCR to combat recessionary forces?  Is it satisfied that the RBNZ is putting in place a robust contingency plan for addressing the risks of a recession in a very low interest rate environment, and if so, on what basis has the Board reached that view?
Prudential policy
–  What enquiries has the Board made as to why the RBNZ did not discover the ANZ capital model breach at a much earlier stage than actually occurred?
–  Is it satisfied that the RBNZ has the systems, staff and policy framework required to enable it to reliably detect non-compliance by banks and insurers, and to detect emerging financial stress?
–  Is the Board satisfied that the RBNZ was sufficiently proactive in evaluating the adequacy of the bank director attestation issues that arose in ANZ (and might exist in the case of other regulated entities)?
–  What enquiries has the Board made with RBNZ senior management and external parties as to the adequacy of the RBNZ’s approach to banking and insurance supervision, having regard to the fact that the IMF assessed the RBNZ as being non-compliant with around 50% of the Basel Core Principles (i.e. the international standards on banking supervision), and that a similar failure applies in the case of insurance supervision?
–  Why does there appear to have been no significant actions taken by the RBNZ to make the necessary changes to its approach to banking and insurance supervision to bring it into alignment with international principles and best practice?  What has the Board done about this lack of action?
–  Is the Board satisfied with the adequacy of the RBNZ’s consultation processes on prudential policy issues, having regard to the serious concerns raised by many parties about the lack of meaningful consultation, the lack of transparency in RBNZ responses to issues raised in submissions, the failure of the RBNZ to adequately take into account many of the legitimate criticisms made of its policies and processes, and the lack of robust cost/benefit analysis?  What is the Board doing to address these concerns – eg raising the issues in question with the Governor and Minister?
–  In the case of the bank capital proposals, what enquiries has the Board made of parties outside the RBNZ to satisfy itself as to whether the capital proposals were well thought-through, thoroughly costed, and subject to rigorous external scrutiny (before they were released)?  Is the Board concerned at the level of criticism being made of the Governor and the RBNZ in respect of the bank capital proposals, and if not, why not?
–  Is the Board satisfied that the RBNZ has done sufficiently robust analysis of the issues in question to justify the extremely large increase in capital ratios being proposed, including in respect of assessing the existing probability of bank default, the level of economic contraction needed to trigger bank default (based on reverse stress testing), whether alternative approaches (such as bail-in debt, as being proposed by many other jurisdictions) would be a more cost-effective approach), and the assessment of the economic impacts of the proposals?  Has the Board made enquiries with external parties on these matters or merely relied on information and views provided to it by the RBNZ’s senior management?
–  Is the Board satisfied with the Governor’s handling of criticism made of him and the RBNZ with respect to the bank capital proposals, including as to whether the credibility of the RBNZ is being damaged by the way the RBNZ has been responding to criticism?
–  What performance metrics does the Board apply in assessing the RBNZ’s performance of its prudential regulatory and supervisory responsibilities?  How does it reach a view as to whether the RBNZ is performing satisfactorily or unsatisfactorily?  And, using whatever criteria the Board does use, what is its assessment? (The same question on performance metrics applies across all of the RBNZ’s functions.)
–  What analysis has the Board undertaken in relation to the RBNZ’s approach to bank recovery and resolution issues?  Is it concerned that the RBNZ is one of the few prudential supervisory authorities in the OECD that has not yet introduced recovery planning requirements for banks?  Is it concerned that the RBNZ has not undertaken any resolvability assessments or resolution planning of the major banks, other than for the limited (and, frankly, very odd) purpose of facilitating the separation of the subsidiaries from the parent banks?
–  Is the Board concerned that the RBNZ’s OBR policy is widely regarded as being unworkable in a systemic crisis and likely to cause financial instability if ever a government was daft enough to implement it?  Does the Board make enquiries as to why the RBNZ has not pursued resolution policies that entail a joint trans-Tasman resolution that seeks to minimise costs for NZ taxpayers by keeping the group intact, as opposed to making a presumption of separation of the NZ subsidiary from the parent bank?
–  Is the Board concerned that, in many key respects, the RBNZ has failed to implement policies that would bring it into alignment with international best principles and practice with respect to banking supervision, insurance supervision and bank resolution (as the IMF has pointed out)?
–  In all of these matters, to what extent has the Board engaged in an in-depth manner with external parties to enable it to be in a stronger position to assess the performance of the RBNZ?
Communications
–  Is the Board satisfied with the quality and frequency of public communications made by the RBNZ in respect of all of its functions?
–  How does the Board respond to criticisms made that the Governor has not given any serious, in-depth speeches on monetary policy, prudential policy, financial stability or other matters relating to the RBNZ’s functions since he assumed office?
–  What analysis does the Board undertake to compare the RBNZ’s quality of public communications with that of other central banks, such as the RBA, Bank of England, Bank of Canada, etc?
These are just a small selection of questions I would be asking if I were a director on the RBNZ Board.  I do hope that the Board’s annual report sheds light on the Board’s enquiries into these matters and provides a robust set of views as to what its assessment of performance is and the reasons for reaching those views.
Regards

(And lest anyone think we hunt as a pack, Geof and I disagree quite vigorously on various aspects of the Bank – including the nature, role of, and reasonable expectations from, prudential supervision, and regular readers of comments section here will have found various fairly strongly-worded criticisms of me and my views of various other issues.)

