Reserve Bank

Household debt, house prices….and Sky

Michael Reddell Financial stabilty, Housing, Reserve Bank

 

Stories about household debt and house prices are everywhere at present.  For anyone interested, Radio NZ’s Sunday morning show yesterday had a 20 minute (pre-recorded) discussion with Chris Green, of First NZ Capital, and me on some of the issues. I think we agreed on more than we disagreed, both emphasizing that large falls in real house prices have happened before and will, no doubt, happen again.  And the domestic economy is currently less robust than either Treasury or the Reserve Bank would have us believe.

The Radio NZ interviewer was, it seemed, keen to run with a narrative of mass collective irresponsibility, but as I’ve noted here before there is no sign that higher house prices are leading to a huge surge in consumption (any more than has happened with previous house price booms), and good reason to think that many people are very uneasy about the size of the debts they are having to assume to get into a first house.  I could have added that house sales per capita, and mortgage approvals per capita are not particularly high by historical standards.  Scandalous as the house price situation is, if there is a mania –  contagious exuberant optimism –  it must be very localized.

Tomorrow, I want to focus again on the Reserve Bank’s stress tests and how we should think about those results.  But before getting into that, it is worth briefly repeating a few other relevant points.

First, there is the constantly repeated claim, especially from some commentators on the left, that the system of banking regulation incentivizes banks to lend on housing security, skewing their whole portfolios towards housing lending, beyond the natural levels justified by the underlying riskiness of different classes of loans.     That is simply false.    The essence of the argument is that in calculating capital requirements, loans secured on housing generally carry a lower “risk weight” than most other forms of bank credit.   They do, and that is because such loans are generally less risky.  Compare a loan secured on an existing house in an established suburb, supported by the wage or salary income of the occupants, with a loan to a property developer for a new project on the fringe of a fast-growing town and you start to get a sense of the difference in risk.   If anything, the initial risk-weighted capital regime (Basle I) probably overstated the riskiness of a typical housing loan and understated the riskiness of many corporate loans (and sovereign exposures for that matter).  In the shift to Basle II, many countries appear to allow banks to reduce risk weights for housing exposures too far.  New Zealand (the Reserve Bank) was much more cautious (even than, say, APRA in Australia).  As I’ve noted previously, the IMF has accepted that New Zealand’s housing risk weights are among the highest used anywhere –  other countries have been coming towards us.   There are reasonable arguments as to whether risk weights can ever be assigned in a fully satisfactory way –  hence the support in many circles for simple leverage ratios, as a buttress to the capital regime –  but there is no reason to think that all types of credit exposures should be treated identically.  Bankers wouldn’t –  with their own shareholders’ money at stake.

Second, there have been plenty of systemic banking crises around the world over the decades.  But as the Norwegian central bank, the Norges Bank, pointed out in a nice survey a few years back, which has been cited by our own Reserve Bank,

Normally, banking losses during crises appear to be driven by losses on commercial loans. Loans for building and construction projects and (particularly) commercial property loans have historically been vulnerable. Losses on household loans appear to be a less significant factor,

This was true, for example, in the Scandinavian crises of the early 1990s –  savage recessions in which (in Finland) house prices fell by 50 per cent and banking systems around the region got into severe difficulties –  and in Ireland in the most recent recession.  And each of those crises occurred in fixed exchange rate countries, in which the authorities had (in effect) abandoned the ability to use monetary policy to buffer severe adverse events.

Are there exceptions?  Well, the US in the most recent crisis certainly looks like one on the face of it.  Housing loans were at the epicenter of the crisis, and the US has a floating exchange rate.  But as I’ve pointed out previously, drawing on excellent book Hidden in Plain Sight, much of what went on in the United States was the direct result of the heavy direct government involvement in the US housing finance market, and the legislative and regulatory pressure placed on private and quasi-government lenders to lower their lending standards on housing exposures. Government-directed credit is often a recipe for some pretty bad outcomes.  Advanced countries where the government did not have a substantial role in the allocation of credit (especially housing credit) and where domestic monetary policy was set to domestic economic conditions –  rather than, say, pegged to German conditions –  did not have banking systems which experienced large losses on their domestic loan books, and especially not their domestic housing loan books.  I’m not aware of any exceptions in recent decades.   I looked at the post=2007 crises here.

Individuals who have taken out large amounts of debt just before housing (or other asset) markets turn can find themselves in a very difficult financial position.  If the borrower has a good income, it might just be an overhang of debt that limits mobility.  In principle, banks can foreclose on mortgages with negative equity, but they very rarely do so as long as the loan is being serviced.  And nasty housing market shakeouts often take place in the context of severe recessions –  in part because building activity is one of the most cyclical aspects of the economy and building activity tends to dry up when house prices fall sharply.  But the case just has not been convincingly made that the New Zealand economy and financial system are seriously exposed as a result of current house prices per se, or of the current level of household debt.  As a reminder (a) that level of debt (relative to disposable income or GDP) is little changed over the last eight years, after a sharp increase in the previous fifteen years, and (b) that level of debt did not cause evident problems when New Zealand last experienced a pretty serious recession in 2008/09.   And relative to the situation on the eve of the 2008/09, New Zealand households now have a much higher level of financial assets (again relative to income or GDP) than they had then.     The risks now may be more localized and concentrated in Auckland than they were in 2007, but there is little to suggest that they pose more of an independent threat to the whole economy or the financial system.  On all published metrics –  whether or capital or liquidity – the banking system is in better health today than it was in 2007 –  and the same goes for the Australian parent banks.  When you dig into the details of the Reserve Bank’s FSR, that is what the data say, but it isn’t what you hear from the Governor.

I’ve been concerned for some time that the Governor has an inappropriate focus on the US experience.  He lived in the United States for more than a decade, including during the 2008/09 crisis, and although his role at the World Bank was focused on emerging markets, he got to participate in some of the international meetings that were epiphenomena around the crisis –  ie lots of headlines, but of little actual relevance to dealing with the various national crises.  Inevitably, that sort of experience influences a person’s perspectives.   But the Governor has never given us any reason to believe that the New Zealand situation now is remotely comparable to the US situation in the run-up to the financial crisis.

Despite all the research resource at its disposal, the Reserve Bank has never published any analysis or research looking at the countries which did, and did not, have domestic financial crises (and especially ones sourced in the housing mortgage books).    What marked out the US and Ireland, for example, from New Zealand, Australia, Canada, the United Kingdom, Norway or Sweden?  Each had very high house prices going into the global recession of 2008/09, each had had very rapid credit growth, most were seriously affected by the recession itself, and yet some had serious domestic loan losses and domestic financial crises, and most didn’t.    Almost certainly, the difference was not simply that the US and Ireland were selected for crises by some celestial random number generator, which indifferently spared the other countries and their banking systems.    As he rushes from one ill-considered distortionary intervention to another, overlapping one control upon another, exempting some borrowers and some institutions but not others, and impairing the efficiency of the financial system, surely the Governor owes us at least this modicum of explanation and analysis?  And that is even before we start asking questions about why the Governor (and his staff) should be thought better able to decide on the appropriate allocation of credit than private institutions whose managers have built careers on making lending decisions, and whose shareholders have considerable amounts of their own money at stake.  Last I looked, the Reserve Bank –  and the Governor –  has nothing at stake in the matter, and they have demonstrated no track record of expertise in making credit allocation decisions. In that respect, of course, they are little different than their peers in other countries. The level of hubris on the one hand, and lack of deep thinking, research and analysis on the other, is quite breathtaking.

And yet our politicians let them get away with it.  They leave so much power vested in a single unelected individual –  selected by another pool of unelected individuals  – whose term is rapidly running out, and who won’t be around to be accountable for the consequences of his intervention.   Then again, perhaps he will.  A typically well-sourced Wellington political newsletter last week claimed that the Governor is well-regarded in the Beehive and might well be reappointed.  It seems unlikely –  and I’d be surprised if our scrutiny-averse Governor even sought another term – but the line must have come from someone, presumably someone reasonably senior.

But, on a quite different topic, now I’m going to stick up for the Reserve Bank.  Bashing government agency spending on all sorts of things makes good headlines.  Bad policies deserve lots of critical scrutiny, and bad polices typically cost taxpayers a lot of money, whether directly or indirectly.  But frankly I was unpersuaded by the Taxpayers’ Union’s latest effort, highlighted in the Sunday Star-Times yesterday, around government agencies’ spending on Sky subscriptions.  Among core government agencies, the Reserve Bank was one of the larger spenders, with a total outlay of around $12000 in the last year.  The Taxpayers’ Union specifically called attention to the Bank.

But why?   The Reserve Bank has a variety of functions, some of which (notably the financial markets crisis management functions) which might warrant a Sky subscription even for professional purposes.  But even if the rest of them are scattered around lunch and breakout rooms in the rest of the building, so what?  Any organization seeks to create a climate that encourages high levels of staff engagement, and the recruitment and retention of good staff.  Some people are just motivated by cash salary –  always the overwhelming bulk of costs for central government policy and operational agencies –  but many are motivated by a richer complex of considerations, including on-site staff facilities –  which might include the quality of the cafeteria, fruit bowls, coffee machines, the Christmas Party, Friday night drinks, medical benefit schemes, access to newspapers, or even access to Sky.  In the private corporate sector there is a range of different approaches –  some no doubt work best for some types of workers, and some for others.  Sometimes these things are actually cheap at the price –  there is more motivational benefit than there is cost to the organization, which suggests everyone is better off.   Access to Sky was never one of the things the Bank offered that particularly appealed to me –  then again, the bonds built over a morning coffee, or gathered round a TV late on a rare afternoon when New Zealand was on edge of winning a cricket test in Australia, were probably good for the Bank, and for staff attitudes to the Bank.

I’m all for serious scrutiny of government agencies.  But focus on the big picture. Look at the quality of the policy advice and research being offered up. Look at the overall costs of organisations and functions, including overall average remuneration levels –  and perhaps even focus on the details when it comes to what senior managers spend on themselves.   But leave managers some flexibility to  attract, manage, and reward good staff  –  within those overall constraints –  in ways that don’t leave them constantly fearing “will this be a Stuff headline”.    We’ll all be a little less well off –  citizens who need a good quality public sector, with a limited number of able staff –  if we don’t.

 

Age discrimination and the next Governor

Michael Reddell Governance, Reserve Bank

It is now June, which means it is only 15 months or so until Graeme Wheeler’s ill-starred term as Governor of the Reserve Bank ends.  Conversations begin to turn to the question of what happens next.

I’ve probably left many people unconvinced, but I still reckon there is a plausible case that the Governor of the Reserve Bank is the most powerful individual in New Zealand.  He exercises a lot of discretion with few checks and balances (perhaps especially in areas other than monetary policy) and there are no established appeal or review rights.  Many Cabinet ministers have lots of power, but they can be dismissed whenever the Prime Minister chooses.  The Prime Minister can be toppled by his or her own caucus with no notice or appeal (see Kevin Rudd, Julia Gillard and Tony Abbott –  or Jim Bolger and Geoffrey Palmer for that matter).  Judges make crucial, life-changing, decisions, but all lower court decisions are subject to appeal, and all higher courts sit as a panel of judges.  Of course, the Governor has power in only a specific range of areas, but as those areas include monetary policy and financial regulation, the effects of the Governor’s choices can be felt very widely.

A month or so ago, I wrote a couple of posts (here and here) about the curious democratic-deficit in the way in which the position of Governor is filled.  It is a choice Parliament made, but it is a very unusual one, whether considered against the models used for central banks/financial regulators abroad, or for other senior positions in the New Zealand government.  Even though the Governor wields so much power, the choice of who serves as Governor is not made by an (elected) Minister of Finance, but by the faceless, largely unaccountable, group of people who constitute the Board of the Reserve Bank.  The Minister technically makes the appointment, but he can only appoint someone recommended by the Board.  That makes the Board members the key players in the process.  Perhaps equally weirdly, the Minister gets to determine the Governor’s terms and conditions (he only has to consult the Board).  In a more reasonable assignment of roles and responsibilities, one might have thought the Minister should be able to appoint an appropriate person as Governor (as happens in most countries, including Australia), perhaps consulting the Board, and perhaps leave the Board to set the terms and conditions, perhaps in consultation with the Minister.

There are no confirmation hearings for either people appointed to the Board, or for a Governor-designate, even though between them these people will have considerable influence on the economy and financial system for years to come.  One might reasonably ask what expertise, let alone public mandate, Rod Carr, Keith Taylor, and the rest of them, have to make those sorts of selections, or why they are better placed to do so than an elected Minister.  Recall that appointing a Governor is not just akin to appointing a CEO of a government department –  who typically has little or no effective policy discretion – or the CEO of a private company.  It is about appointing a key policy (one might almost say “political”, albeit not in a partisan sense) player whose discretionary choices –  and they involve real and substantial discretion – are probably at least as significant as those of most Cabinet ministers, with the associated need to be at least as open and accountable as Cabinet ministers.   It seems like the sort of role that senior elected ministers, not faceless former finance sector executives and academic administrators, should be filling.

But unsatisfactory as the law is, it seems almost certain that it will be the law governing the next appointment of a Governor.

Someone who has paid closer attention to some of the details of those provisions than I have pointed out to me recently clause 46(1)(c) of the Reserve Bank Act.    Under the provision, no one can serve as Governor, or Deputy Governor, once they are aged 70 or over.

This provision is quite old.  The legislation was passed in 1989, and life expectancy has increased by perhaps five years since then.  In addition, New Zealand legislation passed since then has prohibited compulsory retirement ages, unless they are specifically provided for in statute (as this one is).  There is a similar statutory age limit for judges.

In a year when the race of the job of President of the United States seems set to be fought between one candidate who will turn 70 this month, and another who will turn 70 next year (who is in turn still being challenged by a sitting senator who is 74) it is a surprisingly low age limit.  Life expectancy has increased, but in fact it is almost 60 years since Walter Nash became our Prime Minister at age 75, and then left office at 78.

I’m not opposed on principle to having an age limit for the Governor.  If anything, as our law is currently written, the case might be stronger than  that for judges.  In respect of judges, the contrast is striking between our situation and that of the US Supreme Court, where judges often seem to hang on until death (as much as anything to manage succession risk), and where three of the current sitting judges are aged 77 and over.

