The Minister of Finance has commissioned a two-stage review of the Reserve Bank Act.  The scope of the first part is pretty clear: it is about monetary policy (goals, transparency, and decisionmaking structures).  What, if anything, is included in the second stage is still up for grabs, with the Minister awaiting advice from the officials (a joint Treasury/Reserve Bank process) and from the Independent Expert Advisory Panel.   It seems likely that the Reserve Bank itself will try to keep any second stage to an absolute minimum –  as someone put it to me last week, the Bank seems happy with any reform that keeps things pretty much just as they are now –  and the arrival of Adrian Orr as Governor next month is likely, based on past performance, to reinforce that resistance.

A few weeks ago, I outlined the case that, as a key component of the second stage, the Reserve Bank should be split in two.  The Reserve Bank itself would remain responsible for monetary policy and associated activities (notes and coins, foreign exchange reserves, interbank settlement etc) while a new Prudential Regulatory Authority would take on responsibility for regulation and/or supervision of banks, non-banks, insurance companies, payments systems (and for the associated AML controls).

In favour of that position is that:

• it is the more common model in advanced countries today (including Australia),
• the synergies and overlaps between the various functions of the Reserve Bank are pretty slight (and probably no greater than, say, those between fiscal and monetary policy),
• structural separation would allow for clearer lines of accountability, and
• structural separation would allow for the creation of stronger, more effective, cultures  –  with appropriately skilled chief executives –  in each of the two successor institutions.

There hasn’t been a great deal of public commentary about this issue/option, but I noticed that the Shoeshine column in last week’s NBR picked it up.   NBR’s columnist  –  Jenny Ruth –  noted her support for structural separation (“a jolly good thing”).    She has been pretty critical of the Bank’s handling of a number of its prudential responsibilities, and is uneasy about the extent to which she believes the use of LVR limits –  by statutue, in pursuit of financial stability – “has become hopelessly confused with the Reserve Bank’s monetary policy functions”.

But in putting together her column she also talked to Massey banking academic David Tripe who “agrees there is a problem but isn’t so sure separation is the solution”.  He is quoted as saying

“My suspicion is that it wouldn’t improve matters because it would still be the same people doing the supervision”

and arguing

“We’ve got bank capture of the regulator –  the Reserve Bank asks for the data that the banks agree to provide, not the other way round”

On his first point, I guess my response would be that structural separation is not panacea, but that (a) change starts from the top, and (b) it should be materially easier to hold the financial regulator to account when it is responsible for only one main job (unlike today’s Reserve Bank).   And, as I’ve noted above, many of the other considerations also point in the direction of structural separation.  Finding a chief executive and senior management team who care primarily about the prudential regulation of the financial system –  whereas most of the senior management of the Reserve Bank over decades has always been more interested in (and had more background in) monetary policy –  is likely to be significant part of lifting the performance of the regulator.

Perhaps my one real unease is that a standalone regulatory agency could – if it were allowed to – become even more resistant to transparency and public accountability for its actions.  Whether there is a structural split or not, the officials and politicians doing the current review need to take steps to make the regulatory side of the Bank (as it is now) much more open.

(On Tripe’s second point, while I think there is something in what he says –  especially around data –  I rather doubt many of the banks would recognise the “regulatory capture” story.  On that note, I’m looking forward to the forthcoming publication of the New Zealand Initiative’s work on economic regulatory agencies, including the Reserve Bank.)

In her column, Jenny Ruth highlights a number of recent cases where the Reserve Bank’s handling of regulatory issues leaves a lot to be desired (and where, even if the Bank was correct, it has been so untransparent that we couldn’t possibly be confident of that).  I’ve written a bit about one of the cases she mentions –  the Westpac capital models issue.  The Bank has made no attempt to pro-actively disclose the relevant material (and would no doubt staunchly resist OIA requests), and although it claims it discovered the problem, as Ruth notes

“Westpac insiders say that Westpac outed itself. Shoeshine’s money in on Westpac”

Whatever the truth on that point, the whole episode did little to instill confidence in the Reserve Bank’s systems, processes, or accountability.