They are good questions and I’d echo many or most of them (although it isn’t the role of the Board to impose their judgement over that of the Governor’s on specific policy issues).  I’d add some around the Maori strategy, the tree god nonsense, and the prioritisation of resources when the Bank tells us it is resource-starved. I’d want to ask about the performance of the Deputy Governor (recall that they are supposed to report on his performance) as the key line manager responsible for prudential policy initiatives (notably, the bank capital proposals), and around the approach taken by the Board itself in selecting MPC members (eg, whether the Governor was too heavily involved in a committee that should act partly as a check on him, and whether suitable classes of able, expert, and available people were excluded from consideration from the start.).  I’d also be posing question about the adherence of the Bank to the letter and spirit of the Official Information Act and –  more pointedly still – about the Reserve Bank Board’s own adherence to the requirements of the Official Information Act and the Public Records Act (on the OIA, see this recent post for their cavalier disregard for the law).  Oh, and perhaps about their handling of the serious culture, conduct, and compliance concerns in the Bank’s superannuation scheme, where the Board appoints half the trustees, including the chair (each of whom serve solely at the pleasure of the Board).

The second terms on the Board of both the chair and deputy chair expire early next year and it is customary for Board members to serve only two terms.  This is the opportunity for them, leading the Board, to show us –  before the law is changed  –  what might have been, and to model at last serious monitoring and accountability.  It isn’t as if there are not pressing issues on which they should be explaining to us how they have held the Governor and Deputy Governor to account.  The shockingly poor process and seriously weak substance, all overlaid with populist spin. in the bank capital proposals should be central to that.

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.

Still plumbing new depths

I know they shouldn’t, but the Reserve Bank still seems to have endless capacity to surprise, and not in a good way.  Another example turned up yesterday, when someone sent me a link to a Bloomberg story about a speech the chair of the board of the Reserve Bank, Neil Quigley, is giving today.

This is how the Waikato Institute of Directors bills the speech

Governance and decision-making at the Reserve Bank of New Zealand

The government has announced a review of the Reserve Bank Act focussing on governance and decision-making issues.  Key decisions in Phase 1 of the review have been announced, and Phase 2 is about to begin.  The key issues in the review relate to the move from the current “single decision-maker” model to a committee structure, and to changes in the role of the board of directors resulting from this.  The presentation will outline the unique role of the Reserve Bank Board under the current Act, the challenges of operating in this framework, and the ways in which the board’s role and powers are likely to change following the review of the Act.

Significant reforms are coming, which we haven’t seen the text of yet, and nor do we know anything about how those holding statutory positions expect to operate in the new world.

If you stump up $65 you could attend and find out more, unless that is you were part of the media.

Quigley declined a request for media to attend, an institute spokeswoman said.

There is also no sign that the Bank or the Board plans to release the text of Quigley’s speech.   And this time I largely agree with comments quoted in the article from Shamubeel Eaqub.

“There’s this great promise from Adrian Orr that things will change, and certainly he has been more engaged and more open, but in terms of the culture of the board and the organization it seems like very slow progress,” said Shamubeel Eaqub… “When it’s an issue as important as this, we would expect at least a speech to be available to the media.”

But he is probably going a bit easy on the Governor. The Governor can’t actually tell the Board chair what to do, but there can be little doubt that this particular speaking engagement and the (non)communications strategy around it will have been agreed jointly by the Governor and the Board chair.   After all, it is par for the course; pretty standard practice in all but one respect.

That one respect is that it is highly unusual for the chair of the Reserve Bank Board to be giving a speech in his capacity as chair at all.  Perhaps it has happened before, but I’m not aware of such occasions. In fact, it was concern that chairs would want to speak publicly that led to the misguided decision in 1989 to legislate to make the Governor chair of the Board, even though the Board’s primary role was to hold the Governor to account.  It took almost 15 years to fix that mistake.

The Board chair generally doesn’t speak at all –  and successive ones have repeatedly refused media comment on all sorts of issues – except through the bland Governor-covering Board Annual Reports.  In the 15 years these reports have been published, there has never been a single critical word about the Bank or the Governor: either they walk on water and simply never ever make mistakes, or the Board itself is essentially useless.  As I’ve argued previously, my interpretation is the latter one.  This same Board couldn’t bring itself even to criticise Graeme Wheeler for his wildly inappropriate attempts to silence the BNZ’s chief economist, and Quigley’s predecessor was positively egging Wheeler on in his public denunciation of a person who drew attention to what was shown to be a leak of an OCR announcement.

In this case, it appears that Quigely would not even front up himself and explain why he won’t (a) allow media to attend and report his speech, and (b) release his text or any relevant slides.  Instead, the acting head of communications at the Reserve Bank was wheeled out to defend the Board chair.  He didn’t do a particularly compelling job.

“Members of the Institute of Directors and their paying guests will not be privy to information from Professor Quigley that is not already in the public sphere,” said Angus Barclay, acting head of communications at the RBNZ. The bank gives presentations to private audiences because “the presence of news media at an event alters the nature of the discussion” and may dissuade guests from participating “in a two-way experience,” he said, speaking on Quigley’s behalf.

It seems highly unlikely that Quigley will say nothing that is not already public.  He is billed as talking about

the challenges of operating in this framework, and the ways in which the board’s role and powers are likely to change following the review of the Act.

Well, we’ve never heard anything from the Board or the chair about the challenges in the existing framework (as it affects the Board and its role), there is very little in the material released so far on how the Board expects things might change in future, and anything that is in the public domain isn’t from the horse’s mouth –  the people actually paid to do the monitoring, accountability, and reporting role.