It is, rightly, difficult to remove a sitting higher court judge even if that person’s physical and mental capabilities are evidently in serious decline.  In our system, it takes a vote of Parliament, in an address to the Governor-General.  Age limits help to protect against the indignity and awkwardness of such difficult and very public removals.   Then again, between the assignment of cases, appeal provisions, and the fact that appellate courts sit with a bench of judges, the damage a declining individual judge can do can be mitigated.

It is technically easier to remove a Governor of the Reserve Bank whose capacities were failing.  It requires only an Order-in-Council.  But in practice it would be no easier, and potentially much harder to manage in the interim.  A Governor in office has full powers to set monetary policy as he judges appropriate, and to make and vary a wide range of financial regulatory policy measures.  There is no one who can temporarily assign some of those powers to other officials, and there are no appeal rights.   And the Reserve Bank operates in the full glare of scrutiny by domestic and international markets.

But an age limit of 70 simply doesn’t seem to strike quite the right balance.  Ideally, the entire governance structure of the Reserve Bank will be revised, and if the Governor had just one vote (among say 5 or 7) on each of a Monetary Policy Committee and Financial Regulatory Committee then no age limit might be needed at all (there is none in Australia, or the United States –  Greenspan was 79 when he left office).  For now, serious consideration should be given to raising the age limit to at least 75.

As it happens, the age limit is unlikely to have been a binding consideration since the Act was passed. Don Brash left office at 61, and Alan Bollard was a similar age when he finished as Governor.  But Graeme Wheeler will, apparently, be 66 late next year.  That means he could not serve another five year term, even if he wanted one, or if the Board wanted to reappoint him.  He could, however, serve –  say –  a four year term, which might parallel the typical arrangements for government department chief executives (who typically get an initial five year appointment, and then often get a three year extension).

I hear on the grapevine that the Governor has already indicated to staff that he will not be seeking a second term.  If so, the issue is moot as it affects him.

But with more people staying longer in the workforce it might still be relevant to some of the people the Board could consider to fill the office of Governor.

For example, although it has now been 35 years since the position was filled by someone with a Reserve Bank background –  an extraordinary statistic that the Board might want to reflect on – former senior officials would no doubt be among those who might be thought of as candidates for Governor.  The Act not only requires that no one can be Governor or Deputy Governor once they turn 70, but it also requires that first terms as Governor must be for five years.

There are, for example, two current and four former Deputy Governors who are still professionally active.

Peter Nicholl was Deputy Governor in the 1990s, before going on to serve as Governor of the central bank of Bosnia.  He is still apparently professionally active on the international central banking consulting circuit. But he is 72, and so barred from serving as Governor here.

Murray Sherwin succeeded Nicholl as Deputy Governor.  He is now chair of the Productivity Commission, and in many ways could be a very good Governor if he was interested.  But it appears that he is turning 65, probably next year, and so the age-70 limit could be a constraint.

Grant Spencer is a current Deputy Governor, and will have served in that role for a decade by the time Wheeler’s term expires.  Spencer has considerable experience inside the Bank, as well as decade in relatively senior roles at ANZ, but also appears to turn 65 shortly (the first academic publication I could find dated back to 1974).

Three other current or former Deputy Governors don’t face the same issue.  Rod Carr, Adrian Orr, and Geoff Bascand are all in their 50s, and each has chief executive experience.

Where else might the Board look?  There are other senior ex Reserve Bankers, such as David Archer, former Assistant Governor and Chief Economist now in a senior role at the BIS, or Arthur Grimes.  Or if they were interested in plucking someone from an international agency, my first boss Andrew Tweedie is now the Director of Finance (not just a bean-counting job) at the International Monetary Fund.

There isn’t a strong tradition of academics moving directly into policy roles in New Zealand, and nor are there many academics working in policy-oriented research on monetary policy or financial regulation.  Then again, there are two academic administrators on the Board, either of whom might themselves be interested.

The Reserve Bank now has a major and active role as regulator and supervisor of financial institutions, and so some banking background might be a consideration the Board looks for.   There are few senior New Zealand bankers, and especially not ones with the capability to be, and to credibly front as, the single decision-maker on monetary policy.  Some of us used to worry that Mark Weldon’s friendship with the Prime Minister might have seen him succeed Alan Bollard, but perhaps the OCR leak debacle further reduces that risk.

What of public servants?  Iain Rennie, the outgoing State Services Commissioner, has a strong background in macro, and was for a time the Deputy Secretary of that part of Treasury.

Finding the right person should be quite challenging.  It is a big job, and also an unusual one.  The Bank itself isn’t a large organization, but it has quite a range of functions, where the Governor personally has a great deal of discretionary policy power.  And the Bank operates in an area where there is a huge amount of uncertainty.  Filling the role well needs management capability, it needs intellectual capacity, it needs good judgement, and it needs the self-confidence on the one hand, and the humility on the other, to recognize the uncertainties, to be willing and able to engage openly with alternative perspectives, and to acknowledge that –  being human –  from time to time the Governor will make mistakes.  Precisely because the power is so concentrated in one individual, inevitably the questioning and challenging will often focus on that individual.  The ability to embrace sustained scrutiny and work effectively in that spotlight isn’t a talent everyone has –  and nor is it needed for most roles.

From time to time, people talk about the possibility of appointing a non New Zealander as Governor.  I don’t think it is a viable or sensible option.  Think of how much political mileage there still is in New Zealand from bashing Australian banks.  How would people take to having an Australian setting our interest rates, and regulating those Australian (and other banks)?  I don’t think it is politically tenable, and neither –  given the extent of the discretion the Governor wields –  would it be desirable.  I wrote about this issue a while ago and concluded:

I think it would still be a mistake to go global.  Some aspects of the role could be done by any able person –  revitalising, for example, the Bank’s research and analysis across the range of its policy functions.  That is partly just about good second and third tier appointments, and partly about being a voracious customer for the insights that analysis throws up .  But the role also needs someone who understand the New Zealand economy, the New Zealand system of governance, and someone who understands the New Zealand financial system.  And it needs someone who is comfortable, and credible, in telling the Bank’s story – and sometimes it will be a controversial or difficult story –  to New Zealand audiences.  Plenty of people criticized Don Brash over the years, but few doubted that his heart was in this country, and that its best interests were his priority.  In a small country, with a foreign-dominated financial sector, a very powerful central bank, and ongoing controversy about the role of monetary policy and New Zealand’s economic performance, it is hard to imagine any foreign appointee successfully filling the bill.

Of course, it might be a little easier if the governance of the Bank was reformed.  For example, in a system in which the Governor was chief executive, but had no more voting rights on monetary policy or financial regulation policy matters than others members of the respective committees, the stakes are a little lower.  But even then, I think such governance reform more appropriately opens the way to the appointment, from time to time, of a foreign expert as a member of one or other of the voting committees.  Since the Bank of England’s nine-person Monetary Policy Committee was established by legislation almost 20 years ago it has not been uncommon to have a foreigner sitting on that committee. In a New Zealand context, supplementing local expertise with outside perspectives in that way could have some appeal – if New Zealand government board fees were sufficient to attract quality candidates –  but we are still likely to be best, in all but the most exceptional circumstances, to look for a Governor from home –  as we do when we choose ministers, judges, (and these days Governors-General), military chiefs and so on.

The appointment of the next Governor is further complicated by the timing.  The Governor’s term expires almost three years to the day since the last election.  In times past it wouldn’t have been a great problem –  there was a broad bipartisan consensus around the Reserve Bank.  Similarly, when the appointment of Phil Lowe was announced just a few days prior to the Australian election being called it wasn’t a problem: Labor and the Coalition don’t seem to have any material differences on the RBA.   But here all the Opposition parties are campaigning on a different approach to monetary policy.  We don’t know quite how different –  in 2014, Labour’s policy was marketed as quite different, but on closer examination it appeared pretty similar to the status quo –  and part of that would depend on the respective vote shares in a coalition that made up an alternative government.   If the government were to change, it would seem pretty unsatisfactory that an incoming government could find themselves lumbered with a Governor taking office on virtually the same day they did, for a term of five years, appointed by a Board appointed entirely by the outgoing government.  It shouldn’t matter that much, but such is the extent of the policy discretion the Governor has under current legislation, that it does.  Frankly, it should probably bother someone taking the job –  appointed, but not knowing what framework he or she will operate under.

People push back against this argument, noting that changes of government can happen in the middle of a Governor’s term.  And that is, of course, true.  But it is particularly stark when the new term would begin at virtually the same time a new government would be taking office, and when there are –  it appears –  more differences between major parties on the Reserve Bank Act than would have been the case in earlier decades.  There are no easy or comfortable ways to resolve this issue.  An early appointment keeps any announcement clear of the election campaign, but that isn’t really the issue.  Any new Governor has to be appointed for an initial term of five years.  The Acting Governor provisions of the Act can be used only to complete a Governor’s unfinished term.   I noted a while ago that one option might be to offer Graeme Wheeler a brief extension, allowing the longer-term appointment to be resolved once the make-up of the next government was clear.  Perhaps if there were a self-evidently outstanding single candidate for Governor, commanding respect on all sides of politics, it might also be less of an issue.

Under our current legislation these issues are inescapable from time to time.  A five year term will expire in an election year every 15 years, on normal cycles.  One could give the Governor a six year term, which would reduce the chance of the coincidence, but even then a snap election could bring the two dates into synch again.  Much better would be to move to a system that put much less weight on any one individual.  No other advanced country central bank/regulatory agency gives so much discretionary power to a single unelected individual.  We shouldn’t.

The OCR leak: some disclosures

Michael Reddell OCR leak, Reserve Bank, Uncategorized

Will I come to regret this post?  Probably not, but only time will tell.  It also may not be of wide general interest, but that is fine.

Regular readers will recall that I got caught up in the Reserve Bank’s OCR leak.  More specifically, gaping breaches in the Bank’s systems (a near-total reliance on trust) and an actual leak of the March OCR decision would not have come to their attention, and been addressed, if I had not passed on to them information that arrived unwanted in my email in-box on the morning of the release, which suggested the possibility of a leak.  Frankly, if anyone was the innocent party in the whole episode it was me.  I wasn’t the leaker, I wasn’t the major media organisation that failed to disclose the leak by its employees for several weeks, I didn’t even receive what information I had from the person who was the leaker, and I wasn’t the central bank that ran security systems that made such a leak astonishingly easy.

And so I was more than a little miffed to have the Governor of the Reserve Bank describe me and my conduct as irresponsible in his press release announcing the results of the inquiry –  an inquiry that would never have taken place if it had not been for my initiative in alerting the Bank to the issue.  What particularly irked me was that in the same statement the Governor (a) took no responsibility for the laxness of the Bank’s own systems, and (b) seemed to go out of his way to stress how helpful the media organisation, MediaWorks, had been.   It also puzzled me a little that there seemed to be no sanctions imposed by the Bank on the leakers – MediaWorks and its staff.

That prompted me to lodge a series of requests for information –  from the Bank itself, and from its Board (which is paid to operate at arms-length from the Bank to scrutinise the performance of the Governor and hold him to account).    The Bank has actually responded to one other OIA request in this area: the Taxpayers’ Union asked about the cost of the Deloitte inquiry, and was told a few weeks ago that the cost was $58952.28 (plus GST).  My OIA requests have been treated in a more typical Bank way –  not just extended for one month, but all the way out to 1 July, with talk of the possibility of charging.

However, I also sought from the Bank under the Privacy Act material relating to me that was held by the Bank and generated or obtained between the morning of the MPS release on 10 March and the day I lodged the request.  They didn’t respond in 20 working days, but it wasn’t that much after the initial deadline when I was sent a fairly large collection of material yesterday.  I had kept the request quite focused –  I wasn’t after copies of media reports, or out to embarrass junior people who were not involved in the leak investigation and might have been exchanging speculative emails.  All the material I obtained was comments from people directly involved, mostly people from the senior management group including the Governor.

I have tossed up about whether to release this material, and am doing so for two reasons.

The first is that I think it does shed useful light on how the Bank went about dealing with the information I provided to them, and the priors and presuppositions of key people involved.  It is only a partial view of course, and I hope in time the Official Information Act requests will provide some more clarity.  Unfortunately, the Bank has deliberately stalled the release of that information (which it can be onerous neither to collect/collate nor to review).

The second is more personal.  Various people wisely suggested that I separate my irritation at having been personally attacked by the Governor from the wider issues of how the Bank has dealt with the issues of the leak, MediaWorks involvement, lock-ups etc.   Some experienced former colleagues had even got in touch to suggest I must be misinterpreting things, and the Governor’s statement about irresponsibility couldn’t have been meant to include me.  And so I decided to write a private letter to the Governor, outlining my perspective on my involvement in the whole issue and, in light of those points, inviting him to explain, or reconsider, his public assertion that my conduct had been irresponsible.  If possible, dealing with such issues privately is generally likely to be more constructive.

It wasn’t long before I got a very terse response from the Governor confirming that he did indeed regard me as having behaved irresponsibly.  I didn’t do anything with that, other than to pass the message on to those optimistic former colleagues.

But then I received yesterday’s collection of documents.  Publishing them, together with my letter to the Governor and his reply, will enable people to form their own views.  I’m sure many will see what they want to see, and some of those inclined to support Graeme Wheeler more generally may agree with the views he, and his senior colleagues, expressed.   Anyone is entitled to his or her own view.

As for me, I have to live with my own conscience.  There would be nothing shameful in concluding that, with the benefit of hindsight, one might have done some things differently.  After all, the Governor himself –  who had much more time – has changed tack twice since the inquiry was released (from no penalties for MediaWorks to indefinite exclusion from press conferences, and from immediately discontinuing lock-ups to investigating the possibility of reinstating them).   I have asked myself some of the questions others have posed, but reading the material I received yesterday led me to conclude more strongly than previously that I had done the right thing –  not necessarily the things the Bank would have preferred, but those which best balanced the public interest and the protection of my own interests.

Here is the link to the material the Reserve Bank released.

OCR leak inquiry Privacy Act response from RB

My earlier posts on the leak and related issues are all here

And here is what I took from the newly-released material.

