Consulting on the Remit

The Reserve Bank Monetary Policy Committee works to a “Remit” set down for them from time to time by the Minister of Finance (the current one is here). It is a different (and better) system than the previous approach of Policy Targets Agreements between the Governor and the Minister, and in particular makes it clear (as is appropriate in our system of government) that the (elected) Minister and government set the targets for monetary policy, while the MPC is the accountable (at least on paper) body responsible for setting monetary policy to deliver the government’s goal.

Under the Reserve Bank Act the law now reads

And several weeks ago the Bank kicked off the first stage in a consultative process designed to inform the advice they will eventually provide to the Minister of Finance. If you want to have a say, submissions close next Friday (15th).

Consultation with the public (of some sort or other) is required by law.

The idea of this sort of five-yearly review appears to have been drawn from the Canadian process, where in the lead-up to the five-yearly review of their inflation target the Bank of Canada has done a huge amount of analytical work reviewing the issues and options. Now, Canada is a much bigger country than New Zealand – but it is still one country, with its own set of specific experiences and issues – but the range of material they have put out, and research they have undertaken, is typically very impressive. Here is the link to the most recent review, and here specifically the link to the 24 formal research papers.

By contrast, what we have seen so far from the Reserve Bank of New Zealand is a pale shadow. There is a 60 page document, but lots of graphics, but there is no fresh analysis or research at all. It is possible that this first round consultation is designed simply to draw out the questions people think should be looked at more closely, but even if so that doesn’t leave much time before the second stage of the consultation is due (I think they said October or November). It really doesn’t look as though they have in mind doing much, if any, fresh research, whether commissioned or by their own staff. Against the backdrop of some of the biggest disruptions to monetary policy in the 30+ year history of inflation targeting, that suggests a lack of real seriousness about the review. Perhaps the Minister has already suggested (see 5(2)(c) above that he isn’t interested in much, but there is no hint in the document of such an external constraint. It has the feel more of the diminished Reserve Bank we’ve seen over and over again in the last few years – little published research, weak senior appointments (remember the marketing executive now responsible for macroeconomics, monetary policy and markets), and resources spent on (eg) comms staff, “stakeholder liaison”, and climate change, rather than on core areas of Bank responsibility.

As the review of the Reserve Bank legislation has proceeded I’ve observed on a number of occasions, including in submissions to FEC, that there are aspects of the new legislation that are a mess. The Remit review process, especially coming against the backdrop of the new Board announced last week, helps illustrate some of the problems.

Who is responsible for this Remit review advice? Why, “the Bank”. And “the Bank” here clearly does not include the Monetary Policy Committee, since (as you can see in the extract above) “the Bank” is required to consult the MPC before the advice is given to the Minister. And “consult” (standing alone) is about as weak as legislation gets: you can see by contrast that ‘the Bank’ is required to “consult and have regard to” (a materially stronger standard) the views of the public.

It is simply weird. We have a dedicated Monetary Policy Committee responsible for the formulation of monetary policy and working to carry out the current Remit, but they are treated (by the legislation) as distinctly marginal to the entire review process. There is no obligation on them to provide analysis and advice to the Minister, and “the Bank” is not even required – although it may choose to – to have regard to comments the MPC members might have on “the Bank’s” proposed advice or analysis.

Now, of course, the MPC is dominated by management anyway (the law requires a majority of executive members, each of whom owe their position. departmental resources etc to the Governor) but there are the three external members, and on a good day the Minister and The Treasury will try to tell us they have a valuable contribution to make to the monetary policy formulation process (on other days, the Minister will repeat the blackball he and Orr and Quigley put in place whereby anyone with current or future expertise and research agendas in areas relevant to monetary policy is automatically disqualified from serving on the MPC).

By construction, management always has the numbers so long as they stick together, but wouldn’t a much more sensible approach to have been to have made the MPC responsible for the Remit advice to the Minister, drawing on expertise and perspectives from both staff and outsiders?

The current structure seems especially problematic when one remembers who “the Bank” is. Until last week, unless otherwise stated (ie around the MPC) it was the Governor. But now it is the Board – the same Board of ill-qualified, in some cases conflicted, people I wrote about last week. Not one of the non-executive members of the Board has any experience or demonstrated expertise in monetary policy or macroeconomics. I guess in reality they will delegate it all to the Governor….but delegating such a major issue (or just putting it through the Board with no serious scrutiny or discussion) makes a mockery of the new governance structure.

(Amazingly, if the Minister – this one or a new one – wishes to change the Remit, the law requires consultation (but not “have regard to”) with “the Bank” but not at all with the MPC, who really do seem to be there mainly to make up numbers and eat their lunch (creating in 2018 the illusion of reform over the substance).)

As I noted earlier, there was no fresh analysis or research in the consultative document. What particularly caught my eye was that there was no attempt at a rigorous or systematic review of how monetary policy has been conducted, under the current Remit, in the last 2.5 turbulent years, in which the Bank has run up massive losses and seen (core) inflation blow out. I attended an online consultation session a few weeks ago and I raised this with staff. They told me that there is such a review underway, and they will even have it externally reviewed, but observed that they could not promise it would even be available before the next round of consultation on the Remit advice. That seems far short of adequate, even if your prior is (as mine currently is) that the specification of the Remit probably doesn’t explain a lot about what went wrong.

The Act requires that a review of monetary policy be undertaken (by “the Bank”) every five years or so, and perhaps the current exercise they have underway is the first of these reviews.