And Barclay (for Quigley) undermines his own argument in the second part of that extract.  If selected members of a favoured audience are able to ask questions of a public official, and get answers from them, about pending reforms it seems almost certain that they will receive angles or emphases that aren’t available to the rest of us.   Even the argument that the presence of the media changes the character of the forum seems flawed.  The event could, for example, have been run on Chatham House rules grounds –  common enough in many fora, dealing with many, often sensitive, issues –  allowing the reporting of Quigley’s comments, and the reporting of questions from the floor, but not the identification of the questioner. (It was, for example, how the consultation session I attended at Treasury a few months ago on Reserve Bank reform issues operated –  one at which, as I’ve reported before, none of the attendees had any time for the Bank’s Board). It is hard to see how the nature of the function would be changed –  certainly not for the worse –  by adopting that sort of model.  Perhaps as importantly, despite the talk of a “two-way experience”, this isn’t billed as some sort of consultative session, but as an address from a public official holding a statutory office.     But even if it was such a “consultation”, (a) this is a powerful public agency we are dealing with, and (b) it is still no excuse for not releasing the text (it isn’t as if this is material the speaker has covered in similar addresses 100 times previously).

Barclay/Quigley then proceed to dig an even deeper hole for themselves.

Asked how banning media from tomorrow’s event squares with the bank’s stated communication aims, Barclay said: “Professor Quigley will communicate directly with a group of people who will be better informed after the event than they were at the start. That fits very well with our strategy to communicate more widely.”

The word ‘smart aleck” springs to mind.    Even more people would be better informed if Neil Quigley’s text was released, and if media representatives could attend and report his speech.   As it is, I’ve now lodged an Official Information Act request for the text, any slides, and in event that he is speaking without text or slides a summary of his presentation.  Since the material is being provided to some members of the public, there can be no credible grounds for withholding it from others.

One announced change coming in the new legislation is that in future the Board chair will be appointed directly by the Minister, to help make clearer that the Board works for the Minister and the public, not for the Governor, the Bank, or a quiet life for themselves.  Changing the chair would be a good and salutary step for the Minister of Finance to take, if that is he is at all serious about a more open and accountable central bank.  Better still would be to rethink, and dump the Board from its current role completely.

I guess shouldn’t really be surprised at this attitude from the Reserve Bank Board.  This is an entity that doesn’t even do the basics of its job tolerably well.  There is no serious scrutiny of the Governor –  certainly none that ever sees the light of day – there was complicitly in what was almost certainly an unlawful appointment of an “acting Governor” last year, there are no conflict of interest provisions in the Board’s code of conduct,  and –  as I’ve documented previously –  the Board has been in flagrant breach of the requirements of the Public Records Act.  Oh, and they aid and abet some pretty egregious financial sector misconduct (of which this particular case is only one example) –  appointing (and being able to remove at will) half the trustees of the Bank’s troubled superannuation scheme, and being required to approve any rule changes.  The Board members are probably all individually decent people (and I used to have a good relationship with Quigley) but they have taken far too many wrong turnings, and no longer serve a useful public purpose (protecting and promoting the Governor isn’t such a purpose).

Finally, as a reminder of how better, more open, central banks do things, here is a screenshot from the Reserve Bank of Australia’s 2018 speeches page.

rba speeches

A range of speakers, and where possible provision not just of the text but of a webcast, so that audiences can see where the speaker may have departed from the text, but can also see and hear questions and answers –  new material which, in New Zealand terms, is official information.   It just seems to be a standard condition of having an RBA speaker.  There is no reason why a similar approach could not be adopted here, both for the Bank itself (eg the potentially market sensitive post-MPS addresses, to which only favoured invitees among bank customers have access) and by the Board.    When senior officials speak, the default standard expectations should be public access, and open reporting.

If they are vaguely serious about being a government known for “open government” –  and there is little real sign of it so far – it must about time the Minister of Finance and the Minister responsible for open government to have a word with the Governor and the Board chair about what it means.  One can debate the merits of (say) pro-active release of Cabinet papers (something I generally favour) but there should be no debate about speeches by officials being made routinely available.  The Bank, and the Board, are falling well short of any sort of open government standard.  Perhaps some journalist could ask one or other Minister about this case, if only to get them on record washing their hands of any responsibility.

 

 

Reviewing the Board’s charter

In the recent report of the Independent Expert Advisory Panel, and subsequent Treasury advice, on the Reserve Bank Act, one of the things that surprised me was the way both groups (independent advisers and Treasury) simply seemed to take for granted the current role of the Board of the Reserve Bank and seemed to assume that the Board had done its role well and effectively.     The issue is simply not raised in the respective reports, even though the role of the Board is quite unusual – whether in a domestic public sector role, or in comparison with overseas central banks and financial regulatory agencies.  And so even though the government is proposing changes to the decisionmaking structure for monetary policy (and probably, later, for the financial regulatory functions) there is simply no serious analysis at all questioning whether, in light of experience, the role of the Board remains appropriate.   And that is even though few people I’ve ever discussed the matter with –  some ex-Board members apart perhaps –  thought that the Board was doing effectively a useful job on behalf of the Minister and the public.  At the Treasury-convened consultation meeting I attended, no one had a good word to say for the Board.

I’ve outlined the nature of my concerns previously (most recently here).   The Board has very little power –  other than in the appointment of the Governor –  and no resources of its own (that latter issue is touched on in the reports), and –  whatever the merits of the unusual model on paper –  it has ended up, over decades, serving mostly as providing cover for successive Governors. Even though their role is largely to review the Governor’s performance, in 15 years of publishing Annual Reports they have never once uttered even a modestly critical comment of the Bank or the Governor.  Since no one is perfect, that track record just reinforces the conclusion that the Board adds little or no value –  for the public, although no doubt it has proved useful to troubled Governors.   They provided no protection for Stephen Toplis or the BNZ when Graeme Wheeler deployed his entire senior management team to attempt to silence an independent critic.  And they egged on Graeme Wheeler when he used his official position, and public resources,  to attack me for drawing to his attention, and publicising, what proved to be a leak of the OCR.