The first point I noted is that, with the exception of a brief email from John McDermott on the morning of the MPS release, in which he wrote to me “Thank you for letting me know”, no one (management or Board) seems to have considered, at any point in the subsequent six weeks, expressing appreciation to me for coming forward and passing on the information that I had.  One doesn’t try to do the right thing in the hope of being thanked for it, but it is a telling omission nonetheless.

The second point is that I was pleasantly surprised to learn that the Bank seemed to take the information seriously from the start.  By 11:30am on 10 March, Deputy Governor Geoff Bascand had asked the senior manager responsible for risk and audit to undertake an inquiry, noting (page 2) “we cannot be sure it is a leak as opposed to speculation but need to enquire into it with diligence and urgency on the assumption it is”.

That was fine, and he even noted that “in the first instance, he [Michael] is the messenger”.   But in the same email Bascand had already moved on to treating the information I had passed on as an “allegation”, and two of the three questions he expects answers to are about my conduct.

Somewhat surprisingly, in a world in which a “no surprises” policy is generally supposed to prevail between government agencies and the Minister’s office, it appears (page 4) that the Bank only decided to tell the Minister of Finance’s office about the possibility of a leak after I had made a brief mention of the information I received on my blog on the afternoon of the release (having advised the Bank some hours earlier that I was likely to mention it).  That looks like poor political management, but also tends to confirm the unease I felt at the time, that the issue might be hushed up if at all possible.

Geoff Bascand’s biases become increasingly apparent in one of the unguarded emails that requests like this throw up.  After they advised Bank staff of the situation late on 10 March, the head of HR emails Bascand with a brief expression of sympathy.  Bascand’s response is nothing at all about the possible vulnerability in the Bank’s own systems (he being the senior manager responsible for the Communications functions), the possibility of an actual leak, or anything of the sort, but is all about the messenger.

By this time, and perhaps reflecting his biases, it is becoming clear that Bascand has trouble with the meaning of the word “allegation”.  I have commented on this previously, but it is more stark in the light of the information in this release.  In his message to all Bank staff (page 5) late on the afternoon of 10 March the heading is “Allegation of leak information”, and in a five line email the word “allegation” is used twice.  Nowhere, by contrast, does he note something like “we have received information suggesting that information may have been leaked”.      To repeat, allegations are claims are that are made, something that (at least according to my Oxford dictionary) involves “to assert without proof”.

To repeat, at no time between 10 March and 14 April (the release of the short-form inquiry report) did I make any “allegations”.  All I did –  and the emails are in this batch, on page 1 –  was to pass on hard information that I had (an email) while stressing repeatedly that I had no idea whether it was the fruit of a leak, or something else.  At the time, as I’ve said before, I struggled to believe a leak was possible.

It took a while for the leak inquiry to get going.  I’ve covered previously the Bank’s approach to me to assist the inquiry –  an approach which was extremely professional and which carefully referred only to the “possibility of a leak”.  I talked to the Deloitte investigators a few days later.  I gave them a copy of the text of the email I had received, and we had an amicable conversation in which, inter alia, they indicated that the Bank was very grateful to me for having come forward.  At the time I took that at face value, and commented openly on my support for the process the Bank had put in place.  It is worth noting –  because it comes up later –  that the Deloitte investigators did not ask me who sent the email to me, and indicated that they would not expect that I would tell them.  I wrote a post following that meeting with the investigators, mentioning briefly the discussion we had had, but focusing mostly on structural changes that I thought were warranted (abandonment of lock-ups etc) regardless of whether or not there had been a leak on this occasion.

That post seemed to spark some media interest.  The documents contain an email to Mike Hannah (RB Head of Communications) from Hamish Rutherford of Fairfax (someone else who appears to have had trouble with the meaning of the word “allegations”) and over the next couple of days there was a flurry of media coverage, here and abroad, and some clarificatory posts from me (partly annoyed at the continued public use of the term “allegations” by media and Bank representatives).  That in turn sparked various emails among senior managers at the Bank.

Mike Hannah is the first (page 13).  Interestingly, he claims that he would have picked up and responded quickly to any email I had sent before 9am on 10 March.  If so, that is good to know now, although it wasn’t the impression I was under at the time.  But he also notes that the Bank would not necessarily have done anything differently: “we’d have watched the markets very carefully , and might have had to consider going early if we saw action”.  But as everyone recognises, there was nothing visible happening in markets.

Hannah also responds to my point that one reason I hadn’t contacted the Bank in the brief window before 9am was my unease about the Bank’s reaction if in fact it had not been cutting that morning.  He considers it a “flimsy” story, but in fact the tone of the senior management comments –  from him, Bascand and Wheeler – throughout these documents only confirms that was an entirely reasonable fear on my part.  One thing that is striking in these documents is the apparent total inability of such senior people to imagine themselves in someone else’s position with someone else’s (lack of) information. They knew there was a cut coming. I didn’t.

The Governor responded to Hannah (at 1:48 am –  perhaps he was travelling).  From the tone of his email he seems to regard the whole exercise as a “quest for publicity” by me, adding that “my sense is that he is digging himself into a hole” – I’m still not sure, from context, how.    He seems aggrieved (on which more later) that a former employee of the Bank would blog about the enquiry.  It is really quite a weird reaction: one might hope that the Governor would have been most concerned about getting to the bottom of the substantive issue, and would expect considerable public scrutiny at even the possibility that an OCR decision had been leaked.  Recall that by this point –  objections to the misuse of “allegations” apart –  I had been supportive –  in public and in private –  of the whole inquiry process the Bank had put in place.

The Governor forwarded that email to the chair of the Bank’s Board, Rod Carr.  Instead of keeping an appropriate distance from management, Carr weighs in suggesting that perhaps I was now feeling guilty, that my actions were not a “sign of good citizenship”, and that somehow advising them a few minutes earlier  –  see Hannah’s comments above –  might have protected “NZ’s reputation”.    To his credit, Carr does flag the possible need to abolish lock-ups.

A few days later, Mike Hannah reports to the Governor on his approaches to the attendees at the media lock-up.  Hannah remains reluctant to believe that any media person/body can be responsible –  even though I had told him by inference (on the first day) and told the Deloitte team directly a week earlier that the email I received had come from a person in a media organisation.    More generally, at this point, Hannah still seems reluctant to believe that there had been a leak at all –  perhaps understandably given that he ran the lock-ups –  noting of his conversations with journalists “it may all be humour, bluff, etc, but it may also reflect scepticism about Reddell’s credibility”.    Given Hannah’s reluctance to accept the possibilities, the Bank’s in-house counsel (one of the few to emerge creditably from these documents) had to go back to Deloitte (page 16/17) to confirm that I had in fact said the email came from a person in a media organisation.

The Deloitte report indicated that, finally, on 5 April, MediaWorks owned up to the fact that there had been a leak, and that their staff had been responsible.  Perhaps unsurprisingly, there is no email in the system from senior RB managers saying “gee, Michael’s information turned out to be about something real; just as well as he came forward”.

Instead, the documents skip forward to Sunday 10 April.  By then, the Bank had the draft Deloitte report and was providing comments on it, and drafting press releases.

Geoff Bascand had sent out an email expressing surprise that no (MediaWorks) names were named in the Deloitte report –  in particularly that the report did not name the person who had sent the email to me.  Hannah responds identifying his suppositions about who it was, and he indicated that his draft press releases included the name of the person he suspected.  He also noted that he  had “not yet included Reddell’s name” –  the operative word apparently being “yet”.  Reflecting the Bank’s cast of mind, he noted that this was “not to save him” but simply because he still wanted more information.  The next morning, Hannah emails senior colleagues indicating that the draft press release had been done by him and the Governor jointly.  He urges that the Bank needs to get Deloitte to ask MediaWorks for the name of the person who emailed me (even if just to confirm that they would not provide the information).

In response, Nick McBride points out that he would not expect MediaWorks would provide anything more, and urged that the Bank should avoid focusing on individuals, stressing “it is MediaWorks that is responsible”. He goes on to note that “there is also a strong basis for speculating that a journalist emailing from the lock-up was normal behaviour, for Mediaworks at least”.   Interesting, he notes that MediaWorks will be particularly reluctant “if it senses the Bank’s ‘no mercy’ approach and the lack of credit it is likely to get for its admission”.    Given that there were no sanctions imposed on MediaWorks in the 14 April announcement, and the statement went out of its way to praise the cooperation of MediaWorks, something must have changed between then and 14 April.

That same day  – Monday 11 April –  also saw an odd email exchange between the Bank and Deloitte.  The Bank asks for copies of all emails from MediaWorks, and in response is told that “the only other email correspondence that we had with MediaWorks was the email exchange about Mr Reddell’s phone number –  now attached for your reference” [although for some reason not included in the material the Bank released].  My phone number isn’t exactly a secret –  it is in the White Pages.  But that same exchange also confirms that what the Bank released on 14 April is not, despite the impression given in the Bank’s statement, the full Deloitte report at all.  Instead, it appears to be a “short form” “public version”.  Someone should probably request the full report.

The Governor himself was engaged in providing comments on the draft report.  His attitude is evident in the following exchange.  A manager in the audit area of the Bank advises senior management that he has asked that Deloitte delete the word “all” from a description of how I had “cooperated with all our inquiries”, since I had declined to name my source (despite never being asked to, either by the Bank or Deloitte).  Not content with that excision (which wouldn’t have bothered me) the Governor insists that they must delete “Mr Reddell cooperated with our enquiries”, noting “as he didn’t disclose everything that was necessary this therefore gives a misleading impression”.  The fact that the inquiry would never have occurred at all without my original initiative clearly escaped him.

The remaining emails relate to the period after the release of the (public version) of the inquiry report on 14 April.  There is the gratuitously nasty one from someone outside the Bank (page 25) but my interest is mostly in the stance of the Bank’s senior management and Board.

According to Mike Hannah, in an email to the Governor and Board chair, by now I am “obviously smarting from a well-aimed and deserved reprimand”, and am “irresponsible again” for suggesting that the lock-ups had had lax security.  Reading that did prompt me to wonder which senior manager oversaw the procedures for and administration of the lock-ups which had just been revealed to have been breached.

And then the ante starts getting raised further.  According to Geoff Bascand,

“nothing will satisfy Michael. He is a deeply aggrieved person.  Everything will be interpreted through his victim filter”.

I’m not sure where Bascand gets any of this from.  And a simple apology from the Governor for publically tarring me as “irresponsible” would satisfy me.  Bascand continues to seem to think I somehow regret leaving the Reserve Bank, when I had been quite clear for several years prior to doing so that I was keen to get out, and do as my mother had done for me, and be around for my growing children.    That had only become financially feasible by late 2014, and by then the (personally) optimal thing was to stick around long enough to collect a looming redundancy cheque, which is currently helping pay for house alterations.  As I said to John McDermott at the time, my only concern had been that the Bank might change its mind.

The Governor also weighs in (page 27) and we get here the fullest explanation of his view of my irresponsibility

I firmly believe Michaels behaviour was irresponsible in failing to inform the Bank immediately, in not informing Deloitte as to who contacted him and blogging continuously on the matter even when the investigation was underway. I believe the reasons he trotted out for his actions to Deloittes were extremely weak to say the least.

 

I also find all this rich from someone who worked in the Bank for a long time and I believe should have used much better judgement- also Michael has repeated denigrated the work of colleagues that he worked alongside for many years and I believe also he has been reckless in his criticism . I believe many of the points he makes are misplaced and can readily be countered by a competent economist.

Some of this was familiar ground (see his brief letter below), but much was not.  The suggestion that I  –  or presumably others  –  should not have written about the matter while his investigation was underway almost beggars belief.  His internal inquiry about a possible failure of internal process is not exactly on a par with a matter that might be sub judice because it is being dealt with in a court of law. This is a (potential and actual) systems breach in high profile powerful public agency.

Unfortunately, the Governor seems to have allowed his judgement on the specifics of the (possible) leak issue to have become clouded by his irritation at the scrutiny and challenges that I have posed to the Bank, and him in particular, over the previous year or so.   And the substance of his point seems wrong  – I have tried to be very careful, when being critical, to focus responsibility on the Governor (as the law does) and his senior managers, and not on the many able staff who work in the organisation.  I’m quite relaxed about the idea that the Governor will often disagree with my points of view   –  that is hardly surprising, and not really that different than it was when I was inside the organisation –  and, yes, reasonable people (including some other “competent economists”) will differ on many of these issues.  But none of that is, or should be, germane to the specific issue of the leak that (a) occurred on his watch, and (b) would not have come to light without my help.

Since I was interested in lowering the temperature on the personal aspects of this, I approached a friend of mine who is on the Board seeking some sense from him as to why the Governor’s stance towards me on this issue was reasonable.  Perhaps he was in an awkward position, but I was largely fobbed off with a “circle the wagons in defence of the Governor” attitude.  And so I wrote to the Governor, copied to the Board.

That letter is here.

Letter to Graeme Wheeler OCR leak press release

The Governor’s very brief response is here.

Graeme Wheeler Ltr to M Reddell April 2016

The final email in the set of documents that the Bank released is an email from the Governor to his senior colleagues and the Board chair, forwarding them a copy of the letter, with the terse observation “I find this letter quite extraordinary”.

Some readers will get to the end of all this and perhaps still think the issue at stake is that I should have got in touch with the Bank a little earlier than I did on 10 March.  A few commenters on earlier posts have argued that.

Contrary to the sense that pervades many of these emails among Reserve Bank senior managers and Board members, I owed the Reserve Bank nothing.   But I do feel some sense of residual loyalty to the organisation and so I did what I reasonably could, in a way that directly helped them uncover a serious leak (and subsequently amend their own procedures).    If anyone reading these emails thinks that, in my shoes, they’d have rushed to tell the Bank earlier, at risk of being scoffed at and ridiculed had the Bank not in fact been cutting that morning, well all I can say is that they have a thicker skin than I do.  Bascand and Wheeler would no doubt have been poised with some barbed turn of phrase about “there goes Michael again”, ready to tell others the story the next time I ran a post they disliked.