But again note how marginal the MPC is (must be consulted – apparently late in the process (“on a draft”) – but no obligation to have regard to their comments). And meanwhile responsibility for the review rests not with the MPC, but with that generic ill-qualified Board. There might be a certain logic in an independent review (done by proper external reviewers) but it is just a weird model – explicable only by a desire to preserve the Governor’s absolute dominance – to marginalise the MPC (who actually had responsibility, and so some self-scrutiny and reflection could be of value), while leaving the power with the Board but ensuring that no one appointed to the Board has the expertise to add much value at all.

This is the Board, you may recall, that Grant Robertson tried to tell us last week had no responsibility for monetary policy.

The legislation is a mess, and I hope that if there is a change of government next year that the new government makes some legislative time available to tidy up some of these provisions, and completing a transition to a model in which a proper MPC has the core responsibility, collectively and individually.

As for the substance of the consultation, I have made a short submission, the text of which is here

Comments on first-round MPC Remit review

Some of my points are already dealt with above, and several are fairly minor in nature. I am broadly happy with the basic shape of the Remit, and it would ot be the end of the world were it simply to be rolled over as is.

I continue to favour a reduction in the inflation target, returning to the 0-2 per cent formulation we had in the 1990s, which is much closer to “a stable general level of prices” (the statutory formulation – and note that the Act is not up for grabs in this review). To make that feasible the effective lower bound on the nominal OCR (perhaps around -0.75 basis points) has to be addressed and either removed or substantially eased (doing so is not a difficult technical matter, but no central bank has yet done so). But even if the target is kept at a range of 1-3 per cent with a focus on the midpoint of 2 per cent it is important that the lower bound issues are addressed. We are in some respects fortunate that the 2020 downturn proved not to be primarily an adverse demand shock, but demand-led recessions will be back, and central banks are not adequately prepared for them. Meanwhile, the consultative document treats the lower bound issues as a given, even though as a technical matter they are entirely under the control of “the Bank” (how well equipped do you suppose that Board is to deal with these conceptual, legal, and monetary economics issues?)

Here are the last few paragraphs of my short submission

The new Reserve Bank Board

The Minister of Finance yesterday afternoon finally announced the rest of the members of the new Reserve Bank Board that takes office, under its new authorising legislation, today. In my post earlier this week, I highlighted a number of weaknesses in the legislation around the (dis) qualifications of the Governor and other Board members. None of the appointments to the Board appear to be in breach of the Act, but several are questionable on various counts, and taken together (and one should think about the composition of the Board as a whole) the new Board represents a poor, and grossly inadequate, start to the new regime. It could have been a great opportunity for a really impressive fresh start for the governance of the Bank. Instead, the Orr-Robertson degrading of the Bank continues.

As one gets older, rose-tinted glasses about aspects of the past are a risk. I do recall a time when the Reserve Bank Board had some really impressive people on it (mostly credit to Roger Douglas). But the dominant story over the almost 90 years the Bank has existed hasn’t been of impressive people being appointed to non-executive roles on the Board. In making appointments, at least since the government took full ownership of the Bank in 1936, political debts have always been paid or political loyalties rewarded – at times, past, present, and future overtly political figures have been appointed (and I even found one member who’d been a Communist Party donor), and the general quality has ebbed and flowed. One member I’m aware of – whom I gather turned out to make a reasonable contribution – was appointed mostly to spite a then Governor who vehemently objected to an economist the Minister wanted to appoint. There have been a handful of people with relevant subject expertise, some people good at asking (awkward) questions, and the time-servers and middling sorts who populate the myriad of boards and committees governments have to fill.

But – and it is an important but – none of them ever mattered very much. From the late 30s to 1990 it was clear that if the Board was the governing authority of the Bank as an entity (“the Board was the Bank” was used to say), most everything that really mattered about what the Bank did was decided – quite properly under the then-legislation – by the Minister of Finance and/or the Cabinet. That included policy, implementation, and key personnel (Governor and Deputy Governor). No doubt there were plenty of things for the board to do in that era – administration, buildings, staff etc – but it wasn’t the stuff we set up the central bank for. And from 1990 to yesterday, the Board had little say over anything much (not even the pay and rations stuff) but established as an monitoring and accountability body almost exclusively. It wasn’t quite that narrow, in that a person could only be appointed or reappointed as Governor if recommended by the Board.

As the overhaul of the legislation got underway, more recently people could only be appointed to the MPC on the recommendation of the Board, but OIA documents show that when the MPC was established they did not recommend names to the Minister but presented a list and said to Robertson “you pick”. This was the same Board that had got together with the Governor and Minister and put in place a blackball on the appointment to non-executive positions of anyone with actual hard expertise in monetary policy.

What of the new legislation. There have already been attempts at spin.

Thus, we have this from the Minister of Finance

The Board’s remit does not cover monetary policy, which remains solely the role of the Monetary Policy Committee.

And it is certainly true that the Board members do not get to set the OCR or publish projections. But as the Bank now points out on its website. “collective duties of the Board” now include

  • reviewing the performance of the Monetary Policy Committee and its members.

And it is the Board that has to recommend a person to be appointed (or reappointed) as Governor, and has to recommend appointees for the Monetary Policy Committee. It also has the responsibility to recommend removal of these people if they are not adequately doing their jobs.