With different people, perhaps it could do a better job, but the institutional incentives militate against that ever happening –  the Board is simply too close to management (the Governor himself is a member), and even the name (with suggestions of a corporate board) works against a proper conception of an arms-length body providing serious review, challenge, and scrutiny of a very powerful public agency.  Awkward individual members –  and there has often been at least one, sometimes with hobbyhorse issues –  aren’t much more than a nuisance with no outlet.  In my view, far more fundamental change is needed: either turn the Board into a proper decisionmaking body (as with a typical Crown entity),  abolish it, or if arms-length review and scrutiny is the goal, the relevant entity needs to be established outside the Reserve Bank, with independent resources and an independent mindset, and no sense that their role is to champion the Bank.

But in the Independent Expert Advisory Panel’s report there was a sentence  –  the very last one in the body of the report –  that caught my eye.

114. The Board has a code of conduct. The Panel recommends that this be reviewed in light of the legislative changes.

So I asked the Board for a copy of its code of conduct.   Apparently, there isn’t actually a document of that name, but the assumption is that the Panel was referring to a document rather grandly described as the “Charter for the Board”, which they released to me in full.

When I see the word “charter” I have in mind something that those who founded an entity might have issued, establishing and empowering the entity (dictionaries seem to back that interpretation).  Google tells me that, for example, there is a Radio New Zealand Charter, actually included in statute.  It is described thus

The Charter is an important document which sets out our operating principles.

It defines what we do so that everyone – staff, listeners and other stake-holders – can easily understand our objectives and what we are expected to provide for the New Zealand taxpayer.

and is readily available, for all to see, on the website.

The Reserve Bank Act sets out what the Reserve Bank Board is supposed to do.  The Minister of Finance’s letter of expectation to the Board can fill that out a bit.

The Reserve Bank Board’s “charter” doesn’t seem to have any status, except a set of agreed arrangements among the people who happen from time to time to find themselves serving together as the Board.  No wonder the independent panel loosely termed in a “code of conduct”.

Most of the document probably isn’t of much interest, but a few bits (and a few omissions) caught my eye.  First, there was the secrecy.  From the very first line

This Charter is confidential to RBNZ staff and directors. It must not be released to external parties without approval from the Chair of the Board or Governor.

Given that the Board exists solely to serve the interests of the Minister and the public, surely it would be normal, and natural, for a document of this sort to be routinely available on the website?   The Wellington City Council, for example – a notoriously OIA-averse body – manages to have its code of conduct for councillors readily accessible.   What, one wonders, is the Board trying to protect?  Probably nothing –  it is just the mindset.

There are questionable assertions (emphasis added)

The Board may advise the Governor on any matter relating to the performance of the Bank’s functions and the exercise of its powers. The Governor is not required to act on the Board’s advice, but is required to have regard to it.

Nowhere in the Act, that I can see, is there a requirement for the Governor to “have regard” for the Board’s advice –  a term that itself has legal meaning.  A Governor might be foolish to simply ignore advice from the Board, but the Board is set up primarily to review the Governor’s performance,  not to provide advice on policy or management issues.

The “Charter” goes on

Where advice relates to matters of significance, the Board may give that advice to the Governor in writing, having first discussed the matter with the Governor in a Board meeting.

The Board will maintain a record of any formal Board advice given to the Governor.

That is interesting. I have asked for copies of any such written advice.  I suspect there will have been none, but time will tell.

I’ve noted previously that the Board has no independent resources.  It doesn’t even appear to have a general right to whatever Bank information it considers it requires

The Governor will ensure that the Board has access to information, Bank staff and other resources that the Governor, in consultation with the Chair, considers the Board may require to perform its functions effectively.

In other words, the Governor determines what resources the Board has access to, even though the Board’s prime role is to scrutinise and hold to account the Governor.  Sure he is supposed to consult with the Chair –  and in practice can’t totally play hard-ball (since the Board could then conclude he wasn’t adequately doing his job), but the initiative and blocking veto rests with the Governor, not with the Board.

And they have a whole section on public communications, in which this is the most important clause.

The Governor has sole responsibility for the external communications of the Bank. The Chair and/or Deputy Chair, where required by statute or regulation such as by the Finance and Expenditure Committee of Parliament, may speak in those capacities. In no other circumstances shall a Non-Executive Director speak for the Bank or comment publicly on the conduct of the Bank’s functions.

In other words, no Board member –  chair, deputy chair or not –  will ever speak in public except when required by law to do so.  In this clause, the Board appears to be agreeing among themselves that, as a matter of principle, they will never speak –  even via the chair –  to any media in response to inquiries (whether about their processes, Annual Reports, OIA releases, or anything else or about their activities).   How can this possibly be consistent with open government?

The clause must be music to the ears of management.   Back when the current governance model was first set up, one of the big internal concerns was that the Board would become an independent source of commentary on monetary policy (it was why, at the time, the Governor still chaired the Board –  even though it existed to hold him to account).   And it seems quite right that Board members should operate under a policy of not offering running commentary on individual OCR – or LVR –  decisions, or the state of the economy.      But for the Board members to broaden that out and simply refuse to respond to, say, media inquiries on their own conduct, including their reviews of the Bank’s actions and performance, should be quite incredible.  It should be unacceptable.   These people are ministerial appointees, paid to serve the Minister and the public, and should be subject to scrutiny, and willing to make themselves (perhaps primarily through the chair) openly accountable –  not just when compelled to by law.