At one level, the attitudes in these emails don’t surprise me greatly –  although perhaps I’m a little  surprised that despite the OIA and the Privacy Act they wrote these things down.  And I’m a little relieved that none of them are from my own two previous bosses.  I don’t think they reflect well on the Bank, or its Board, but that is also something for others to judge.

Appointing a central bank Governor

Michael Reddell Governance, Reserve Bank, Uncategorized

I commented yesterday on the unusually powerful role the Reserve Bank of New Zealand’s Board plays in determining who will be appointed as the Governor.  The Minister finally makes the appointment, but he can only appoint someone the Board recommends.   And the influence  of Board members is multiplied because the Governor of the Reserve Bank of New Zealand exercises an unusually large degree of power.

In New Zealand, the Governor is single (legal) decision-maker (and recently provided a written reaffirmation of that position as practice as well as law). And the Bank exercises power not just over monetary policy, but over a raft of regulatory policy matters (as well as the administration of supervision) in respect of banks, non-banks, and insurance companies, and a variety of other generally less contentious discretionary functions (notes and coins, foreign exchange intervention, payments system, and the operations of the key securities settlement system).  And in many areas the Reserve Bank’s legislation is quite permissive, leaving considerable policy discretion to the person who happens to be Governor (LVR limits –  whether or not to have them, and how they should be used –  is one recent example).  Even in respect of monetary policy, as have seen in the last few years, the Policy Targets Agreement (inevitably and probably sensibly) leaves plenty of room for interpretation.

So who gets appointed to the position matters a lot.  That person, while no doubt in receipt of lots of advice, will have considerable discretionary influence in many areas.   They aren’t just technocratic judgements either.  Reasonable people will have quite different views on appropriate policy in a lot of these areas, partly reflecting differences in what weights they put on different considerations and values (fluctuation in unemployment vs swings in house prices, say).     And they are typically areas in which there are either no rights of appeal, or where the courts have been very reluctant to second-guess decisions of executive officials.  Unlike, say, the Minister of Finance, the Governor does not typically require new legislation or parliamentary approvals (Budgets mean nothing without securing supply in Parliament, and public money can’t be spent without parliamentary appropriations), and doesn’t even have to front up to question time in Parliament each day.   In formal legal terms, the Governor is not even subject to parliamentary control on the level, let alone the composition, of the Bank’s expenditure.

So the ability to determine who gets this role is extraordinarily influential.    But this power rests not with the Prime Minister, not with the Minister of Finance, not with the Governor-General, but with half a dozen low profile individuals, themselves appointed by the Minister of Finance but for five year terms (in a system with three year parliamentary terms).  These people operate in secret –   past Annual Reports have been bland exercises in supporting whoever the incumbent Governor is –  and face no parliamentary scrutiny either when they are appointed or, generally, at any time during their term.

Who are these people?

The current non-executive directors (plus the Governor who is also a director) are:

Rod Carr

Bridget Coates

Neil Quigley

Jonathan Ross

Tania Simpson

Keith Taylor

Kerrin Vautier

Mostly company directors, a couple of former senior finance sector executives, a couple of (mostly micro) economists, a couple of university administrators, and a lawyer.  I’m sure they are all fairly able people in their own fields, but why would we delegate to those people in particular the ability to determine who will exercise that huge discretionary power the Governor has.  I’m not aware that any of them has ever stood for, or been elected to, public office, and we know little of their preferences or views on the sorts of issue whoever is Governor will get to decide.  But those preferences (explicit or not) will almost certainly influence the sort of person they put forward.  When I worked at Treasury I helped provide advice to the Minister on possible Board candidates –  including some of those now on the Board –  but we never looked into the questions of Board members’ policy preferences.  The focus was typically on a range of experiences and skills to help do the ongoing monitoring role.  But in fact the power to determine who (and what sort of person) is appointed Governor is probably where the Board members have most influence, and the least scrutiny.

I’m not suggesting that they exercise that power carelessly.  Or that they are necessarily blind to the political environment.  Since the current Act was put in place, the Board has chosen two Governors (Don Brash was already in place when the Act was passed, and reappointments are a somewhat different matter).

There was quite a strong sense of political involvement in the process after Don Brash left in 2002. The then Prime Minister was furious with the Board for having allowed the Governor to be employed on conditions that allowed him to go straight from running the central bank one day to active party politics the next.  And word was also understood to have come down that the government would not be receptive to the nomination of a “Brash clone”, widely regarded as anyone who had been in senior management under Don Brash.   But my sense (I was second tier manager at the time) was that the Board played the process fairly straight.  They employed an executive search firm –  but I’m not sure how much effort the recruiters would have put into understanding the policy preferences and inclinations of candidates.  I understand that at the final interview stage it was a choice between Rod Carr (Deputy  –  and then acting –  Governor), Murray Sherwin, Deputy Governor until quite recently, and Alan Bollard.  People can debate whether Alan was really the best pick but all three were serious credible candidates.

In 2012, again an executive search firm was used.  I understand that the choice quickly resolved to one between the longstanding incumbent Deputy Governor, Grant Spencer, and Graeme Wheeler, with the suggestion that Board members were quickly wowed by Wheeler’s experience in international bureaucracies, and the big name referees he cited.  Again, on paper both candidates looked quite impressive, but I wonder how much effort the Board put into understanding and assessing the candidates’ policy preferences and inclinations.  And, of course, even if they had made time to, what qualified the Board members to assess those –  innately “political” – preferences and determine which set was, in some sense, “best”?  That, surely, is what we have politicians to do.

If the Board doesn’t do it, and the Minister can at no point impose his own candidate, then what we end up with is either a candidate who accords with the implicit (often unstated and perhaps unrecognized) biases, preferences, and interests of Board members, or something more random.  A person might be chosen because they are thought to be, say, a good manager, and/or, have some familiarity with macroeconomics and finances.  But what they might do with the considerable powers they are to be given is simply unknown –  even to the Board.  That simply isn’t good public policy governance.

I’m also not suggesting that if in 2002 and 2012 the appointment of the Governor had been solely in the hands of the Minister of Finance we would necessarily have had different people appointed.  Bollard and Wheeler both looked like establishment candidates when they were appointed,  As I noted, the Labour government in 2002 was pretty clear it didn’t want Brash people, and Alan Bollard’s give-growth-a-chance mentality (in contrast to perceptions of “crush growth Brash”), if it had ever been enunciated, would probably have resonated with Michael Cullen and Helen Clark.  And Bill English was known to have been keen to find a place back in New Zealand for Graeme Wheeler.  But those decisions really should have been in the hands of somone the voters could toss out, not a bunch of fairly anonymous Board appointees, who often enough will have been appointed by the previous government.

I can think of no other powerful independent office holders which are appointed, in effect, by unelected unscrutinised people.  The State Services Commissioner appoints head of core government departments, but those department heads typically have little or no policy flexibility –  policy is set by ministers, and departments advise and administer.  The State Services Commissioner himself is, in effect, appointed by the Prime Minister, as is the Police Commissioner. Judges are appointed by the Governor General, on  the recommendation of the Attorney General. The Chief Electoral Officer is appointed by the Governor General on the recommendation of Parliament, as is the Ombudsman. The Governor General is appointed on the advice of the Prime Minister.   And all boards of decision-making Crown entities (eg FMA, NZQA, TEC, EQC) are appointed by ministers (those Boards in turn employ chief executives, but the power rests with the Board, not with the CE.)

There is simply nothing comparable in New Zealand to the situation of the Reserve Bank in  (a) the extent of policy discretion held by an unelected official, and (b) the extent to which other unelected officials control the appointment of the person (the Governor) exercising that discretion.   It is a reach too far –  too much distance between those we elect, and the person exercising the (considerable) discretionary powers.  Perhaps it might matter a little less if these were decision-making committees being appointed (as is typical with central bank), but in this case it is one man –  and any one person while have his or her own biases, preferences, idiosyncrasies and flaw.

What happens abroad?  Well, typically the head of the central bank is appointed directly by politicians, most commonly the Minister of Finance or President. With a bit of help, I found a handful of countries where the appointment is subject to parliamentary ratification (the US is the most obvious example, but it is also the case in Japan, and in several emerging economies).  The Reserve Bank had an article not long ago on some of these issues, including a useful table on appointment arrangements etc ( I had editorial responsibility for the article, but have just noticed an error, in that the Japanese requirement for parliamentary ratification was somehow overlooked).

But what about cases at the other end of the spectrum?

In Sweden, the Governor (and other monetary policy decision-makers) are appointed by the General Council.  That might sound a bit like our Board, but it isn’t.  It is a parliamentary committee, appointed by MPs from their number, after each election, in proportion to the various parties’ representation in Parliament.  The Minister of Finance doesn’t get to appoint the decision-makers, but elected politicians certainly do.   (Note in Sweden the central bank has much less discretionary power than our Reserve Bank has, as it is ot responsible for banking regulation and supervision).

The closest parallel to the New Zealand arrangement is Canada.  The Bank of Canada also has, in law, a single decision-maker, the only other advanced country central bank to have such a model.  The Governor is appointed by the Board, with the consent of the Minister (in substance the same approach as in New Zealand). One difference from the New Zealand system is that members of the Board in Canada are appointed for three year terms (rather than five years in New Zealand) in a parliamentary system in which elections typically occur every four years (rather than three years in New Zealand).  It is also worth noting that in Canada the Secretary to the Treasury sits as a non-voting member of the Board, and that the Bank of Canada also has little or no responsibility for supervisory/regulatory matters.

My point is not that there are no parallels with the New Zealand model –  Canada, with quite old legislation and a much narrower range of responsibilities, is strikingly similar,  But our model remains quite unusual, and seems to leave a rather large democratic legitimacy gap: there is much more effective discretion for central bankers than was realized when the law was passed in 1989, few other central bank decisionmakers are appointed this way, and there is nothing remotely comparable in how we appoint key decisionmakers is other areas of the New Zealand government and public sector.

I suggested yesterday that at very least the Reserve Bank Act should be amended to provide simply for the Governor to be appointed by the Minister, taking advice and nominations from anyone the Minister chooses.  I also suggested the idea of parliamentary select committees hearing before any new Governor takes office, along the lines of the model now quite successfully used in the United Kingdom.  We don’t have a constitutional system of parliamentary ratification of appointments, or indeed for Parliament to be directly involved in making appointments (with the except of the important deliberately non-partisan positions such as the Ombudsman or the Chief Electoral Officer).  Perhaps one could argue that the Governor has so much power an exception should be made for his position, but I wouldn’t go that far.

As I noted yesterday, our FEC is less likely to do the scrutiny job well than, say, the House of Commons Treasury select committee does.  Able government members very quickly become ministers, and the ones who aren’t yet want to be soon.  Rocking the boat by openly asking hard questions of a ministerial appointee-designate probably isn’t particularly rewarded.  And, unlike the UK, we don’t have much a hinterland of able former ministers from the governing party who stay on in Parliament, and are often willing  –  and better positioned – to pose those sorts of questions.   Our select committees also simply aren’t well-resourced.  But FEC hearings would be better than the situation we have at present, and not being tied to actual MPS or FSR announcements (which are what Governors mostly front up to FEC for), the process might encourage more serious questioning.

(A reader got in touch to suggest something beyond FEC hearings: perhaps a debate in Parliament itself on the appointment, with the whips off.  That just seems too out of step with our system of government for me.  Apart from anything else, the policy inclinations and character of a person appointed to have big discretionary influence over monetary and financial policy doesn’t seem like the sort of area one would want to remove party discipline for. A Minister of Finance might reasonably tolerate his MPs grilling a Governor-designate in a select committee, but should be able to expect his party to ultimately support his appointee to such an important position. )

The Governor of the central bank is a position unlike the Ombudsman, the Chief Electoral Officer, or the Auditor General.  Those positions really need to be non-partisan in nature, since they are focused on the process of our democracy.   The Governor, by contrast, exercises considerably discretionary power, and it is the nature of things that there will be differences, often along partisan lines, in how the Governor should exercise that power.  There is a case for some specific policy decisions of the Governor to be at arms-length from the government of the day, but there is strong public interest in understanding the inclinations and preferences of the person appointed to the role.  Hard questioning of anyone appointed to a position wielding considerable discretionary power is likely to make for a better functioning system of government.  And sheeting home responsibility for those appointments to politicians whom we can turf out, rather than to little known appointees who owe citizens little and over whom we have little leverage, is perhaps even more fundamental.

The system of appointing the Governor really needs to change.

 

Reforming the Fed…and the RBNZ

Michael Reddell Governance, Reserve Bank

I’ve been working on a review of an interesting new book by an American academic, Peter Conti-Brown, with a background in law and financial history, on reforming the governance of the US Federal Reserve System.  The Power and Independence of the Federal Reserve is a funny mix of a book.  At a time, in the years following the 2008/09 financial crisis, when all sorts of people from different parts of the political spectrum have concerns about the Fed –  be it concerns about the influence of bankers, unease about the quasi-fiscal choices the “technocratic” central bank has been making, pushes to “audit the Fed” and so on –  the author sets out to aim for a pretty broad audience.  It isn’t just an academic tract –  he clearly hopes to be read by think-tankers, Congressional staffers and intelligent voters who perhaps have a vague sense that “something is wrong”.   It is difficult to imagine an equivalent book in New Zealand selling more than 100 copies.  There are some advantages to size.

There is the odd amusing story to spice up the text.  Picture the early Board members of the Fed worrying about where they would rank in the official US order of protocol.  Unimpressed at the State Department’s ruling that they would “sit in line with the other independent commissions in chronological order of their legislative creation” they escalated the matter all the way to Woodrow Wilson.  The President, clearly unimpressed with the pretensions of the Board members, told his Treasury Secretary “well, they might come right after the fire department”.   The State Department ruling stood –  in order of precedence, Fed Board members ranked behind the board of the Smithsonian.

One of Conti-Brown’s key themes is that if laws matter, and of course they do, individuals and the intellectual climate of the times matters more.  He devotes quite a lot of space to illustrating how, with largely unchanged legislation, the conception of the Fed, and the relationship between it and politicians (especially Presidents), has changed markedly over the decades.  (A somewhat similar story might be told about the Reserve Bank of Australia, over its rather shorter history.)  Marriner Eccles –  chair of the Fed under Franklin Roosevelt –  saw the role of the Fed as being to work hand in glove with the Administration.  The modern conception of an operationally independent central bank is very different –  perhaps especially in the US where the Administration has no role in setting policy targets (unlike, say, the UK or New Zealand).