In the Bank’s Annual Report (sec 240) they are specifically required to include

(m) a statement as to whether, in the board’s opinion, the MPC and the members of the MPC have adequately discharged their respective responsibilities during the financial year (see section 99); and
(n) a description of how the board has assessed the matter under paragraph (m)

And that is just monetary policy. The Board also now has all the powers the Governor previously had on prudential regulatory matters (mostly banks, but including non-bank deposit-takers, insurers, payment system infrastructures), New Zealand’s physical currency, a large balance sheet. And there are a number of grey areas in the Act of matters which in my view really should be matters for the MPC, but seem to be matters for the Board. You will recall the big disputes a few years ago about the Governor’s ambitions to dramatically increase capital ratios: such things are now the responsibility of the Board. And recall that the whole point of the new Board model was to reduce the single-person risks inherent in the previous legislation (so don’t anyone think about running a “oh, none of this matters as the Governor runs things” response).

So lets look at the make-up of the Board.

Take the Governor first (and note the oddity of the new legislation where on paper the Governor is a totally dominant figure on monetary policy, but just another board member on the Bank’s other major policy/regulatory functions). With the best will in the world, no one would argue that Adrian Orr is a leading figure in either monetary policy or financial stability functions. With a really really impressive chief executive, the rest of the Board can matter a little less – but the best people need hard and informed questioning. All the signs suggest an undisciplined and petulant figure who just isn’t overly interested in the core responsibilities of the Bank – and that would be consistent with his record of speeches over his four years in office.

Then we have the chair, Neil Quigley, who was an economics academic and is now Vice-Chancellor of Waikato University. Quigley has been on the Board for more than a decade, has been chair since 2016 (and thus presumably bears the greatest responsibility for Orr, and what followed). But as I discussed yesterday in all those years on the Board there has been little sign of serious and hard challenge and scrutiny, and despite Quigley’s academic background there isn’t much sign these days of someone devoting a lot of time to keeping abreast of the literature on financial stability and regulation. How could he? Most would have thought a university vice-chancellor role in these difficult times would itself be at least a fulltime job. Quigley’s appointment appears to be a transitional one (to 30 June 2024), and his replacement would be a key opportunity for any new government taking office after next year’s election that was serious about restoring the authority, reputation etc of the Bank.

It is downhill from there with the rest of the Board. Taking them in alphabetical order

All laudable no doubt, but not a shred of a sign of suitability to be a board member of New Zealand’s prudential regulator or to be choosing appointees to the MPC and evaluating the performance of the MPC.

I’ve discussed Finlay previously. We can be relieved that his terms as NZ Post chair (owning Kiwibank and Kiwi Wealth) ended yesterday. He should never have been actively involved in Reserve Bank affairs while chairing the owner of a major bank. But that is now over, and we are left with someone who looks like a pretty generic professional director and accountant. Perhaps, and despite his past (what ethics does he display in having accepted the RB/NZ Post conflict), he could be a perfectly adequate director of yet another government body. But it isn’t evident there is any expertise or experience in monetary policy, prudential regulation, financial stability etc.

Higgins appears to be wholly and solely a diversity hire. Her background is all very interesting, perhaps even laudable, but…..this is the central bank and prudential regulatory agency, and there is not a shred of relevant background or qualifications – any more than a professor of Latin and university bureaucrat would typically have.

Paterson is another carryover from the old board. Perhaps she is just excellent (but remember all those questions we didn’t find in the Board minutes to now) but she is a pharmacist turned generic company director. There is a place for such people, perhaps even a couple on a central bank board, but subject matter expertise and energy on such matters seems less than evident.

Pepper seems to be the only appointee with recent practical exposure to financial markets. On paper he looks like he could be quite a reasonable appointment to the FMA Board (perhaps a swap with Professor Prasanna Gai who is on the FMA but has expertise and experience that would be very valuable on the Bank’s Board or MPC). But the Bank’s Board is more about financial institutions than about wholesale markets and it isn’t evident he has much knowledge about institutions, the sort of risks that threaten them, or about financial regulatory policy – let alone being particularly fit for evaluating MPC members.

And then there is that insurance company he recently became a director of. According to the Minister

Mr Pepper is a director at Ando Insurance Group Ltd, but that role is not expected to create a conflict of interest as Ando is a non-regulated company.

The problem is that when you look up that company it is described as almost 40 per cent owned by a foreign insurer which is regulated by the Reserve Bank, and Ando describes itself as writing its insurance business for that regulated company. I don’t know either the business or the law enough to know why Ando itself is not regulated by the Reserve Bank, but on what we do know the appointment, while lawful, seems pretty questionable, and not (especially after Finlay) a great way to start a shiny new Board and governance model. One wonders what Treasury made of it when they provided advice to the Minister on appointees. (Or, indeed, the other political parties when, as the law now requires, they were consulted.)

Raumati-Tu’ua (who seems to be a qualified accountant) is another of those generic professional directors. As I said earlier, there is a place for a couple of them on the Board, but there is no relevant subject matter expertise at all.

For the most part I am not suggesting that as individuals these people are unsuited to being on a mixed Board (although Higgins appears utterly unqualified, and Pepper questionable on ethical grounds), but what you end up with is a Board that is deeply unimpressive and really unfit for anything like the role the legislation envisages for the Board of the Reserve Bank. There is no one with any real expertise or authority in banking, no one with any real expertise on financial regulatory matters, no one who really seems fit (or ready) to be holding the MPC to account or making good choices about who should go on the MPC in future. And, perhaps a little surprisingly given the limited pool of expertise locally and the risks of too inward loking an approach, there is no one from abroad. As a group – however nice, and perhaps able they each are in their own fields – they simply aren’t up to what the job should entail, and that against the background on an inexperienced and underqualified senior management team. One can only imagine the Australian Prudential Regulatory Authority people reading of these appointments with some mix of despair and bewilderment while – condescendingly, but as they are prone to – suggesting that fortunately it doesn’t matter too much as APRA does the prudential supervision that really counts for New Zealand. That model – wind up and turn things over to APRA – was rejected (and rightly) by Michael Cullen almost 20 years ago, but his successor seems to be going for the worst of all worlds -a a bloated and expensive central bank of our own, led by people who do not warrant any great level of confidence in their individual or collective capabilities in the role they have taken up.