They might, for example, reasonably be challenged by a journalist over their apparent failure to comply with the basic provisions of the Public Records Act.     There are, it appears, no records of the process the Board undertook, over 15 months, leading to the appointment of the new Governor.    It is a pretty basic statutory requirement, which the Board is not exempt from.   (Curiously, in the Board’s charter there is no general commitment, or requirement, to keep proper records, or the comply with statutory provisions such as the Official Information Act or the Public Records Act.

But the omission that really did surprise me, at least a little, was that there was nothing in this “Charter” or code of conduct, about the handling of conflicts of interests.  Even the Act recognises that such conflicts are possible.

In considering the appointment or reappointment of a person to the office of non-executive director of the Bank, the Minister shall have regard, in relation to that office, to

  • that person’s knowledge, skill, and experience;
  • and the likelihood of any conflict between the interests of the Bank and any interests which that person has or represents.

The Act prohibits anyone who is “an employee of a registered bank or a licensed insurer’ from serving as a director, but there are few other restrictions.   For example, people who are Board members of regulated institutions are not prohibited from serving on the Reserve Bank Board, nor are people who serve as professional advisers (eg lawyers) to regulated institutions.  Someone who works for a payment system provider, or a clearing house –  or who is on their Board, or a consultant to such entities –  could have a clear conflict in respect of the Reserve Bank’s physical currency or NZClear operations.

These aren’t just hypotheticals.  One of the current Board members is also a member of the board of directors of a major insurer –  and the Reserve Bank, in addition to its ongoing supervisory and regulatory responsibilities in that sector, is now dealing with the recent failure of an insurance company, and the role of the Reserve Bank.

I suspect the Board does have some internal practices regarding the handling of all sort of potential conflicts of interests –  and they themselves can’t control who the Minister of Finance chooses to appoint.     But they look like the sort of thing that should be properly documented –  and disclosed – in any sort of code of conduct, or “Charter” for a major public agency.  The concerns are attentuated to some extent by the fact that the Board has few decisionmaking powers, but they have the right to offer advice on any of the Bank’s responsibilities and assert – see above – that the Governor is required to have regard to their advice.  And the members all have privileged access to information on both monetary policy and (probably particularly) regulatory policy.    I’m not sure what the appropriate boundaries are –  given the role of the Board as it stands –  but I hope the Board does, and can articulate their policies and practices.

The Board has not done, and is not doing, a good job.  It is set up by Parliament to serve our interests –  public, Parliament, and Minister –  but constantly seems to see itself mostly as a servant, and defender, of Bank management.  Those are two quite different roles.  The so-called Charter adds a little more to the list of concerns, and the reasons why the government, as part of the current review, should more seriously consider far-reaching structural change, reconfiguring the role of the Board and the way that public-funded review and assessment functions are undertaken.  The current model isn’t working, at least for anyone other than Bank management.

The Reserve Bank’s Board

I’m not an NBR subscriber but I’d been told that last Friday’s edition was quoting me on various aspects of Reserve Bank reform, so when I was in town yesterday I picked up a copy.  I’ll come back later in the post to that article by Jenny Ruth.

But, as it happened, there was another substantial piece in the same issue of NBR also calling for an overhaul of the Reserve Bank governance model.  This one was from Roger Partridge, chairman of the New Zealand Initiative.

The New Zealand Initiative will, no doubt fairly, tell you that they don’t represent any particular interests.  Nonetheless, in Australian parlance, their membership makes up the “big end of town”.  In particular, all four main banks (and a couple of the smaller one) are members, and the Board includes the chair of the Financial Markets Authority and a (until recently) CEO of one of the banks  (CBL Insurance is also shown as one of the members, but I guess not for much longer).

The Initiative appears to be quite unhappy with the governance of the Reserve Bank, especially around its prudential regulatory functions.  All the Bank’s powers are “directly vested in the Governor” and thus, they argue, “the Governor is not accountable to the board in the way any other chief executive would be and the Board has no power to override regulatory decisions”.  Partridge goes on to note that, in his view,

“None of this would matter if the Reserve Bank’s exercise of regulatory power were consistently exemplary. But, as the New Zealand Initiative will disclose in a report to be published next month, there are reasons to believe the bank’s conduct is far from exemplary.”

(Disclosure: I was one of the many people they talked to in putting this report together, and have seen and commented on a draft.  Here I restrict my comments to what is in Partridge’s NBR article.)

Partridge expresses concerns about both “the standards of behaviour of those responsible for the bank’s regulatory decisionmaking, and with the quality of analysis informing its policymaking”.    He notes that the current model is unusual, and (a) lacks the checks and balances that arise from multi-member decisionmaking bodies, (b) the Board has limited effective ability to hold the Governor to account, and (c) the Bank isn’t subject to “the same level of departmental or parliamentary scrutiny as other regulators”.

It is hard to disagree, and I’m certainly not about to.

But in thinking about alternative models, I’m not convinced –  on the basis of what is on display here –  that the New Zealand Initiative has yet thought hard enough.  For example, they seem to take for granted that the Reserve Bank (a single organisation) should be responsible for both monetary policy and the regulatory functions, and yet focus only on the governance of one of those functions, not that of the organisation as a whole.  They also seem to take for granted the existing powers the Reserve Bank has on the regulatory side –  in which the Bank has much more policymaking powers, not just powers around the implementation and enforcement of policy, than most other regulators do.