Of course, the notion that individuals matter shouldn’t really be a stunning insight.  But much of the modern notion of an operationally independent central bank rests of the implicit view that there are technocratic answers to the problems we delegate to central bankers.  If so, then it really shouldn’t matter much which technocrat holds the key job(s) at the central bank.  That view was near-explicit in the way the New Zealand framework was set up: set the goal clearly enough, and make the Governor dismissable if he fails, and pretty much anyone will do.

Life –  macroeconomics, and financial regulation –  isn’t like that. Central bankers and financial regulators make choices, especially (but not only) in crises and, whatever the relevant legislation says, the values, ideologies and experiences of those who hold decision-making powers will matter, at times quite a lot.

And so much of Conti-Brown’s book is, in effect, around appointment and dismissal procedures for key positions in the Fed.  He is particularly exercised about the positions of the heads of the regional Feds, and indeed of the regional Federal Reserve Banks themselves (“we get a sense [from past Congressional testimony] that nobody knew exactly how to define these strange quasi-private quasi-public structures”).

The US Constitution itself has an appointments clause.  “Officers of the United States” can only be appointed by the President with the “advice and consent” of the Senate.    There is an exception for “inferior officers”, for whom Congress may specify that the President alone or the head of an agency (him or herself a principal officer, appointed by the President with Senate advice and consent) may make the appointment.  Members of the Fed’s Board of Governors are “principal officers” and are subject to Senate confirmation.    The President can also dismiss principal officers, but the courts have also ruled that, for independent agencies such as the Fed, the President cannot dismiss a principal officer at will (eg just for policy differences).

Regional Fed presidents, who exercise what looks like considerable authority as rotating members of the FOMC, are not appointed by the President, do not face Senate scrutiny, and are also not appointed (or dismissable, even for cause) by people who are themselves principal officers.  In Conti-Brown’s words “the Reserve Banks and FOMC, as currently governed, are unconstitutional,  The separation between the US president and the Reserve Bank presidents is simply too great”.

Conti-Brown argues that the role of the regional Presidents, and their relationship with the rest of the system, should be markedly changed.  He proposes putting the Board of Governors clearly in charge, giving them exclusive responsibility for the appointment and dismissal of regional Presidents, and effectively reducing the regional Feds to no more than branch offices.  In his model, the regional Fed Presidents would all be removed from the FOMC, except as (in effect) senior staff observers, so that all monetary policy decisions will have been made only by people selected by the President, and subject to the Senate advice and consent process.

I’m less persuaded by that as a solution.  For a start, from a distance, it looks politically unsaleable.  Even if the locations of the regional Feds reflects the politics and economics of 1913, rather than 2016, those institutions are “facts on the ground” and there would presumably be a great deal of resistance to removing that regional vote, and explicitly undermining the clout and status of the regional institutions.  An alternative model, which he discusses, seems more plausible.  Instead of subordinating regional Fed Presidents to the Board of Governors, why not instead make each regional Fed appointment a presidential appointment, with the full advice and consent process?   It looks like a model that achieves much the same end –  presidential appointment (and dismissability) and Senate scrutiny, without risking undermining the intellectual diversity that strong regional Feds have at times brought to the system. (I was struck a few years ago by the ability of a senior (regional) Fed researcher to publish a scholarly book that was quite critical of the Fed’s handling of monetary policy, including in quite recent years.)

Conti-Brown also proposes changes at the Board of Governors.  He rightly highlights that the legislation vests power in the Board of Governors itself, not in the Chair, and yet –  to a greater or lesser extent –  all modern chairs have been allowed to assume a disproportionate amount of power and influence.  Conti-Brown cites one former senior staffer as saying he would never have wanted to be appointed to the Board, as he would have far power/influence there.  Part of the issue arises because of the repeated reappointments of chairs.  Conti-Brown proposes term limits for the chair (two five year terms, so that there is a serious scrutiny of appointees at least every 10 years), and changes to the Board appointment terms as well.  Personally, I suspect the recent proposal by former senior Fed economist, and now Dartmouth professor, Andrew Levin, for a single non-renewable seven year term for all senior Fed officials (board, chair, regional Presidents) would be a better way to go.

Conti-Brown also argues that key staff at the Board of Governors also have a big influence on policy, and that consideration should be given to making them presidential appointments, so that their values, ideologies, experiences etc can be tested and scrutinized.  He is particularly concerned about the role of Fed’s General Counsel, whose advice has mattered a lot in handling financial crisis and regulatory issues.  Making such positions presidential appointments seems like a step too far.  Of course, advisers should be expected to have some influence.  But the formal powers in the system rest with the Board of Governors (and the FOMC), the people who chose whether or not (and to what extent) to accept the advice offered by even the most senior staff.  Ensure strong public scrutiny of those people for sure.  But not the next tier down.

As so often with American books on public policy issues, it is light on international comparisons.  Appointment and dismissal procedures for central bankers (and financial regulatory bodies) differ widely.  Then again, I’m not aware of any other advanced countries with a system even remotely like that of the United States.  The structure looks out of step with what we expect in public policy agencies today, and parts of it appear to be unconstitutional.

I found the US issues and analysis fascinating.  But that is partly because thinking about the systems used in other countries, especially key ones, can help one think about the model for New Zealand.  We don’t have a written constitution, and we don’t have a federal system.    But we do, I think, expect that delegated powers will be exercised by people appointed by people we elected.  That is typically the case with the numerous Crown agents and entities.  Board members and Board chairs are appointed by the relevant Minister, and key decision-making powers typically rest with the Boards themselves.

That isn’t the case with the Reserve Bank of New Zealand, which exercises a great deal more discretionary policy flexibility (in monetary policy, and in financial regulatory matters) than any other statutory agency I’m aware of in New Zealand.    There are some plausible reasons for putting some of the Reserve Bank’s functions at a considerable arms-length from day-to-day ministerial intervention (one could think of the administration of prudential policy as it applies to individual institutions), but even if one accepted all those arguments, there still don’t look to be good grounds for our governance model.

In the United States, the United Kingdom or Australia, the Governor (or chair) of the central bank is appointed by the government of the day.  In the US case, the Fed chair is subject to Senate advice and consent, but only a presidential nominee can be appointed.  The Senate cannot substitute its own candidate.  In both Australia and the UK, the respective central government has untrammeled ability to appoints its own candidate.  In the euro-system, there is lots of horse-trading and haggling among heads of government and finance ministers, but Draghi was appointed by politicians, from a field identified by politicians and their advisers.

Contrast that with the New Zealand system.  The Minister of Finance appoints the Governor, but he can only appoint a candidate nominated by the Bank’s Board.  The Minister can reject a nomination (as the US Senate can) but at no point in the process can he or she impose their own candidate.  Now, of course, the Board itself is appointed by the Minister, gradually.    Board members are appointed for five year terms, and although there are provisions for the removal of Board members, removal can only be done for cause (oddly, one possible cause is obstructing the Governor, but there is nothing comparable about the Minister). A new government might easily take more than a whole three year term to be able to achieve a majority of its own appointees on the Board.  And the Minister of Finance does not even get to determine which of the Board members serves as chair, typically a quite influential role in any Board.

This was a model that was set up when the conception of the role of the Reserve Bank was (a) quite narrow, and (b) highly technocratic.  If the Minister could specify a PTA clearly enough, who was on the Board or who was Governor wouldn’t matter much at all.  But as everyone now recognizes, PTAs can’t sensibly be written that clearly, and there is nothing comparable for the other functions that the Governor exercises considerable discretion over.  The values, ideologies and experiences of whoever is appointed as Governor are likely to matter considerably –  much more so in New Zealand, since a single individual exercises those powers, with few near-term checks and balances.

So, operating wholly behind closed doors, the members of the Bank’s Board get to determine the person who wields more power, and more discretionary power, than almost any person in New Zealand, at least in matters economic.     The individuals on the Board are probably mostly good and quite capable people (I know several of the current Board moderately well).   But whose values and interests, and what “ideologies” or implicit models, are they serving  or reflecting (consciously or otherwise)?  What accountability is there for the choices they make, which can have material implications for short-term economic performance and for the soundness and efficiency of the financial system?  It seems like a model with all too little democratic legitimacy.

If we are going to stick with the single decision-maker model for the time being (it will, surely, in time be amended) at least we should move back to a more conventional system in which the Minister of Finance (or Governor-General acting on advice) makes the appointment.  He can take advice from whomever he wants –  Treasury, the Bank’s Board, lobby groups, his colleagues –  but his nominee should have to go through proper select committee hearings before taking up the role.  We don’t have a model of parliamentary ratification of appointees in New Zealand, but the British model in which appointees to the Bank of England policy committees face considerable scrutiny in select committee hearings seems to add some value to the process, even though the committee cannot formally stop an appointment going ahead.   It might be harder to do well in New Zealand, since there is less of a hinterland of MPs not eagerly jockeying for the next promotion to the ministry, but it has to be better than what we have now.  At very least, Opposition MPs on the relevant committee could question, scrutinize and challenge the person the government has appointed to the role of Governor.  The current Governor might, for example, have been scrutinized on how he thought about the housing market and the role of policy.

If we going to keep the role of the Reserve Bank Board as being primarily about holding the Governor to account, direct ministerial appointment of the Governor also seems preferable.  Under the current model, the Board is responsible for the person appointed as Governor.  That gives them an interest in judging that person to have done the job well (if the Governor is judged to have failed in that regard, it is at least in part a reflection on the people who chose the Governor).   Monitoring someone clearly appointed by the Minister could be another matter (although structures still create risks that the monitoring Board gets too close to the Governor).

Over the longer-term, I think we need to move to a system in which committees appointed the Minister of Finance (and subject to parliamentary scrutiny before taking up the role) make monetary policy decisions and whatever financial regulatory decisions should appropriately be delegated to the Reserve Bank.

In the meantime, there is the becoming-pressing issue of the expiry of Graeme Wheeler’s term next year.  As I have noted previously, it expires right in the middle of the likely election campaign (almost three years exactly since the last election).  All main Opposition parties are campaigning for a different approach to monetary policy (time will tell what that specifically means).  How can it be appropriate for a Board appointed exclusively by the current government to be recommending an appointee as Governor (who will exercise huge discretionary powers over our economic fortunes and financial system), to a Minister  whose government might be out of office by the time the new appointment takes effect.  A new government might have a quite different emphasis and should, in my view, more easily be able to give effect to that.

I’m not sure what the right answer is, given the current legislation. I’ve previously, somewhat reluctantly, suggested that Graeme Wheeler, if willing, should be offered a one year extension to his term, allowing the longer-term appointment to be made under the new government (National or Labour led).  However, his performance over the OCR leak issue (including , in effect, minimizing the serious misconduct of a major corporate)  makes me wonder whether even for a short period that would be a prudent option.  Appointing an acting Governor –  probably one of the existing deputies –  for perhaps six months, might a better option.  There is statutory provision for it –  it was what happened when Don Brash resigned.

The US model does look as though it needs reforming.  But, perhaps even more pressingly, so does New Zealand’s. It is simply out of step with

  • the range of functions and discretionary activities the Bank now undertakes
  • overseas practice in central banking and financial supervisions
  • governance of other independent Crown entities in New Zealand.

It puts too much power in the hands of one person, and that a person whose appointment is largely determined by unelected people, operating with little or no effective scrutiny.

 

Questions about the OCR leak, the inquiry etc

Michael Reddell OCR leak, Reserve Bank

Questions about the handling of the OCR leak issue aren’t going away.  Last Saturday, I posted some thoughts on some issues that the Reserve Bank and MediaWorks should be asked about, flowing from a careful rereading of the relevant documents.

Since then there has been a variety of articles –  especially focused on MediaWorks – in the mainstream media.   Jenny Ruth had a piece on the NBR website “Were there other MediaWorks leaks from Reserve Bank lockups”.  Hamish Rutherford has a substantial and useful piece in the Dominion-Post this morning “MediaWorks Owes an Explanation” (although I have considerably more readers than he reports) and John Drinnan’s media column in the Herald today is largely devoted to media aspects of the leak and its aftermath.

It is perhaps understandable that the mainstream media has focused mainly on the media dimensions –  many of them are grumpy at losing the opportunities previously afforded by the lockups (although others quietly acknowledge that the lockups were really products of a different technological age and probably had to go).  I don’t have much sympathy on that count, having called a month ago for the lockups to be scrapped.  But I do share the surprise that there has been no evident specific  sanctions meted out to MediaWorks, the chief culprits in the whole affair.  Various people have suggested that MediaWorks should have been banned from lock-ups, rather than ending the practice altogether.  Ending lock-ups was the right thing to do, but it is still surprising that there appear to be no other concrete consequences for MediaWorks’ flagrant breach of the rules (not reported to the Bank for weeks).   Then again, what other sanctions were available?  One might have been to deprive MediaWorks of, say, opportunities for any interviews with the Governor. But since he doesn’t give interviews, I guess that option wasn’t available.

There are questions for MediaWorks, but in the end they are a private company and have to make their own judgements about what to tell us.  It is disappointing that they have not been more open.  I’m not so much bothered about them not naming the person who sent the email from the lock-up, but about things like:

  • had these sorts of leaks happened before by MediaWorks staff?
  • why did it take more than three weeks for MediaWorks to acknowledge that its employees were responsible (including more than two weeks after the issue had extensive media coverage).

But, as I say, MediaWorks is a private organization.  The Reserve Bank, by contrast, is a powerful public body.  We should expect an open and transparent approach by public institutions when bad stuff happens, and the Bank is subject not just to the Official Information Act, but also to parliamentary scrutiny.  I think there is a range of questions to which the public deserves answers from the Bank:

  • Did the Bank, or Deloitte, ask MediaWorks whether these sorts of breaches had occurred before.  If not, why not.  If so, what was the response?
  • Why does the inquiry report not address issues around “the process for transmitting the Governor’s OCR decision to see if any improvements are needed”, even though the Bank had told me the Deloitte inquiry would cover such matters?
  • Was MediaWorks given a chance to comment on the draft inquiry report, or the draft of the Reserve Bank news release of 14 April?
  • Why does the Reserve Bank press release go out of its way to stress the cooperation of MediaWorks, when MediaWorks did not report the breach until more than three weeks after it occurred?
  • Why does the news release not accept any responsibility for the Bank having run lock-ups with such lax security procedures that a breach of this sort could happen so easily?
  • Have any Reserve Bank officials been disciplined or reprimanded for failing to update security procedures to reflect the advances of technology?