If there is a National/ACT government after the election it will have to make it a matter of priority to begin a far-reaching overhaul of the Reserve Bank (management and governance) to reverse the increasingly embarrassing spectacle of sustained institutional decline.

Meanwhile, of course, under the new law, the Minister of Finance was required to consult with other political parties on proposed appointees. It is a relatively unusual provision which Labour chose to put in the law, presumably intended to single their seriousness about a high quality Board that was broadly not too unacceptable across party lines (consistent with that, these appointees do not serve at will and can be removed only for cause – not including being ill-qualified in the first place). One wonders what National and ACT (in particular) said when the Minister consulted? Perhaps there were worse names on an original list. Perhaps the parties never bothered objecting, or perhaps they did object and Robertson just pushed on through anyway. Perhaps the relevant spokespeople could tell us?

I have lodged a series of OIA requests with the Minister, The Treasury, and the Reserve Bank to get a better insight on the process leading to those appointments, including the consultation with other parties.

End of an era

Today marks the end of an era at the Reserve Bank, as the last of the “Governor as single decisionmaker” model is dismantled, and tomorrow the new Board takes over the primary responsibility for the Bank’s affairs. The single decisionmaker model was an experiment, but with time it was increasingly apparent that it was a poor one, increasingly unfit for purpose. No other country reforming its central banking and bank etc regulatory arrangements followed us. It is to the government’s credit that they have moved the governance model for the Reserve Bank back towards the international mainstream (even if the specifics of the 2018 and 2021 are less than ideal, and in some respect a dog’s breakfast).

(NB note that most of the new Board, to take up office tomorrow, has not yet been appointed – or at least announced. With the new Board reportedly supposed to be meeting tomorrow, perhaps there is some launch announcement planned, but it is all a bit strange and not really that satisfactory.)

In this post I wanted to focus, perhaps for the last time (although they still apparently have an Annual Report to come), on the old Board. This should be the last day we see this graphic topping the Bank’s “Our Board of Directors” page

For 32+ years, taxpayers have paid a Board to (come for lunch and the cocktail do and) monitor and hold to account the Governor (and more latterly the MPC). They controlled who could be appointed as Governor and to the MPC, and – consistent with those accountability responsibilities – could recommend dismissal. The rules and responsibilities have changed a bit over time. For the first decade or more, the Governor chaired the Board, and even though there was a non-executive directors committee that was supposed to do the holding to account, the messaging implied by the structure wasn’t exactly crystal clear. And it wasn’t until about 20 years ago that the Board was required to make its own (public) Annual Report, but even then not very much changed – and consistent with that general observation, the Board’s report was buried in the midst of the (Governor-controlled) Bank Annual Report and was given no publicity when the Bank released its Annual Report.

There have been some able people on the Board at various times over the years. And some awkward people (the two may even have overlapped), but the institutional incentives very quickly developed into a model that meant few hard questions really got asked, little serious scrutiny happened, and the public never got any serious insight from the Board’s activities on their behalf (the Board, after all, had access to papers the Bank jealously guards for years and years after they were relevant, and can engage and challenge the Governor and other decisionmakers). I say “very quickly developed” because in the earliest years of the regime there was a view – shared by the Governor – that the inflation targeting governance regime was relatively mechanical and that a Governor might reasonably expect to lose his/her job if inflation overshot the target range. The first (apparent) breaches in about 1995 prompted some hard questions, some letters to the Minister, but eventually a recognition that the whole thing involved a lot more judgement and discretion if sensible policy was to ensue. There was a recognition that the target was something to be “constantly aiming at”.

Unfortunately for the Board, had they ever aspired to do the job really well they didn’t have the resources to do so. It became customary to have one professional economist on the Board (first Viv Hall, then Arthur Grimes, more recently Neil Quigley), but Board members didn’t get paid much themselves, had no direct access to staff resources, had no budget to commission independent professional advice, and their own Secretary was for the most of time a senior staffer of the Governor. Board meetings occurred on Bank premises, and one entered the Board room past the row of oil paintings of former Governors. And once the Board got its own chair – chosen by them, not the Minister – for 13 years they opted to have as their chair former RB staffers, first Arthur Grimes, and second Rod Carr. Most of the Board members knew about being on corporate boards – where they had decision-making powers – and so there seemed to be a tendency to default towards the sorts of issues they might have dealt with as corporate board members. Monetary policy and financial stability/regulation were not high among them. Arms-length challenge and scrutiny also weren’t really among those functions – on a corporate board, the board has far more ownership of the firm’s strategy (something the Act never envisaged for the RB – the Board had no say, for example, in Policy Targets Agreements or the conduct of monetary policy).

And so acting as cover for management seems to have become the default mode – most especially externally but, as far as we can tell, often internally as well. Some Board members had their own agendas – some more laudable than others – but there was never much sign of a sustained effort to hold the Governor and Bank to account, to act as if they represented the government and people of New Zealand rather than the Bank management (notably whoever was the Governor at the time). At times, their Annual Reports even talked about helping with the Bank’s external relations (for example, at the functions held around Board meetings outside Wellington).