I haven’t written about the two other episodes Jenny Ruth highlights, both involving Kiwibank (you can read them for yourself).  Neither suggest that the Reserve Bank’s prudential wing has been on top of its game, or that they really have an instinctive handle on the nature of markets and financial institutions.

There are capable people in the regulatory/supervisory side of the institution (and I sat on the relevant internal policy committee for the best part of 20 years) but it is time for some refreshment, and the sort of restructuring that a fresh chief executive, focused on building and maintaining a strong and effective regulatory agency, can bring.  I’m not convinced, by any means, that all the regulatory framework is well-warranted, but if Parliament chooses to regulate, we need the job done excellently, and with considerable transparency and accountability.

NBR appeared on Friday morning.  As it happens, on Friday the Reserve Bank was taking regulatory action.   At 6.37pm an email dropped into my inbox stating that CBL Insurance had been placed in interim liquidation by the High Court, on application from the Reserve Bank.  The Reserve Bank is, of course, now responsible for the prudential regulation of insurance companies.

In time, I hope we see a substantial accounting by the Reserve Bank of its activities in this case, including its exercise of its powers to apply for the appointment of a liquidator.  In the meantime, I was interested in a piece on interest.co.nz by David Hargreaves who suggest that, based on what we’ve seen so far, this episode too raises questions about the handling of the Reserve Bank’s supervisory/regulatory role.

From the Hargreaves article

That the RBNZ was interacting, strongly it seems, with CBL Insurance going back as far as July last year was revealed by CBL Corporation to the NZX only as recently as February 5, almost in passing and then more explicitly on February 7.

Key parts of the February 7 revelation for me were that the RBNZ had done an independent review on CBL insurance, that it had, as long ago as July 27, 2017 issued a minimum solvency recommendation, and then – most crucially from my perspective – that on November 22, according to the statement from CBL Corp, RBNZ had issued directions to CBL Insurance, CBL Corporation and its subsidiaries, requiring them to consult on any non-business-as-usual transactions greater than $5m.

That last one, as far as I’m concerned is a biggie. Essentially a publicly listed company with a sharemarket value of three quarters of a billion dollars was put on the leash by the regulator three months ago. And yet nobody was told publicly.

The CBL February 7 statement went on to say that “these directions and discussions that CBL Insurance has had with RBNZ have been occurring under strict confidentiality orders prohibiting CBL from making any announcement to the market while those orders remained in place. These orders have now been lifted.”

Neither confirm nor deny

The RBNZ refuses to either confirm or deny that it had placed confidentiality orders on its interactions with CBL Insurance last year.

He goes on

I actually think the RBNZ had some obligation to let the public know it was engaging with this company.

I do not like the idea of regulation behind closed doors because it is suggestive, at least, whether that is the reality or not, of a holier than thou attitude. It is to me, the regulator putting themselves above the public.

I’m not sure how well prepared the RBNZ was for getting itself into a situation like this with a publicly listed entity like an insurance company.

I’m not so sure about “holier than thou”, but it is an example of just the sort of thing the Reserve Bank always used to worry about: if it had private information (especially about significant regulatory interventions) and customers were nonetheless allowed to carry on trading with regulated entity, doesn’t that then create at least some moral risk, some moral exposure, if the regulated entity subsequently failed?  It seems extraordinary, if true, that the Reserve Bank could ban a regulated entity talking about a regulatory intervention.

Hargreaves’ solution isn’t one I’d agree with

Personally, I would suggest creation of a separate authority to regulate and supervise the insurance sector. Yes, it would be more money, it would arguably be more bureaucracy, but sometimes that’s what you’ve got to do for the best results.

Frankly, I’ve never been quite sure that the case for prudential regulation of general insurance is particularly strong anyway, and would be very reluctant to see a standalone insurance regulator. But I take the Hargreaves story as reinforcing the case for a strong standalone prudential regulatory agency, led by people whose sole job is prudential regulation and supervision, and within governance and accountability structures that help ensure serious and effective scrutiny of how the regulatory agency does its job.