In support of seeking answers to these, and other, questions, I have lodged an Official Information Act request with the Reserve Bank.  It requests the following information:

Terms of reference

  • Copies of the terms of reference for the Deloitte inquiry, including the TOR as at 15 March 2015 (the date of Nick McBride’s approach to me), and any subsequent variants, (formal or informal).
  • Copies of any advice to or from the Board regarding the terms of reference

MediaWorks’ 5 April advice

  • Copies of the initial MediaWorks advice to the Reserve Bank and Deloitte on 5 April (date as per the inquiry report).  In the event that the advice was oral, please provide copies of any filenotes or other records of conversations with MediaWorks.
  • Copies of any follow-up requests for further information made to MediaWorks or its representatives by the Reserve Bank or the Deloitte inquiry team.

The Deloitte inquiry report

  • Names of any person or organisation, beyond the Reserve Bank’s staff or Deloitte, invited to comment on the draft report.
  • Copies of any advice provided to the Reserve Bank by non-executive members of the Reserve Bank Board on the draft report.

The Reserve Bank’s 14 April news release

  • Copies of all drafts of the 14 April news release
  • Names of any persons or organisation beyond the Reserve Bank’s staff or Deloitte, invited to comment on the draft news release.
  • The time at which MediaWorks was given a copy of (a) the draft, and (b) the final news release.
  • Copies of any comments made to the Bank by (a) MediaWorks and/or (b) non-executive Board members on the draft news release.

Internal Reserve Bank committees

  • Copies of the relevant sections of the minutes of any meetings of (a) the Governing Committee, and (b) the Senior Management Group at which the (possible/actual) OCR leak, and/or the Reserve Bank’s response to it, were discussed.

I remain more than a little aggrieved, having brought the issue to light in the first place, at having my conduct described by the Governor as “irresponsible”, but I have addressed those issues in a separate letter to Governor.
 

 

 

 

Ambivalence about expectations of the Board

Michael Reddell Governance, Reserve Bank

(For those interested in the ongoing lock-up issues, my thanks to an offshore reader for drawing my attention to newly-released Audit Report by the Federal Reserve’s Office of Inspector General on the Fed’s lock-up procedures and processes.  The Fed procedures appear to have left open significant risks of leaks and breaches of embargoes –  and there was one actual breach last year.  In effect, again the system relied largely on trust.  The report contains a variety of recommendations to tighten security. A Reuters article on the OIG is here.)

Since reading yesterday morning (eg here ) about the OIA release by the Minister of Finance of a near-final draft of a new (November 2015) “letter of expectation” to Rod Carr, chair of the Reserve Bank’s Board, I’ve been trying to work out what to make of it. (The letter itself is near the back of the document released here.)   On the whole, I think it is probably a step forward, at least in the specific current circumstances.  But it has some dangers too, and risks undermining some of the good features of the statutory governance model for the Reserve Bank.

I’ve written previously about the Minister of Finance’s letter of expectation to the Governor , and in due course will be interested in this year’s letter.  Last year’s was surprisingly light on (ie there was no reference at all to) any concerns about the persistent deviation of inflation from the target.  The Minister and the Governor have a clear and direct legal relationship across a variety of strands: the Minister appoints (and can dismiss) the Governor, the Minister and the Governor sign a PTA that governs  the Bank’s conduct of monetary policy, and the Minister has a wide range of powers in a variety of matters (mostly regulatory, but including also fx intervention) dealt with in the various pieces of legislation the Reserve Bank is responsible for.

The relationship between the Minister and Board members is designed to be much weaker than that.   Board members are appointed by the Minister, and can be dismissed by the Minister (for cause),  but (unusually) the Minister does not even get to decide which of the Board members will be the Chair.  That is decided by Board members themselves.    The Board has quite a limited ongoing legal relationship with the Minister of Finance.  They are responsible for making a recommendation to the Minister as to who to appoint as Governor, and they are required to provide advice to the Minister on the Bank’s annual dividend.   But that is about it.  The Board must prepare a (published) Annual Report, which must be physically delivered to the Minister, but is not specifically described in the Act as a report to the Minister.

It is when things go seriously wrong that the Board is supposed to start talking to the Minister.   Section 53(3) of the Act provides that

If the Board is satisfied—

(a) that the Bank is not adequately carrying out its functions; or
(b) that the Governor has not adequately discharged the responsibilities of that office; or
(c) that the performance of the Governor in ensuring that the Bank achieves the policy targets fixed under section 9 or section 12(7)(b) has been inadequate; or
(d) that a policy statement made pursuant to section 15 is inconsistent in a material respect with the Bank’s primary function or any policy target fixed under section 9 or section 12(7)(b); or
(e) that the resources of the Bank have not been properly or effectively managed; or
(f) that the Governor, except as provided in his or her conditions of employment has, while holding office as Governor,—
  • (i) held any other office of profit; or
  • (ii) engaged in any other occupation for reward; or
  • (iv) had an interest in a bank carrying on business outside New Zealand; or
(g) that the Governor is unable to carry out the responsibilities of office, or has been guilty of serious neglect of duty, or has been guilty of misconduct,—

the Board shall advise the Minister in writing and may recommend to the Minister that the Governor be removed from office.

That is (rightly) quite a high threshold to cross before the Board must make such reports to the Minister.  The Act never envisaged a close or regular reporting relationship between the Board and the Minister.

I have sometimes written of the Board as being essentially the Minister’s monitoring agent (and I see the new letter uses the same language).  But if it was a pardonable shorthand, on further reflection I don’t think it is a fully accurate description either.  What the Act seems to envisage is a model in which the Board is charged with reporting publicly on how well, or otherwise, the Governor has been doing his job, but is supposed to stay at quite an arms-length from the Minister: paid to keep an eye on the Governor certainly, but expected to stay quite clear of the Minister unless things are so bad that the possibility of dismissal is coming into focus.

And I think that is the way it should be, at least if we want to maintain an operationally autonomous central bank.   Why?  Because the whole logic of making the central bank operationally independent, especially on monetary policy, is based on the (not totally uncontentious) view that we will typically get worse outcomes if elected politicians are too close to the decision-making process.  Instead, we set up an open and transparent medium-term PTA, in which the Minister takes the lead in setting the target, and the Governor is responsible for implementing policy consistent with that agreement .  PTAs are deliberately written for terms of five years, and the Governor is left to get on with the job (with all the reporting requirements, public and market scrutiny etc).

And so I am a little uneasy about this new letter of expectation, even if it supposedly flowed from a conversation initiated by the Board (I take that with a pinch of salt, as the Board may well have been responding to the Minister’s public expression of unease with the Bank last year).

The letter seems to have three broad areas of substance.  The first is a list of Minister’s specific interests for the Board in its monitoring role.

  • Monitoring the performance of monetary policy with respect to the Policy Targets Agreement (PTA).  I expect the Board to provide me with a clear sense of its judgements and the basis for them in assessing performance in meeting the PTA, recognising that the policy targets have evolved to be flexible and forward looking.

  • Assessing the performance of the Bank in promoting the maintenance of a sound and efficient financial system.  I expect the Board to articulate how it judges performance with respect to this statutory objective. I am particularly interested in how the objectives of soundness and efficiency are promoted and balanced.

  • Monitoring the Bank’s regulatory policy processes. The Bank has important regulatory responsibilities.  I expect the Board to take a close interest in the robustness of regulatory policy development and to articulate how it judges performance with respect to this function.   In particular, the Board should:

    • – Keep under review how the Bank’s regulatory policy is developed in light of the Government’s response to the Productivity Commission’s report on regulatory institutions and practices, and how these changes improve regulatory practice.
    • – Test the Bank’s thinking on regulatory policy developments and be satisfied that the Bank has reasonably addressed any alternative perspectives from other relevant parties (eg, the Government, the Treasury, the Council of Financial Regulators, Australian stakeholders, the financial sector and the wider public through consultation).

  • Monitoring the Bank’s relationships.  The Bank has a number of important stakeholder relationships – with me, with the Treasury, with regulated entities and with other agencies.  I would expect the Board to keep under review how these relationships are operating in practice.

  • • Monitoring of operational functions.  The Bank has a range of operational functions, including those related to payment systems and currency.  I expect the Board to monitor the Bank’s operational performance and risk, particularly with regard to the use of the Crown’s resources and wider economic efficiency.  •

  • Organisational strategy and financial management.  The Bank is a complex organisation with a large balance sheet. I expect the Board to take a strong interest in the Bank’s strategy and financial management.  The Board should closely monitor the Bank’s performance against the Statement of Intent (SOI)

It is an interesting list, and in some cases quite pointed.  For example, the explicit recognition of the possible tensions between regulatory measures to promote system soundness, and the statutory provisions around the efficiency of the financial system.  Or “the Board should test the Bank’s thinking on regulatory policy developments and be satisfied that the Bank has reasonably addressed any alternative perspectives…. [including from] the wider public through consultation”.  That would certainly be welcome.

The letter of expectation also deals with the Annual Report

The annual Board report, as required under the Act, is the formal document that sets out the Board’s assessment of performance.  I expect this to provide enough detail to enable me and the wider public to understand how the Board has undertaken its review role.

I have written previously about the severe shortcomings in past Board annual reports.  Last year’s said almost nothing of any substance, and tended to reflect the prevailing practice in which the Board has seen itself as “having the Governor’s back”, and being part of the Bank’s efforts to spread its messages.

If this provision in the letter of expectation is a shot across the bows, suggesting that better and fuller Annual Reports should be produced, it is most welcome.  The Minister outlined a variety of specific areas he is interested in (above), and we should hope that there would be substantive material on each in the next Annual Report –  not just about the processes the Board used, but about its substantive assessments and residual uncertainties. I remain somewhat skeptical, but time will tell.

Towards the end of the letter, the Minister includes these paragraphs

The duties of the Board include keeping under review the performance of the Governor.  I would expect to discuss your assessment of the Governor’s performance from time to time.  I would not expect you to limit your communications on the performance of the Governor or the Bank to the narrow criteria set out in section 53(3), as I hope those circumstances would apply rarely if ever.

Greater visibility of the Board’s activities throughout the year would also be welcome and I would be interested in any suggestions you have to facilitate that.  In addition, I will ask my office to establish six-monthly meetings with me.  In advance of those meetings, I invite you to share any other documents regarding the Bank’s performance which would support the discussion.

Here I am just not sure.  It is no secret that I don’t think the current Governor has done a particularly good job, so in one sense the more questions asked about his performance the better.  But the institutions are not designed around any particular individual, and probably nor should the practical implementation arrangements be.  Non-transparent regular discussions between the Board and the Minister about the Governor’s performance create risks of inappropriate pressures being placed on the Governor (not just on monetary policy, perhaps more especially in regulatory matters).  Since the Minister has deliberately been given the power to dismiss the Governor only in fairly extreme circumstances, it isn’t clear what is gained by the Minister and the Board holding such conversations, unless those potential-dismissal thresholds are coming into view (and, as the Minister notes, he hopes that is “rarely if ever”).  Indeed, is there even a legitimate ministerial interest, given the choices Parliament has made about the structure of the Bank and the role of the Governor?  I think there are material flaws in the allocation of responsibilities under the Reserve Bank Act.  One of those is that the Governor has too much control of financial regulatory policy (as distinct from the application of that policy).  The Minister might share some of those concerns, but the right way to deal with the issue is to amend the Act, not use the Board as back-channel leverage.

When I first read that final paragraph in the letter, I wondered if “greater visibility” meant public visibility.  If it did, that would be quite inappropriate –  a good published Annual Report is the appropriate model and at other times the Board should have a low profile, not detracting from that of the Governor.  In fact, I think the Minister is only talking about the Board being ‘visible’ to him.  But, as discussed above, I remain uneasy about the idea of regular formal meetings with the Minister –  as distinct perhaps from the odd informal discussion over lunch –  especially if it involves additional “documents” being provided to the Minister.  It runs the risk of the Minister and Board second-guessing individual decisions by the Governor, and that simply isn’t the statutory model.

But there is another risk.  I’ve noted previously that the Reserve Bank Board has tended to act as if its role is to provide cover for the Governor.  In principle, they should be able to have free and frank exchanges with the Governor in private –  including on the issues the Minister touched on in his letter.  But if the Board is getting into a regular/routine reporting relationship with the Minister, I fear that the “have the Governor’s back” tendency will just be reinforced.  The Minister might appoint Board members, but they meet at the Bank, the Governor is a Board member, the Board has no resources of its own (only what the Bank provides), and a senior Bank manager is Secretary of the Board.  So far, they have only chosen former staff (Arthur Grimes and now Rod Carr) as chair.  They have become quasi-insiders.   None of this is intended as criticism of any of the individuals concerned; the incentives simply work together to make it a model that is never likely to generate regular hard-nosed rigorous scrutiny of the Governor’s performance.  It is a model that few, if any, other countries have adopted.

And so I’m left ambivalent about the letter of expectation to the Board.  On the one hand, it seems likely that this initiative has flowed, at least in part, from the tensions around the current Governor’s performance –  and so in that short-term sense, I’m pleased to see more questions being asked, and challenges posed.  And anything that produces better quality Board Annual Reports would be welcome.

But the model of governance Parliament established for the Reserve Bank 27 years ago does not envisage routine close ties between the Board and the Minister.   Indeed, I’m aware of no advanced country with an operationally independent central bank where there are such close ties.  If we want a central bank with operational independence, the Minister of Finance should be at a considerable arms-length.  In one sense, the Board is the Minister’s monitoring agent, but only with qualifications –  the role the Act envisages for the Board, as it related to the Minister, is for quite extreme circumstances.  The Board are not, say, the Minister’s employees who just happen to be representing him on some committee or other.