I could develop some anecdotes at length, including for example, the board member who used to ring me up (while I was still on staff) for inside angles on monetary policy and the Governor, at a time when that member was attempting to mark out an independent position (oops, he is now the Board chair). But I’ll largely leave it at that. I don’t think anyone – perhaps with the exception of some individual Board members – thinks the Board ever really did the job it was designed for. You could be attacked in public by the Governor – for exposing an OCR leak, resulting from weak management systems – and an approach to the Board still resulted only in them gathering in behind the Governor. Are we to suppose it was any different when Orr was attacking his critics around the bank capital plans in ways that few regarded as represented expected conduct from a Governor?

But what interested me was how they had handled the events of the last year or so. The Bank has run up massive losses on the LSAP. Inflation – headline and core – has shot through the top of the target range. All in all it is has been one of most interesting – and surely questionworthy – periods in the 30 years the Board had the monitoring and accountability responsibility. You might think the outgoing Board would want to end well.

A while ago I lodged an OIA requesting the Board minutes for the period November 2021 to April 2022. About the time those results came back I found on the Bank’s website the results of someone else’s OIA for the minutes for September to November 2021. So we have a run of several months of minutes, over a period when things moved a lot on monetary policy (actual inflation, the OCR, forecast inflation – oh, and those LSAP losses). We might have hoped for a lot of evidence of hard questioning, challenge, and serious scrutiny.

Well, might have if we had known nothing of the previous 30 years.

The Bank – or Board – is relatively open in what they release, so we get a good sense of the complete minutes. There are some questions about what they write down, but even there they seem to have improved (relative to earlier concerns that in some areas they were in flagrant breach of the Public Records Act).

What do we learn?

The first meeting was in early September, not long after the August MPS (which itself came the day after the lockdown was announced). The minutes are seven pages long, and we learn a fair bit about the People and Culture report, the Enterprise Risk Management report, the Governor’s activities, and even the RB superannuation scheme (which the Board had some particular non-statutory responsibilities for). Monetary policy gets half a page

Only one Board member is reported as saying anything (“noted” not exactly being a strong form of questioning) and none seems to have challenged the (soon to be restructured out) Chief Economist’s view that the Bank had plenty of time and didn’t need to act (much/) until it had a seen a full 12 months of data. The Governor – the most influential MPC member – is not reported as having said anything.

The late-October meeting minutes took eight pages. We learned quite a lot of various administrative and/or extraneous matters, including the Bank’s climate change strategy. There was quite a discussion on the forthcoming FInancial Stability Report, but no sign of any serious challenge or scrutiny from Board members, on requests for follow-up papers etc. And then we got to monetary policy, the OCR having just been raised for the first time.

I’m sure it was all very pleasant, but there is no sign of any hard questioning about immediately relevant issues (or perhaps the Public Records Act is being ignored again). No one seems to have challenged them as to whether, just possibly, if inflation was already above the midpoint and employment at or above midpoint, and forecasters had been taken considerably by surprise, whether a more aggressive stance might be warranted. No one seems to have challenged Ha on his complacent comment the previous month, despite (presumably) just having confirmed those minutes.

At the November meeting there appears to have been no discussion of monetary policy at all (although the Board was at pains to stress the importance of the outgoing Board having time to prepare their final Annual Report). Not a word. And, of course, still no mention at all of those mounting LSAP losses – and the Board is supposed to have been agents of the minister and the public, not of the Governor.

For the December meeting this is what the minutes record

All of which may have made for quite an interesting discussion, but as the Governor is recorded pointing out, monetary policy has to act given what is happening to fiscal policy (fiscal policy is not something the Governor or Board are responsible for). But there is no sign of any unease, of even a single Board member challenging the Bank to show that it was on the right track or that inflation would come out something like forecast. There is just no sense of holding powerful decisionmakers to account in particularly troubling times. Just a chat, with one’s friends and colleagues.

At the February meeting, this is all there was about monetary policy

Again interesting (if brief) but with not the slightest sense of unease or challenge, no pressure on the Governor or his colleagues.

In March

Were some future historian to stumble across these minutes, but not the relevant parts of the Act, they might have assumed that the Board had just a right to be briefed, but no responsibility for ensuring the Governor and the MPC are held to account.

And finally in this sequence, the April meeting

It is, I’m sure, interesting enough, but it scarcely counts as evidence of accountability.

Now, it is always possible that there are secret unrecorded discussions (in breach of the Public Records Act). The other OIA requester asked for a copy of one of the Board’s reports to the Minister, which the Board/Bank adamantly refused to release

That should be unacceptable: the Governor and MPC are statutorily accountable via the Board, and the idea that management might refuse to supply information to the Board because the Board’s report – even with some redactions – to the Minister might be released (with some lag) should have been unacceptable. But we needn’t worry that there might be anything very revealing in such a report: take a look at the March Board extract above, and you’ll see they record there that they were going to tell the Minister all was fine.

At one level, knowing what we do as to how the Board has operated over 30 years, none of this should be too surprising. But it doesn’t reflect well on them (any of them). We have a chair presumably focused mostly on working with the Governor to see in the new act (questionable appointments and all), and so hardly likely to make himself awkward on current monetary policy, and other Board members with neither the expertise, inclination, nor institutional culture to ask hard questions. But still….across all those months

  • no record of a single hard question,
  • no sign of any sustained engagement at all with the external MPC members (whom they are supposed to individually hold to account)
  • no requests for supplementary papers,
  • no suggestions of commissioning independent analysis,
  • not a single mention  of the huge (and mounting over this period) LSAP losses,
  • no suggestion of any regrets about anything.