Partridge appears to approach the issue primarily with a corporate model in mind.  In a corporation, the Board is elected by shareholders and has overall responsibility for the business.  The Board in turn appoints a chief executive –  who might, or might not, be appointed as a Board member –  and delegates certain responsibilities (day to day management) to the chief executive.    And what the Board giveth the Board can take away  – if it can hire, it can fire, and it can alter or withdraw delegations, or even override specific decisions.  Key strategic decisions will be taken by the Board.  There is, at least in principle, a clear goal in mind: maximising value for the shareholders.   And the business either operates in a competitive environment or if not, that is a problem for the competition authorities.  Hardly ever are commercial businesses handed monopoly powers.  That is a quite different situation from a regulatory agency – prudential or otherwise.

Partridge cites the Financial Markets Authority as a better model.  In many respects, the FMA is structured like a corporate: the Minister appoints (and can dismiss) part-time Board members, and the Board hires a chief executive.  But it is worth remembering that the FMA has quite limited policymaking powers: most policy is made by the Minister, whose primary advisers on those matters are MBIE.   The FMA is largely an implementation and enforcement agency.  That is a quite different assignment of powers than currently exists for the Reserve Bank’s regulatory functions (especially around banks).  Also unaddressed are the potentially serious conflict of interest issues around the FMA Board, in its decisionmaking role. More than half the Board members appear to be actively involved in financial markets type activities (directly or as advisers), and even if (as I’m sure happens) individuals recuse themselves from individual cases in which they may have direct associations) it is, nonetheless, a governance body made up largely of those with direct interests that won’t necessarily always align well with the public interest.

Reasonable people can reach different views on the performance of the FMA. I gather many people are currently quite pleased with it, although my own limited exposure –  as a superannuation fund trustee dealing with some egregious historical abuses of power and breaches of trust deeds – leaves me underwhelmed.  It is certainly a model that should be looked at in reforming Reserve Bank governance –  it is, after all, the other key financial system regulator –  but I’m less sure that it is a readily workable model for the prudential functions, even with big changes in the overall structure of the Reserve Bank, and some reassignment of powers.  It certainly couldn’t operate well if both monetary policy and the regulatory functions are left in the same institution.  It doesn’t seem to be a model followed in any other country.  And it isn’t necessary to deal with the core problem in the current system: too much power is concentrated in a single person’s hands.  In a standalone regulatory agency, I suspect an executive board –  akin to the APRA model –  is likely to be an (inevitably imperfect) better model.  In an monetary policy agency, the Governor and any committee/Board members should all be appointed by the Minister (as is standard international practice).

Having said that, I welcome the fact that the New Zealand Initiative is now championing the cause for reform of the governance of the Bank’s prudential regulatory functions, and hope that adds to the impetus for putting those issues front and centre in Stage 2 of the review of the Reserve Bank Act.

Jenny Ruth’s article in the same issue of NBR picked up two of the issues I’ve been calling for reform on.  The first relates to fixing up the current weak provisions around Reserve Bank five-yearly funding agreements: they are (formally) voluntary, not remotely transparent, and out of step with the way we fund numerous other important government agencies, including ones that can make life difficult for sitting governments deciding on annual budgets.   Current provisions are simply out of step, and should be fixed.  If not now, we could wait another 30 years until the next major review of the legislation.

The other issue relates to the future of the Reserve Bank Board

“Another of Mr Reddell’s views is that the Reserve Bank’s board is essentially useless and should be scrapped and Shoeshine can’t help but agree.”

She goes on to recount my own bad experience with the Board –  the Board chair’s active cheerleading for the then-Governor tarring me as irresponsible, after I highlighted evidence suggesting (correctly as it happens) a leak of the March 2016 OCR decision –  and the way the Board was similarly supine in the face of the former Governor’s attempt to silence BNZ chief economist Stephen Toplis.  By statute, the Board exists to hold the Governor to account.  By revealed preference, they seem to exist to have the Governor’s back and never ever express even the slightest open unease.  They aren’t decision-makers (Parliament hasn’t given them that power), and instead they’ve chosen to turn themselves into cheerleaders.

My unease here isn’t personal.  I know several of the directors and have worked quite closely with a couple of them.  One even attends the same church as me and was MC at our wedding.  But they are serving no useful role and in some areas simply aren’t even following the law.

Jenny Ruth highlights the quiesence around the misplaced and ill-judged 2014 tightening cycle, referring to Board annual reports.

Shoeshine knows what a wonderful thing hindsight is, but Mr Wheeler was never able to bring himself to acknowledge that hindsight did indeed show the 2014 hikes were a mistake. Clearly the board couldn’t bring itself to disagree with him.  Shoeshine’s all for this cheerleading role to end.

As it happens, the Board was cheerleading right to the end of Graeme Wheeler’s term.  Quite recently I lodged a request for the minutes of Board meetings from the second half of last year.  One of those meetings was Wheeler’s final one as Governor.   I guess it is customary to say only nice things to those who are leaving, and to step delicately around any points of unease.  But whatever they may have said in private they didn’t need to record anything much for posterity (which is what minute of this sort really are).    And yet they did.  This (with emphasis added]  is from the minutes of the Board meeting held on 21 September 2017.

The Board noted that Governor Wheeler had successfully led a substantial amount of change in Bank policies and in internal Bank management. Policy initiatives included the development of macroprudential tools to address financial stability concerns, changes to the regulatory regime for regulated financial institutions, a review of payments system infrastructure, the new currency, and an expansion in the Bank’s communication and external engagement. Within the Bank Governor Wheeler has promoted a focus on efficient use of resources, understanding risk in the Bank’s operations, the development of management and leadership capability and the formalization of the Governing Committee framework for decision-making within the Bank. On monetary policy and inflation, Governor Wheeler faced global economic and financial conditions that produced a sustained deflationary impulse through tradable goods prices despite moderately strong economic growth in New Zealand and non-tradable inflation within the target range. Governor Wheeler led a substantial new research programme within the Bank analysing the drivers of low inflation outcomes, including the reasons why the record levels of migration have produced less inflationary pressure than in earlier business cycles. The Board has enjoyed an open and collegial relationship with the Governor, including in the implementation of a range of new processes following from the receipt of Minister English’s “Letter of Expectations” to the Board.