Of course, my overarching view is that the Bank’s governance model is flawed, and if there as ever a sound argument for it, it is no longer well-suited to range of functions the Bank undertakes, and is out of step both with international practice and with how New Zealand governs other public sector agencies. The model should be changed, and it remains something of a mystery why the Minister is so resistant to change.  My alternative, which uses the able people on the Board more actively in a decisionmaking role, was outlined here.

 

 

The OCR leak – some more thoughts

Michael Reddell OCR leak, Reserve Bank

I was re-reading the documents released on the OCR leak.  There are three of them: the Deloitte report, the Reserve Bank’s press release, and the MediaWorks press release.  The latter document doesn’t seem to be on the web (and certainly not with the company’s 2016 press releases), but someone did send me a copy.  This is the text

Mark Weldon, Group CEO, MediaWorks said:

“MediaWorks unreservedly apologises to the Reserve Bank for this incident. Once MediaWorks was aware a leak had taken place, it conducted its own investigation to determine whether the leak had come from within MediaWorks and self-reported that to the Reserve Bank.”

Regarding the specifics of the matter, Richard Sutherland, Acting Chief News Officer, said:

“The leak was caused by a failure within News to follow proper process and changes have already been made as a result. We are addressing the breach with those concerned and new policies and training will be implemented moving forward.”

I also compared the Deloitte report with what the Bank’s legal counsel, Nick McBride, told me about the scope of the enquiry – which they had already commissioned by then – when they asked for my assistance.  I included the whole email in yesterday’s post, but this was the bit I had in mind today

The Bank has appointed investigators from Deloitte to try and find out whether there was a breach in security and, if so, how it occurred. They will also review the process for transmitting the Governor’s OCR decision to see if any improvements are needed.

A number of things struck me:

  • We have not seen the terms of reference for the Deloitte inquiry.  They are referred to in passing in the report, but are not attached.  That seems strange.
  • The substance of the report is less than three pages of text.  A full page of that is devoted to me.  I don’t have too many problems with it, but I understood it was normal public sector practice when inquiries are done to give those affected by the inquiry an opportunity to see, and comment on, the report in draft before it was published.  That didn’t happen for me (but there must have been coordination with MediaWorks –  did they see the report before it was released?).  Had the draft report been shown to me, I would have requested some wording changes.
  • Despite the comment in McBride’s email that the investigation would “review the process for transmitting the Governor’s OCR decision to see if any improvements are needed”, there is nothing at all on that topic in the published report.  I had offered some comments, in passing, on that matter when I met with the investigation team.  Were the terms of reference changed at a later date?  If so, why?
  • The MediaWorks statement says that “once MediaWorks was aware a leak had taken place, it conducted its own investigation to determine whether the leak had come from within MediaWorks and self-reported that to the Reserve Bank”.  But that seems inconsistent with the Deloitte report, which says that the source was identified only after “communication that we initiated with the journalists”.  The inquiry report says it only focused on the media after my meeting with the inquiry on 18 March, and I wrote about the leak possibility for the second time that day (and I know various MediaWorks employees read my blog), and the mainstream media gave a lot of coverage to the story on 21 March.  So news of the possible leak was widespread by then at the latest.  And yet MediaWorks only self-reported the information about the leaker “to RBNZ and to us [Deloittes] on 5 April 2016”, more than two weeks later.  It doesn’t take two weeks for an organization to track something like this down internally – MediaWorks knew which of its employees had been in the lockup.   It seems more probable that MediaWorks acted only after the inquiry team requested a meeting with the staff who had been in the lockup.
  • It is striking that the Deloitte report makes no attempt to assess whether what the MediaWorks person in the lock-up did on 10 March (file a draft story back to their office well before the embargo lifted) had been done before.  And the MediaWorks statement also does not address that issue.  There are various stories on the media grapevine that it was, in fact, established practice.  And while I have no way of knowing whether that is so, it is not inconsistent with the fact that the person who sent me the information presumably didn’t see anything extraordinary about doing so.   There is no suggestion in the report or statement(s) that the transmission from the lock-up was somehow accidental (inadvertently hit the wrong button, or somesuch), and if it wasn’t accidental perhaps it was customary.    It is unfortunate that the Reserve Bank’s inquiry does not appear to have attempted to assess whether that was the case, or even just note the possibility.
  • The Reserve Bank’s own statement seems very supportive of the MediaWorks hierarchy, even though (a) people in that organization knew what had happened from the start, (b) must have known it was against the rules, even before I started to draw attention to the issue, and (c) the timing suggests that the management action (and formal internal investigation) was all rather belated, occurring when their people realise they would be interviewed by the inquiry and would have to provide an accurate factual account of what happened.

There seem to be quite a few more questions that should be asked of both the Reserve Bank and the MediaWorks management.

In passing, I would note that I have read and heard many dismissive comments in the last few days from other media people about MediaWorks, and their coverage of economics and monetary policy issues.  I don’t watch their TV channel, and am not a commercial radio listener.  Nonetheless, I had actually been quite impressed that Radio Live had been keen to run interviews with some one like me on such diverse topics as the OCR, US monetary policy, Kiwibank, the real exchange rate and economic performance, immigration policy and so on.  As I say, I don’t listen to commercial radio (my wife kept saying “but no one I know listens to Radio Live”), so I’m not sure how representative those sorts of interviews are. But my experience had been a wholly positive one –  intelligent interviewers, aiming at popular market no doubt, asking sensible well-researched questions, and not obviously pursuing “gotcha” moments (but then why would they with a middle-aged rather serious economist, talking mostly about rather geeky issues?).

Someone has, however, drawn to my attention an NBR story in which Rob Hosking reports  that

“Mr Reddell did not at the time ask how they knew of the decision an hour before it was announced-  an omission which has apparently caused some resentment within Mediaworks who feel he should have warned them about this”.

Yeah right.  The MediaWorks people knew very well that the information was not supposed to be outside the lock-up.  What was I supposed to do –  assuming I had believed it was the fruit of a real leak which, as I noted yesterday, I had no particular basis for doing (25 years of MPSs having gone by without one) ? I genuinely didn’t know what to make of it.   I suppose I could have said “you do know you aren’t supposed to have that information, assuming it is true, don’t you?”  But the sender, and the people that person apparently overheard, already knew that. The 9am release time is no secret.  It was no worse sending it on to me than it was for them to have had the information, in breach of their express commitments to the Reserve Bank, in the first place.  I had no ongoing or formal relationship with MediaWorks (I generally talk to any media –  or anyone else –  who asks), and I reported the matter to the Reserve Bank because if there had in fact been a leak, it was their information and systems that had been compromised.  The guilty people were hardly likely to own-up unprompted.

The OCR leak: again/still

Michael Reddell OCR leak, Reserve Bank

I’m heartily sick of the Reserve Bank leak story and hope that this is the last occasion I write about it.  But there were a few further points I wanted to make, partly in response to the coverage in the last 24 hours.

I would also add that despite several commenters on various stories having correctly noted that the longstanding system vulnerabilities mean that there may have been previous leaks over the years from people in the Reserve Bank’s media or analyst lock-ups, I’m not sure it would a wise use of time or resources now (or perhaps even possible) to attempt to prove it one way or the other.  But that is a matter for the Reserve Bank.

Much of the media commentary has been about the abolition of the Reserve Bank’s lock-ups.  The many good trustworthy people pay the price of one peripheral player cheating.  Worse, it will apparently be harder to get good reporting and consumers of news will suffer.  And, from some of the economists, a concern that financial markets might be more volatile for the “first few minutes” after the release while economists and traders try to digest what the Bank is saying.   I plead for some perspective.

All of this commentary loses sight of the simple point which I have made previously, and which the Reserve Bank statement yesterday also makes.  Other countries don’t do it the way we were.  No country that I’m aware of had provided advance lock-ups for economists and analysts for official interest rate announcements.  And the handful that do provide some tightly-controlled advance notice for a select group of journalists give them only a few minutes advance notification, not two hours.  Other countries’ central banks don’t provide their staff to provide private briefings to media or analysts in advance of release, in doing so providing different information to those inside those lock-ups than is available to those outside.     What the Reserve Bank wants to say  in its releases should be carefully drafted and refined, and then put in the official documents, and left to speak for itself.  Sometimes press conferences can be useful, but they should be viewable (as the Reserve Bank’s are) by everyone, not only by the select few.  If anything, under the new arrangements, the press conferences may even allow better scrutiny and more searching questioning of the Governor, since future press conferences will occur an hour after the release (rather than a few minutes after as has been the case until now).  That will allow journalists to talk to economists, politicians, sector group leaders etc before they pose their questions to the Governor.

It is worth remembering, again as I’ve pointed out previously, that half of each year’s OCR announcements have always taken place without benefit of lengthy explanatory lock-ups (or press conference).  The full scale lock-ups have been used for Monetary Policy Statements, but not for the other intervening OCR reviews.  I’m not sure there is any evidence that the market reaction to those one page statements has been any more difficult or volatile than for the MPS releases.

Nonetheless, I think there are still some aspects of the new regime that will require some bedding down, and perhaps later refinement.    I’ve long thought it was a mistake to release OCR announcements at exactly the same time as MPSs. A better model, in my view, would be to release the OCR decision as soon as it is made (further reducing another aspect of risk in the system) and then to release an MPS a few days later, as background analysis (looking forward, and providing ex post assessments).  In such a model, the MPS would be much less market sensitive (the main market-moving news is in the OCR announcement itself). For such a background document, there might be less harm (but less interest) in a lock-up to explore the technical detail of the forecasts.

More immediately, the Reserve Bank should consider adopting the idea proposed by former Czech central bank head of communications Marek Petrus (discussed on his Lombard Rates blog, and here on mine) that the Bank should host an analysts briefing later in the day of the MPS release.  In such a briefing,  analysts could ask questions of the Bank (in person or by phone –  akin to conference calls investment banks run), and the Bank  might also be able to use the occasion to resolve  openly any misinterpretations that had arisen over the day.  But the critical aspect of the arrangement is that the briefing would be webcast (as the press conferences are) so that everyone has the same information, whether in Wellington, Auckland, Singapore, or New York, whether economist or not.  A concern about the new system the Bank announced yesterday is that it will resolve one problem and open another.  The analysts lock-up (and the later economists’ lunch) has always had problems in that they sometimes provided information to attendees that wasn’t available to everyone else.  In the new world there is a risk that there will be high rewards for those – especially the Wellington-based – who, searching for nuance, secure coffee discussions with the Chief Economist or the Manager, Forecasting.

Somewhat surprisingly, even the Prime Minister has weighed in, calling for the Reserve Bank to reconsider, noting that Budget lock-ups had worked well.  I’m not sure whether The Treasury uses more robust systems to reduce the risk of leaks (perhaps they will be reviewing them in light of the Bank’s experience?), but even if they aren’t the case for a lock-up for Budget material is much stronger than for MPS.  First, there is typically a wide range of material across huge number of portfolio areas.  Second, often new initiatives are being announced, with technically complex details.  And third, not much about the Budget is typically very market-sensitive, especially as the Beehive typically provides strong hints (or more) on the juicy stuff in advance of Budget day.  By contrast, OCR announcements and MPS releases are really just the same old stuff over again (new data, new rate, but the same basic framework), but the bottom line is highly market sensitive, and there is no pre-briefing of selected journalists.

Changing tack, I have been a little surprised at how little of the media coverage has focused on the Reserve Bank’s weak systems.  Perhaps that is understandable: the media has the strongest interest in the story as it affects them (changes in lock-up arrangements), and the Reserve Bank is a powerful institution and most of them want to remain on good terms with the Bank (even while complaining quietly).  But what happened in this episode involved two things:

  • A MediaWorks staffer who breached his own express or implied commitments to the Reserve Bank (not to communicate the information before the embargo lifted)
  • A central bank that ran lock-ups that, it turns out, used no technological protections, and relied totally on trust to protect extremely sensitive information.

I was trying to explain the story to my children last night.  I told them that I had no reason to distrust the people who live on my street, but that nonetheless I would irresponsible if we went out and left the doors wide open, simply relying on trust that nothing bad would happen.   Most of the time, nothing bad would happen.  But if and when it did, people (including the insurance company) might reasonably talk of contributory negligence.

Managing highly sensitive information is not incidental to what the Reserve Bank does, but integral.  And yet they unnecessarily sit on the OCR decisions for six days, running risks of (inadvertent) release by someone inside the institution.  And they tell the Minister of Finance –  when he and his advisers will have their own agendas –  more than hour before the announcement.  And –  the focus of this episode –  they have dozens of people from the financial media and financial institution economists in lock-ups which were secured by no more than trust.    I don’t think I had realized until last night quite how bad the situation was.  On entering the lock-ups participants have to hand in their phones, but all continue to have access to their laptops with active internet connections throughout the lock-ups.  There was, apparently, no effort ever made to secure either individual laptops or the rooms where the lock-ups were held (to physically prevent transmission until the embargo is lifted).    In an earlier post, I touched on hypothetical risks –  the analysts lock-up used to be held in a room easily overseen from neighbouring apartments – but all the time anyone in the lock-ups could simply have emailed the news to anyone they chose.  It is staggeringly lax.  Mike Hannah, Head of Communications was quoted in yesterday’s press release on the new arrangements, but these previous lock-ups were his responsibility.  What were he, and his boss Deputy Governor, Geoff Bascand, doing in allowing such incredibly lax security?  They left the door wide open, and eventually (at least) one person walked through it.

As I noted yesterday, it is surprising that the Governor’s press release took no responsibility for any of this, and offered no apology for it.   I hope the Bank’s Board (and its audit or risk committee) is asking some hard questions.

Finally, I remain irked at being accused by the Governor of being “irresponsible”, for not passing on to the Bank the email I received (from someone not in the lock up) as soon as I received it.   As I have already noted, I had no relationship of trust with the Bank, owed them nothing, and in passing on the information at all –  acting with a sense of public responsibility, and a concern for the best interests of an organization I had worked for for decades –  I have probably jeopardised my future relationship with MediaWorks.  I am also irked that yesterday was the first time I had heard the Bank suggest that I was somehow to blame.  It has the feel of a line made up after the event, to distract attention from the real story: the Bank’s weak systems, and a security breach by a journalist who the Bank had allowed to participate in its lock-up.