It is easy to be inured to flawed frameworks and the weaknesses they generate, but this really isn’t good enough.  These people took the taxpayers’ money (no much admittedly, but they each took the deal) and seem barely to have been focused at all on their monetary policy accountability duties, through one of the biggest monetary policy disruptions for decades.   Perhaps I should ask for the minutes of meetings of the previous 20 months, but it would be a real surprise if anything had been different then.

The Bank itself appears little better, since there is no evidence in any of these minutes of robust or independent analyses and reviews of what had gone well, and what badly, why for examples forecasts had been so wrong, and what lessons staff and management had taken.  And so we are in the weird position  that the Bank has a consultation paper out at present on the future Monetary Policy Remit, and yet tells us that the review they are finally doing of the last couple of years stewardship may not even be released before the second round of consultation closes.

The Board has proved useless. It was always likely given the incentives and flawed structures, but that is no excuse for any of the members.  The job was there to be done, and they have not been doing it (most notably over the dramatic times of the last 12 months).

The end of the era will be no loss.  We can only wait and watch and see how the new Board does –  when the Minister finally manages to dredge up enough people willing to do the job to get a full complement on board.  

Questionable provisions in the new RB Act

On Friday (1 July) the new Reserve Bank legislation comes fully into effect. The new Reserve Bank Board takes over from the Governor personally as the key governing body of the Bank, on all matters other than the conduct of monetary policy (but even there they have a big influence on the composition of the MPC). A member of the outgoing (advisory) Board told us – he sits on the RB pension fund trustees as, for my sins, do I – that the new Board is having its first meeting on Friday. And yet today is Tuesday and we still don’t know who is being appointed to this (on paper) powerful government board. Every Tuesday for the last couple of months I’ve checked Grant Robertson’s Beehive page, and still there is no announcement.

The Governor is a Board member ex officio. And several months the Bank slid onto their website the information that two members of the existing Board (including the chair) and one new person had been appointed to a “transition board” and would be appointed formally to the new Board. But the same web page still says

Neither the government nor the Bank seem to have been entirely straight on the matter, since an OIA release of Board minutes says that Suzanne Snively has also been appointed to the transition board, and has been attending meetings of the outgoing board. It is a curious appointment, both for her age (I’m not keen on a trend towards US-style gerontocracies) and for the fact that it is almost 40 years since Roger Douglas first appointed her to the Reserve Bank Board (back in the previous era when the Board held the formal powers). Media reports suggest she fell out with Douglas, and is much more ideologically aligned with the current version of the Labour Party and its not-Douglas Minister of Finance.

The other newbie we know about is Rodger Finlay. I wrote about his appointment a few weeks ago and there has since been some media coverage. Recall that the Bank was quite open in advertising that Finlay had been appointed to the transition board and was being appointed to the full Board even though he is chair of NZ Post, majority-owner of a New Zealand bank (Kiwibank) that just happens to be the weakest of the large banks in the system. The unadorned label “He is currently Chair of New Zealand Post” is still there this morning.

It was a highly inappropriate appointment, even though in response to questioning from a journalist the Minister of Finance’s office eventually advised that Finlay was ending his term with NZ Post on 30 June. [UPDATE: I’m advised this was actually passed on to the journalist quite readily by NZ Post itself.] If his appointment to the Reserve Bank early was really vital to the success of the new regime, he should have stepped down from the NZ Post role immediately, and neither Orr, Quigley nor Robertson should ever have countenanced anything different. Quigley told media that Finlay had been developing “new governance systems” for the Board, but if he had any real suitability for such a role – where ethics count hugely – he should have known from the start how inappropriate it was, and would look, for him to be serving the Reserve Bank in such a role while chairing the company that majority-owned a bank regulated by the Reserve Bank. For all that Quigley says they were aware of the issue all along, everything about how they operated suggests they took the narrowest legal interpretation, in a way they would no doubt look on askance if a regulated entity tried it on. (It doesn’t strengthen their case that NZ Post is also majority owner of Kiwi Wealth, a significant funds management operation even though that body is not regulated by the Reserve Bank.) As it is, documents released under the Official Information Act confirm that Finlay has been regularly attending meetings of the existing Reserve Bank Board and thus been party to all the information that board has had before it.

It is a poor look and reflects poorly on everyone involved – Minister, Governor, chair, Finlay, and (less severely) the other members of the outgoing board. Among other things, it raises doubts about the approach that these players might take in future. And also leaves us with the question as to how the consultation with other political parties – now required for Board appointees – went down as regards the Finlay appointment. I guess one day the OIA may shed some further light. It is all rather suggestive of a cavalier Wellington approach to conflicts of interest (and both actual and apparent matter).

In my earlier post I included this section of the new legislation on the sort of people who can’t be Board members.

I have no problem with the provisions that are there. The problem is with what is not there. As I noted in the earlier post it is astonishing that a director or senior employee of a company that has a majority holding in a regulated entity (bank, insurer, deposit-taker etc) can be appointed to the Board, and can hold those two positions simultaneously. It is almost as concerning that someone who derived most of their income from work for one or more regulated entities (eg a partner of a law or accounting firm) can simultaneously be a director of the prudential regulatory agency.

But what I hadn’t noticed then (I guess my focus was elsewhere) was that there is no restriction at all on Reserve Bank board members holding ownership interests in regulated entities. According to this brand new law, I can’t be a director of a bank, insurer or finance company and simultaneously serve on the Reserve Bank Board (tick) but…..I could own a whole entity and do so. It is astonishing that Parliament has not protected us against the risk of such an appointment – so much so that one almost has to start asking why. Reserve Bank staff aren’t (or weren’t) allowed any such holdings, but it is the Board that makes the rules, sets priorities etc..