The Governor thanked the Board for its constructive advice and support for him
throughout his term.

How terribly chummy.   It is carefully worded, but there is no mention of the persistent failure to keep inflation near the target midpoint (despite all the “substantial new research programme”), and none of the fact that surely no one other than Bank –  and the cheerleading Board? – regarded external communcations during the Wheeler years as any sort of positive.  In a way it is all encapsulated in the final remark recorded from the Governor –  this Board exists almost entirely as the agent of the public and the Minister to hold the Governor to account, not to “support” him.

It really time for this Board to be disbanded.   Perhaps a Board has a role in either an ongoing Reserve Bank (as monetary authority) or in a new Prudential Regulatory Authority, but if so it should be nothing like the sort of board we’ve wasted public money on for almost 30 years now.

Finally, the release of those Board minutes confirms that the Board still does not meet even some of its most basic statutory obligations, those under the Public Records Act.   There is nothing at all in the minutes about the process leading to the recommendation to the Minister of Finance of a name of a person to be appointed as the new Governor.  To be clear, if there had been I’d have expected much of the material to have been withheld –  on privacy grounds –  but the minutes are quite clear that there is no such record.   As an example, at the meeting of 16 November –  presumably the one at which the final recommentation was made –  there is just this

8.2 Non-Executive Directors-only Session

No minutes follow, no records, no indications of anything being withheld.  Simply a flagrant breach of a simple statutory obligation.

I noticed that earlier this week the government appointed Dr Chris Eichbaum to the Reserve Bank Board (a role he held previously, being appointed by Michael Cullen for a term from 2008 to 2013).   Eichbaum is an academic, working in the School of Government at Victoria University, and so presumably has a professional interest in good process etc. Whatever else Eichbaum brings, perhaps he could remind his colleagues of their basic statutory recordkeeping obligations?

 

Reserve Bank Annual Reports

Last Friday, the Reserve Bank’s Annual Reports were published.  There were two of them, both required by law.   But most people wouldn’t know that.

There was the outgoing Governor’s own report on the Bank’s performance, the annual accounts etc.  That warranted a press release, and some modest media coverage.  But buried inside the Bank’s annual report was the, quite separate, statutory Annual Report of the Reserve Bank’s Board.    It has no separate place on the Bank’s website, it wasn’t accompanied by a press release from the chairman, although this year it did actually get passing mention in the “acting Governor”‘s press release.

The Reserve Bank Board isn’t a real board, in the sense known either in the private business sector, or in the government sector.  As the Board itself notes “the Board is a unique governance body in the public sector”.  The Board largely controls the appointment of the Governor, and has some say over the recommended dividend.  But otherwise, its powers are all supposed to be about providing a level of scrutiny and monitoring of the Bank –  and in particular the Governor personally – on behalf of the Minister of Finance and the public.  In practice, at least with a public face on, the Board tends to be emollience personified –  nothing to worry about here chaps –  that has very effectively served the interests of successive Governors.

A post about the Board’s Annual Report has become a bit of an annual ritual (2015 and 2016).  But before turning to the substance of the Board’s 2017 report, I wanted to pick up just a few points in the (now former) Governor’s report.

In his final speech as Governor (which I wrote about here), Graeme Wheeler sought to (a) tell a pretty positive story about New Zealand’s economic performance over his five years in office, and (b) claim significant credit for the Bank for that (supposed) good performance.   He returns to the theme in the Annual Report

With our own economy about to enter its ninth year of expansion, it’s useful to put a longer-term focus on New Zealand’s progress. Compared to the period 1990-2012
(i.e., the 22-year period since flexible inflation targeting was first introduced), New Zealand’s economy has experienced slightly stronger GDP growth and much faster employment growth over the last five years. Headline inflation has, however, been weaker and our current account deficit has been smaller as a share of GDP, while the unemployment rate has been around its average for the period since the mid-1990s. Labour productivity growth has been disappointing, a challenge we share with many other advanced economies. While some of these economic outcomes since 2012 lie beyond the influence of Reserve Bank policy levers, the Bank’s monetary policy has been a significant driver behind the growth in output and employment.

Setting aside the minor point that there was a double-dip recession in 2010, and thus any expansion has been running for only around seven years, there is so much wrong or misleading with these claims that it is hard to believe that a serious public figure –  a public servant not a politician –  would repeat them.

Where to begin?

Perhaps with the five years in which there has been no labour productivity growth at all.  Yes, global productivity growth is weaker than it was in the 1990s and early 2000s, but few other advanced economies have experienced anything as bad as New Zealand’s productivity record in the last five years.

Or with the fact that headline GDP growth has been reasonable only because of very rapid population growth.  Growth in real per capita GDP has been pretty poor, largely reflecting the complete absence of productivity growth.  Similarly, rapid employment growth mostly reflects rapid population growth, and unemployment has been above any reasonable estimates of a NAIRU throughout the Governor’s term.

Or with the shrinkage of the export sector as a share of GDP.

Or with house prices.

Or with the fact that, over this particular five years I’m pretty sure that the Reserve Bank was the only advanced country central bank to boldly set off on what it envisaged as a large tightening phase, only to have to (grudgingly) more than complete unwind the tightenings they actually did implement.

With no global crises, no domestic crises, no domestic concerns about conventional monetary policy exhausting its capacity (unlike many other advanced countries), Wheeler should have had a fairly easy five years.   As it is, there isn’t much credit he can claim for the Bank and its monetary policy.