 

Let me explain.  And if the detail is painstaking, feel free to stop here. This is for the record as much as anything.

 

As I have said previously, I received an email from a MediaWorks employee at 8:04am on the morning of 10 March.  It is reproduced in the Deloitte report.  It read.

We have just heard that the Reserve Bank is cutting by 25 basis points
I didn’t see the email straightaway  –  it is the sort of time my kids are getting ready to leave for school.  I saw it about 10 minutes after it arrived, and emailed back to the sender at 8:14
if true, that is very encouraging –  at last.  I  have thought it a bit more likely than the market pricing, but…one never quite knows
As I have noted all along, I had no way of knowing (until yesterday) if this was real information, or just the sender talking things up.     The tone of this email is not one suggesting I instantly believed there had been a genuine leak.
Various people have asked why the person sent the email to me in particular.  It had already been arranged that I was going to provide some on-air commentary on Radio Live later that morning on the OCR announcement.
I’ve gone through this stuff before, but in the following minutes various things went through my head.  I flicked onto the ANZ and Westpac exchange rate chart pages, half expecting, half fearing, to see a sudden movement in the exchange rate.  If there had been a genuine leak it seemed unlikely that I was going to be the only one to know, and in all my years at the Reserve Bank –  including running the Financial Markets Department –  our greatest fear had been market participants being able to profit from early access to such information.
At some point I thought about contacting the Reserve Bank.  That wouldn’t have been as easy as it sounds.  I’m not exactly persona grata at the Reserve Bank, I knew that key people would most likely actually be in the lockups, and I didn’t have their cellphone numbers.  Graeme Wheeler wasn’t in lock-ups, but he was hardly going to take my call.   I could have sent an email, but who was likely to be rushing to open emails from me in that dead half hour when their attentions were on the media and market lock-ups.   And, as I have noted previously, I didn’t know if the information was the result of a real leak.  If I’d passed it on to the Bank before 9am, and it turned out they weren’t cutting, what I could expect from them was not a “hey, thanks Michael, even though there clearly wasn’t a leak on this occasion, but we really appreciate you pro-actively coming forward” but more like “there he goes again, always willing to believe the worst, constantly undermining us”.   And so, since the market hadn’t moved, I kept the email myself for the remaining few minutes and as soon as I’d read and digested the key bits of the statement (my own priority), I sent this email through to John McDermott (Assistant Governor, and my former boss) and Mike Hannah, Head of Communications at 9:08am
Mike, John
For what it is worth, I received an email an hour ago from someone telling me that they had just heard that the Bank was going to cut by 25bps this morning.  I have no idea whether it was a well-sourced “leak” or just speculation, but I have no reason to doubt the person who told me, who in turn (as far as I’m aware) has no reason to pass on simple speculation.
Regards
Michael
As I’ve noted previously, there are no allegations in this email, simply information  –  information which I didn’t know what to make of, but which now at least seemed to warrant investigation.
I didn’t hear from them for a while (both were at the press conference).  Reflecting on it a bit further, at 9:47 I sent this follow-up
Just for the avoidance of doubt, the email did not come from anyone inside the Bank (or inside govt).
At 10:03 am I had this email from John McDermott, cc’ed to Mike Hannah

Hmm. Serious but this is very little information to go on. What time exactly did you get the email?

John

A couple of minutes later I responded

8:04am

And at 10:08 I sent this to Mike and John

and i’d be checking the media lock-up
At 10:29am I had this response from  McDermott

Thank you for letting me know. I am disappointed that somebody knew and thought it a good idea to spread the leak. Somebody with a decent character would have instead informed the Bank. You should let them know that for them to tell you puts you in a difficult place.

I had not noticed until now that McDermott even then apparently assumed there was a leak (“I am disappointed that somebody knew”).

And I responded at 10:37

No difficulty for me –  not as if I trade fx markets (or would ever use such information if I did). I did check the exch rate charts at the time, and had I seen any sudden move would have passed on the information before 9am.   I may mention the issue in my post on the MPS later in the day.
Regards
Michael
I did make mention of the issue some hours later in the my post on the MPS.   I noted, somewhat agnostically
And finally, as I have noted to them, the Reserve Bank might want look to the security of its systems.  I had an email out of the blue at around 8 this morning-  most definitely not from someone in the Bank –  telling me that the sender had just heard that the OCR was to be cut by 25 basis points.  I have no way of knowing if it was the fruit of a leak, or just inspired speculation, and was relieved to see the foreign exchange markets weren’t moving, but it wasn’t a good look.
And left it at that.
The next I heard was an email from Nick McBride, the Bank’s in-house lawyer, on 15 March

Michael

I think I saw you in Thorndon New World today when I was buying my lunch. Anyway, I am emailing you following your email to John McDermott and Mike Hannah at 9:08am Thursday 10 March alerting them to the possibility of a leak of the OCR decision. The Bank has appointed investigators from Deloitte to try and find out whether there was a breach in security and, if so, how it occurred. They will also review the process for transmitting the Governor’s OCR decision to see if any improvements are needed. I’m sure we both agree that it is the public interest to ensure the integrity of the process and tighten it as necessary.

As you are the person who has information that may indicate vulnerability in the process we would be grateful if the Deloitte investigators could talk to you about your email to John and Mike. We would suggest the meeting to discuss this take place at a convenient time for you at the Deloittes office here in Wellington (Level 16, 10 Brandon Street), ideally this week. If you could let me know the days and times you are available that would be appreciated. Deloitte should be able to fit in with you.

The lead from Deloitte is Ian Tuke and I have copied him on this email.

Thank you very much in advance for your cooperation. Feel free to contact me if you have any queries.

Nick

I thought this was a thoroughly professional approach, was relieved to hear about the inquiry, and we set up a time to meet.  There was no suggestion in Nick’s email, or in any of the earlier comments from McDermott, that I had done anything inappropriate.

A couple of days later I had a meeting with the Deloittes people conducting the inquiry.  I don’t have word for word what the senior guy said, but it was along the lines that the Bank had been very appreciative of me coming forward.  We had a good discussion, I gave them the original MediaWorks email (sender redacted) and I came away pretty content with how the Bank seemed to be handling the issue.

On 21 March, the following Monday, the media appeared to finally take some interest in the possibility of the leak.  Hamish Rutherford wrote a story on Stuff, in which he had sought comment from the Reserve Bank.   This is where I started to get a little annoyed with the Bank

The Reserve Bank has confirmed that following an allegation, it had launched an investigation.

“We are aware of an allegation that information may have been leaked ahead of the OCR announcement on 10 March,” a spokesman of the bank said.

While we have no evidence at this stage that any information was leaked, we take the integrity and security of market-sensitive information very seriously and have initiated an external investigation into the allegation.”

Note the repeated use of the word “allegation” –  a word, or idea, which had not appeared at all in Nick McBride’s email above (which simply talked of investigating the “possibility of a leak”).  As I have said repeatedly, I made no allegation: I passed on information, which appeared to raise some questions, and left it to the Reserve Bank to make what, if anything, it could of that information.

And then I heard nothing more of the matter until yesterday afternoon’s release.

The Bank has also taken to running the line that if only I had told them earlier, they would have avoided risks by bringing forward the release of the MPS (perhaps from 9am to 8:45am).  I’ve already touched yesterday on the implausibility of the idea that this would have solved their problems.  Graeme Wheeler should engage it a bit of introspection and ask himself just what his reaction would have been if somehow I had got hold of him or his advisers by 8:30 and told them what I in fact told them just after 9am.   After all, what I was passing was only hearsay (a solid report of what someone else had heard) at that point –  I didn’t know there had been a real leak, and so the Bank couldn’t be sure either.  And, frankly, the messenger would have mattered –  and I daresay Graeme would have been less inclined to react positively to hearing it from me, than from one of his admirers.  In reality, they would have debated the matter among themselves –  after it had taken perhaps five minutes to get the key people in the same room –  been not sure what to make of it, especially after checking the exchange rate screens.  Probably they would have waited it out til 9am.  Partly because if they hadn’t, and had released at 8:45, it would have created mayhem –  the markets moving suddenly with people still away from desks and screens, and the Bank could only have said something like “we received information, from a source we aren’t sure we trust, which suggested that there might have been a leak”.  I’m not sure how that would have made their position, then or now, any better.   Those who lost money would have been even more vociferous than usual (and understandably so).

In  conclusion to what has been a long post, I am sufficiently riled by the gratuitous attack that I am considering raising the matter with the Reserve Bank Board.  Are such ad hominem attacks on someone public-spiritedly providing (possibly at some cost to myself) information that enabled the Reserve Bank to (a) identify an actual leak, and (b) identify serious weaknesses in their systems, the sort of behaviour they expect or tolerate from their employee the Governor? I sincerely hope not.

 

The OCR leak

Michael Reddell OCR leak, Reserve Bank

The Reserve Bank has this afternoon released the Deloitte report into the possible leak of the OCR on 10 March, and a press statement from the Governor.

I have given comments to various media outlets, but thought I should set down my assessment for the record.

It is extremely disappointing that it has now been confirmed that there was a leak.  One MediaWorks employee in the media lock-up apparently emailed several of his colleagues outside the lock-up.  My involvement in this unfortunate episode arose because a MediaWorks employee sent me the email that is reproduced in the Deloitte report.

It is unfortunate that the Deloitte report does not (and probably was not asked to) look into how it was that the Reserve Bank’s systems for managing lock-ups for incredibly sensitive information were as insecure as they proved to be.  From the Deloitte report it seems that no underhand technology or secret signaling was involved; simply someone emailing from their laptop.  I’m no technology expert, but I’m staggered that such an easy breach could have occurred.  When systems are weak, sooner or later they will result in a breach, by accident or deliberately.   It is also unfortunate that the Governor’s press release does not address this issue.

The Reserve Bank’s overall response to the confirmation of the leak is the right one.  Ending media and analyst lock-ups is a step I recommended in a post several weeks ago, reflecting the vulnerability of such events (especially as technology has advanced), the fact that few or no other central banks provide any advance information in lock-ups, and the fact that such lock-ups have at times meant people inside the lock-ups have better information on the Bank’s interpretation of the documents than people who do not attend such events.    The new model will bring the Reserve Bank into line with standard international practice.  It is a model that would, I hope, have been adopted even if it had been confirmed that on this particular occasion no leak had occurred.

There are further steps that should still be adopted to minimize the risks of inadvertent early releases of the OCR.  For example, the lengthy lag between taking the OCR decision and releasing it should be shortened.  I was also surprised to learn from the Deloitte report that the Minister of Finance had been aware of the decision before 8:04am on the morning of the release.  When the OCR system was established in 1999, the practice was to advise the Minister only 10 minutes or so before the announcement.  If the Minister needs to know at all (and it isn’t clear why), 10 minutes notice should be an ample courtesy.

The Governor’s press release was disappointing on several counts.

First, it took no responsibility at all for the Bank having run systems and procedures that allowed this leak to have happened.  Of course, the leaker should not have leaked, but the Reserve Bank should have managed its procedures in a much more robust way to ensure that the leak could simply not have happened (especially in the easy way it appears to have).

Second, I was struck by the grudging gracelessness of the statement.  This inquiry, the associated discovery, and the subsequent change of procedures, would not have happened if I had not, at my own voluntary initiative, informed the Bank of the information I received.  It is as simple as that.  Unlike those in the lock-up and their employers, I am in no relationship of trust with the Bank, owe nothing in particular to them, and had actually valued the outlet that MediaWorks from time to time had provided for my commentaries and views.  And yet the statement offers not a word of appreciation or thanks to me; instead it criticizes me for not telling them about the information earlier.

“The fact that several people outside the Bank, who had access to the information improperly, failed to alert the Bank immediately, was irresponsible and left open a significant risk that the Bank could have closed down quickly with an immediate official release.”

As I have been clear all along, I never knew (until today) whether there had been a leak, or whether someone was just engaging in some big talk.   And the fact that there had been no market movement made me reluctant to believe there was a real leak –  as did the fact that I had worked at senior levels at the Bank for many years, and been under the impression that security at the lock-ups was fairly water-tight.

Moreover, as readers know, the Bank’s attitude towards me over the last year has not exactly been positive and cooperative.  Perhaps I could have gone to them at 8:20 and said “someone just told me you are cutting this morning”.  In fact, the thought didn’t cross my mind initially.  But when it did, my reaction was “what if they aren’t cutting.  They will simply scoff, and say “there goes Michael again””.  And so I kept the email to myself –  still not sure whether it was real news or not –  until I knew the Bank had cut, whereupon I passed the information on to the Assistant Governor and the Head of Communications.

I gather this “Michael was at fault” line is now part of their stock response (someone this afternoon told me that John McDermott had run that line to him previously).

MediaWorks people were at fault, and the Bank had weak systems that allowed a serious leak to occur.  Had I been less professional and more opportunistic, I could have put the text of the email on my blog as soon as I found it. After all, I was in no relationship of trust with the Reserve Bank.  Unsure whether it was for real or not, I reckon I still have enough credibility that doing so would have created a lot of damage.  But I didn’t do that: I kept it to myself and instead I told the Bank about it as soon as I was sure I was not going to look stupid.  I was simply caught in the middle of this – and have spent several weeks with people suggesting or implying that I had made it all up, was making allegations etc

The Governor is also misleading to suggest that even if I had alerted them earlier they could have avoided problems by immediately releasing the information themselves.  That might have been their reaction –  although they would surely have had to ask how seriously to take my information –  but it wouldn’t saved chaos, and might only have made things worse.  The hour before the OCR is released is a dead zone in New Zealand markets.  Many people abroad focus on New Zealand again just a few minutes before the scheduled time of the release.  To have released at 8:35. generating huge market movements, when they couldn’t even be sure that a leak had occurred (a week later they were still just talking of me making “allegations”) would have made life a lot harder for them, with plenty of aggrieved and vocal offshore people.

I guess I wouldn’t really have expected gratitude, but the graceless (and blame-shifting)  tone of the Governor’s statement is really something that should have been beneath the dignity of someone so senior.