Before going further I should clarify two things: first, I’m sure no one wants to stop Board members (or staff) having totally passive interests through, say, a widely-offered Kiwisaver fund, or a passive NZ equities index fund. A caveat that no holding could be large enough it could credibly be regarded by a reasonable observer as likely to influence decisionmaking would seem sufficient to cover that. But that does not cover a 40 per cent stake in a finance company (say). And, second, the issue here is not a director might be engaging in deliberations specifically on a company s/he held a major stake in: I’m still willing to believe conflict of interest policies would require such a director to recuse him/herself from that specific discussion. But the Reserve Bank Board makes policy, applies policy, for broad classes of institutions, and no director with an ownership (or major income) interest in a regulated institution should be making policy for that class of institution, or contributing to internal discussion on the direction policy should go.

The new Act has a long list of provisions regarding conflicts of interest (from section 61). It starts reasonably enough

Any such conflict has to be disclosed to the chairperson – but not to the Board more generally, let alone the public.

And although the general provision is that a person cannot participate in a matter in which they have a conflict, there is explicit provision in the Act for the chair to waive that prohibition

Any such waiver has to be disclosed, but only in the Bank’s Annual Report, which may not be out for more than a year after such a waiver has been granted.

And one might have more confidence in the current chair, were he not complicit in the appointment of Rodger Finlay, while the latter was chair of the owner of a majority stake in a large bank.

More generally, there is a sense that these conflict of interest rules are written to cope with episodic events and conflicts that might arise, not really specifically foreseeably, in the course of a term on the Board. If the Board is looking to hire a consultant who is the husband or child of a Board member most probably that Board member would stand aside for that discussion/decision. But a Board member who owned half a finance company might reasonably claim that, having known of such an interest, the Minister had nonetheless lawfully appointed him/her, and that the conflict of interest rules would not apply to the Board’s general deliberations on policy for finance companies. Perhaps it would hold up, or perhaps not, but the government and Parliament should never have left such scope for uncertainty, the risk of highly inappropriate appointees (however capable), in the legislation. Section 31 (see above) should have been written a lot more restrictively.

My concerns were only heightened when I happened to have a look at the clause in the Act governing the removal/dismissal of a Governor. These are the things that disqualify you from being Governor.

But notice that being a director of an entity that owns a regulated entity isn’t a disqualification. And neither is having a direct ownership interest in a regulated entity.

Was this an oversight? It appears not. These are just causes for which the Governor can be dismissed

1(g) looks like it should be reassuring. But, there is more

Parliament has explicitly written the Act to allow the Minister of Finance to agree with the Governor that the Governor can hold an “ownership interest in a regulated entity” while serving as Governor (all compounded by the fact that no such provision would be public information).

I am not, repeat not, suggesting anything shady between the current incumbents, but why would Parliament put such a provision in the Act (without at least one of those “trivial or incidental holdings arising from passive holdings in broad-based investment funds” type of caveats)? It is just a dreadful look.

Will any of these provisions necessarily be abused? No, not necessarily. But things have not gotten off to a good start with the Finlay appointment, which makes it difficult to have much confidence in the rigorous integrity of the people involved in these appointments etc, now and in the future. Maintaining a honest and uncorrupt system depends in no small part on sweating the small stuff, but Parliament should just never have left these matters in any doubt, apparently entirely reliant on successive ministers, Governors, Board members being interested in bending over backwards, even when it is inconvenient, to avoid the substance or appearance of conflict in our prudential regulator.

Meantime minister, where are the Board members for this shiny new goverance model? And where, in particular, are the members with real and in-depth expertise in banking, financial system regulation and so on?

A highly inappropriate appointment

For 32 years the Board of the Reserve Bank hasn’t mattered very much. With no democratic mandate, no effective accountability, and no subject expertise either, they have a big say in who has become Governor (the Minister of Finance can only appoint someone they agree to recommend). But apart from that once in five years activity, they’ve mostly been asleep, turning up and collecting their (rather modest) fees but mostly doing little of what they are supposed to be doing – holding successive Governors to account. On paper, the model looked sensible enough, but once it became clear that accountability was a bit harder than it first looked, successive boards seemed to lose interest. With no resources and little expertise, and not much incentive either, they settled for a role that in practice – and it is documented in successive Annual Reports – amounted to little more than providing cover for successive Governors; when they did well, when they did poorly, and even when they went quite off reservation. It probably wasn’t greatly helped by the fact that when the Board finally got to have its own chair, the first two were former senior managers of the Reserve Bank. There were a few things they had legal responsibility for, but in the scheme of things it didn’t amount to much. And when they had little power, and even less inclination to use it, it didn’t very much matter who was appointed. Have we, for example, seen or heard any sign of hard critical accountability questions of the Bank re the recent monetary policy failure, or the $8bn of losses the Bank has run up? (That is a real question: I have an OIA in requesting the minutes of recent meetings.)

But on 1 July, a new era dawns. When the 1989 Act was passed, it gave almost all the powers of the Bank to the Governor personally. The 2018 amendment changed that, at least on paper, as regards monetary policy, but those responsibilities went to the MPC. The Board’s role didn’t change much, other than acting as postmen for the Governor to let the Minister know who he wanted appointed to the MPC. In what are now much the bigger areas of the Bank’s responsibility (banking regulation, insurance regulation, cash etc), the powers still rested with the Governor.

But not from 1 July. The Governor will still be a Board member, but it will be the Board that once again has the power and the responsibility for the discharge of the Bank’s powers and responsibilities (ex monetary policy). They can, and no doubt will, delegate many day to day things to the Governor, but they will have the power.