It is the sort of self-serving nonsense the Bank’s Board –  if it was doing its job –  should have been calling out.   Apart from being simply wrong, it isn’t even helpful.  If the Bank had really had the huge influence on medium-term economic performance that the Governor seems to be claiming, it rather undermines the case for having so much power – so many choices-  at such a remove from elected politicians.  The normal case for an independent central bank is that such an agency will keep inflation down and won’t make much difference to economic performance at all.

But there is –  again – little sign in the Board’s Report of serious scrutiny or accountability.  Even honesty seems to be at a premium.

The Board’s Reports have certainly lengthened.  Only three years ago, the Board’s report was only two pages long.    Last year’s report was four pages long.  This year’s report is six pages long, and the first four of them are quite densely-packed text.

But apparently the Reserve Bank does no wrong, ever.  So not only is the Reserve Bank Board “a unique governance body” in the public sector, but the Reserve Bank must be a unique organisation, public or private.   One wonders if it was immaculately conceived, or acquired such perfection itself?

There is two solid pages of text on monetary policy and (as far as I can see) not a word that management would feel even slightly uncomfortable with.  No areas that the Board thinks the Bank might have put greater emphasis on, no disagreement, nothing.

There is another one and a half pages on the Bank’s regulatory functions, but again apparently nothing where the Board thought the Bank might have done better, or areas where a different emphasis might have been helpful. It could all have been written by management (and may well have been).  Management will have been particularly pleased to read this

“The Board has also observed that the Bank carefully considers the feedback it receives on regulatory initiatives, bearing in mind that regulated institutions will not always agree with the regulator’s approach and the eventual regulatory outcomes.”

No doubt, although there is little evidence open to the rest of us to suggest that the Bank pays any heed to substantive feedback in its formal consultation processes.  And one might reasonably wonder whether in a moment of introspection the Board might perhaps think that “monitored institutions will not always agree with the monitor’s approach or the eventual conclusions of the monitor”, and wonder if that description has ever characterised the Board’s Annual Reports on the bank.

And so we labour on through lots of descriptive text about the activities of the Board –  with nothing on the evaluative frameworks they use, or the external advice they draw on.  As we do, we come to the odd interesting snippet such as this

“Monitoring the Bank’s relationships is a continuous process.  During the year the Board availed itself of a number of opportunities to observe how these were operating in practice, paying particular regard to any feedback on the messaging, transparency and accountability of the Bank.”

It looks as though this sentence is supposed to be meaningful, but quite what the meaning is supposed to be isn’t clear at all.    Does it mean that perhaps they were just ever so slightly uncomfortable with the heavyhanded pressure Graeme Wheeler and his senior managers brought to bear on Stephen Toplis and the BNZ (the latter an institution the Bank regulates) when Toplis criticised the Governor’s communications, even if they can’t bring themselves to say so?    One might hope so, but if people who are paid to hold a powerful agency to account won’t even criticise, even diplomatically, such egregious abuse of office, we might wonder again what use they are to citizens.   (And I did lodge an OIA request, the results of which suggests no serious concerns in private either.)

Towards the end of the Board’s report, they write about the change of Governor.  To read this report, one wouldn’t know that the Board had been well down the track towards recruiting a new permanent Governor, oblivious to the election, when the Minister of Finance forced them to stop.  You have to wonder what they gain by the omission, when the relevant material is already public.   They explicitly note that they and Treasury sought advice from Crown Law on the approach to be followed.   Despite that advice, the purported “acting Governor” appointment still appears to be unlawful.  Remarkably, the report contains nothing on the steps the Board had already taken, before the end of 2016/17 to find a new Governor, even though that appointment is one of their principal responsibilities.

Finally, as it does every year, the Board’s Report notes the Board’s relationship to the Reserve Bank’s superannuation scheme (the Board appoints half the trustees including the chair).   This is a deeply troubled fund, grappling with some pretty serious historical errors –  including some made by the Board itself, which must approve rule changes.   I’ve written previously about the role of the Bank’s (now) deputy chief executive –  who attends all Board meetings –  in these matters.   But the Board’s Annual Report simply records the heart-warming fact that the new superannuation fund chair “kept the Board informed of the work associated with the development of a new Deed for the Trust”.  On the principle that when you things you know about are wrong, it leaves one worried about the other material that one doesn’t know in detail.  On this occasion, there was no “new deed”, but some amendments to the rules (largely) to allow the superannuation fund to comply with the new Financial Markets Conduct Act.   As part of those changes, trustees were about to left in the lurch by the Bank –  unremunerated and yet with no liability insurance.    Only threats that the new rules would not be executed (requires all trustees to sign) and a written protest to the Board helped secure a backdown.  And the more serious issues, of past rules breaches, and mistakes in past rule changes, still look set to head to the courts next year.  Millions of dollars are potentially in dispute.

As I’ve written (repeatedly) before, the Reserve Bank’s Board doesn’t really serve much of a useful function.  A thoroughgoing reform of the goverance of the Reserve Bank (including the role of the Board) is well overdue, and there are signs now that whoever forms the next government it may well happen (although I am less optimstic of that if National leads the next government as even if they favour some change, they may not favour changes New Zealand First –  or the Greens if you must –  would support).   If the Board is to retain a role as an accountability and monitoring body, it too will need a shake-up.  Independent resourcing would help, but much of what is really needed is a different mindset, in which the Board finally serves the public, not acting as guardians of the Governor.  My own preference would be for the monitoring and accoutability functions to be undertaken by a Macroeconomic Advisory Council, established formally at arms-length from the Bank, the Treasury and the Minister of Finance.