I’m not optimistic it will make much difference. Cultures change slowly, management is always much more motivated and better resourced than part-time government boards, and it is a poor signal that the previous chair is being carried over to the new regime. One might have hoped that the skills required for one role might be different from those for the new one. But apparently the Minister of Finance doesn’t see it that way.

Three weeks out from the start date the government has still not announced most of the members of the new board. But some months ago they announced the first three appointees, to serve as a “transitional board” smoothing the way to the new regime, before those three people take up formal board appointments on 1 July.

Here it is worth noting that the government has chosen to swing from one very unusual model to another one. It was very unusual (whether in New Zealand public life or overseas central banks and prudential regulatory agencies) to have so much power vested in a single individual. It is quite normal to have a Monetary Policy Committee (even if quite extraordinary to bar anyone with active expertise in the area from non-executive positions on the MPC). But it is very unusual to have banking, non-banking, insurance and payments system regulatory functions – policymaking and implementation – resting with a part-time non-executive board (especially when these same part-timers also have responsibility for MPC and Governor appointments). In such a model, avoiding potential conflicts of interest (actual and apparent) should always have been a critical consideration.

In the Act there is as a long list of types of people who are disqualified from being on the board.

I don’t have any quibble with the items that are on that list. My problem is with the ones that aren’t. One should probably add to (l) “or the chief executive or employee of any Crown agency”. But my biggest concern – and, as we shall see, the problem is already apparent – is with 31(2)(a). Again, just fine as far as it goes, but it does not go very far. Thus, a director or employee of an entity that owns a regulated entity is not disqualified (which just seems extraordinary), and nor is there anything to disqualify anyone who might earn a large chunk of their income (say as lawyer or consultant) from a regulated entity). No doubt the Board will have a conflicts of interest policy which would stop someone being directly involved in discussions on the institution they were part of, but such appointments simply should not be made at all. Policy affects sectors more generally, and these conflicts are not incidental. (Even with the old Board, which had no powers, there was an issue not that long ago with a Board member who was also a director of an insurance company, a sector for which the Bank is prudential regulator.)

Here is my specific concern.

I don’t know Mr Finlay, had never heard of him prior to this appointment, and know nothing about him beyond what is on the Bank’s own website.

But he has just been appointed to the board of New Zealand banking system regulator by the Minister of Finance when he is also chair of NZ Post, which is the majority owner of the 5th biggest bank in New Zealand (which also happens to be government-owned, and his appointment to the NZ Post Board is also a government appointment).

I checked the NZ Post website and there was no sign Finlay was just about to step down from that role (and even if he was, he should not be appointed to the RB role until quite clear of his banking-sector responsibilities).

It isn’t even as if Finlay seems to have any particular expertise in banking or financial system regulation – he just seems like another accountant and professional director, of a generic type that must be two a penny. If he did have great expertise it still wouldn’t justify such a conflicted appointment, but there is not even that to be said for him.

How can the Minister of Finance have thought such an appointment was okay?

But there are questions about others too.

The appointment of Board members is in the gift of the Minister, but it would be very unusual if the Governor (and the old/new chair) had not been consulted. Did they think it was just fine to have on the board of the banking regulator someone who is chair of a company that owns a large bank (all the more troubling when that bank is the weakest in the system, by capital, and most prone to bailout risk)? What advice did they provide to the Minister or Treasury on that point?

And one of the odd features of the new law is this provision

The fact that this provision was added, emphasises just how important these RB Board roles are seen as being (not just cosmetics like the old board). But where were the other political parties (National and ACT in particular) when Grant Robertson consulted them about Finlay’s appointment?

It is an outrageous appointment. It is hard to think of a comparable appointment in other advanced countries (but if anyone knows of one, let me know). It would not even be possible in most (generally run by executive boards). But even if some other advanced-country government somewhere has made such an appointment, it should not have been done here. It is bad form and – whatever the possible merits of Mr Finlay personally – it sets a dreadful precedent. If this government can do it for the chair of the owner of a state-owned bank, what is there to hold back some future government appointing someone in a similar position in a private bank. Mr Finlay himself, may be (probably is) a perfectly decent person, but if he really had what it took to be on the founding board of a banking regulator, he should have known not to have taken the RB appointment while holding the NZ Post one. Adrian Orr and Neil Quigley share responsibility, having (at best) stood silently by.

The real responsibility rests with Grant Robertson and the Cabinet. But they have apparently been given cover for this appointment by their political opponents, who apparently did not say no when Robertson came to consult, and even if (just possibly) they demurred then have said nothing since.

It is a sad example of the increasing corruption (institutional, rather than personal financial) of the New Zealand political system, notwithstanding those deluded annual Transparency International perceptions surveys.

This appointment should simply never have been made. It should be revoked, or Mr Finlay should do the decent thing and resign one or other of his NZ Post and Reserve Bank appointments.

UPDATE: According to this entry on The Treasury’s website, Finlay’s NZ Post appointment was for a term running from 21 August 2019 to 30 April 2022. As noted in the main post, he is still shown as chair on the NZ Post website, although I could not find an announcement of a renewal of his appointment by the relevant minister(s).

UPDATE: In addition to it being inappropriate to have someone on the board of the banking regulator who is chair of the majority owner of Kiwibank, it would also seem inappropriate to have someone on the central bank board – directly involved in the appointment of the Governor and MPC members – who is chair of the majority owner of the funds management business, Kiwi Wealth.

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.


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
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?
–  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.

(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.