I gather that Treasury and the Reserve Bank have been consulting this week with private sector representatives on the possible prudential regulatory aspects of the Stage 2 review.  I hope that the idea of structural separation –  with all it could entail –  isn’t lost in the desire of Reserve Bank management to keep things just as they have (not overly effectively) been.

I’ve come to think so.

The Reserve Bank has two main functions:

• conduct of monetary policy (and supporting activities –  currency issues, foreign reserves management, interbank settlement accounts), and
• prudential regulation of banks, non-bank deposit-takers, insurance companies (and roles around payments system and AML thrown in for good measure.

These quite different functions are conducted in one institution, but they needn’t be.  In fact, in most advanced countries they aren’t.

Historically, there wasn’t much prudential regulation in New Zealand at all.  There was lots of direct regulation of various types of financial intermediaries (banks, building societies, savings banks and so on) but most of the regulation (reserve ratios, interest rate controls etc) was macro policy focused, not about financial system stability or depositor protection per se.   That regulation –  often administered by the Reserve Bank, but individually approved by the Minister of Finance –  was a substitute for the sort of market-based monetary policy all advanced countries now rely on.   As interest and exchange rates were freed up, the panoply of direct controls was stripped away.   Our great bonfire of such controls took place in 1984 and 85.

By the time what became the Reserve Bank of New Zealand Act 1989 was going through Parliament, the primary conception of the Reserve Bank was as a monetary policy agency.   Sure, there were some regulatory provisions –  and in particular provisions around the handling of bank failures –  but it was seen as pretty peripheral activity.  If anything, it became more peripheral as the 1990s unfolded: the framework covered only banks (increasingly a foreign-owned group), there was a shift to a largely disclosure-based regime, and the function took very few staff  (from memory, only around 10 or 12 staff).  For practical purposes it probably wasn’t too much of an issue that the two functions were in one institution.

But as the 21st century unfolded so too did a dramatic change in the supervisory and regulatory activities the Reserve Bank was involved in.    There were new classes of entities to regulate or supervise, new functions (payments system and AML) to regulate or supervise, new statutory reporting obligations, a reduced reliance on disclosure (even for banks), and new powers and new appetite for more direct and discretionary regulatory interventions (culminating, for example, in the numerous iterations of LVR controls in recent years).  The Reserve Bank now is at least as much of a financial regulatory and supervisory agency as it is a monetary policy one.  A large share of the staff, a large share of the budget, and a large share of the Govenor’s time is now devoted to these functions.

I’m not here offering a view on the merits, or otherwise, of these new activities.  The point is simply that Parliament has either specifically mandated the Bank to do these new things, or written legislation that has allowed the Bank to do them.    And those functions don’t look like going away any time soon.  After all, if many details are a bit different from models used in other countries, the broad direction –  more comprehensive, more intensive, controls –  isn’t exactly some idiosyncratic New Zealand thing.  It is the way of the world, for good or ill.

At times, the Reserve Bank has tried to make a virtue of this “all in one” model.  In the wake of the 2008/09 recession, the former Governor Alan Bollard made much of the idea of a “full-service central bank”, very well-positioned to carry out the variety of different functions because they were all located in a single institution.    More often, the Bank has pointed out that there is a range of ways of organising these activities, suggesting that no one model is clearly superior.

There is certainly a range of models used in other countries, but once one looks a bit more closely there are also some pretty clear patterns which emerge.  Specifically, New Zealand’s current model is out of step with the main stream of advanced countries.

People here often, and naturally, look to Australia.  Once upon a time their Reserve Bank and ours had a lot in common in what the institutions were responsible for, and both had evolved through a phase where direct controls had been mostly about monetary policy.  But about 20 years ago, the emerging regulatory functions were spun out of the Reserve Bank and a separate Australian Prudential Regulatory Authority (APRA) was established.     There has been no sign that the Australian authorities are unhappy with that model, which seems to work well, allowing both the RBA and APRA to concentrate on their own primary areas of responsibility.

There are plenty of advanced country central banks which are responsible for bank supervision.  But in most cases now those national central banks are part of the euro-area: they don’t themselves set monetary policy (although each Governor has a vote at the ECB), and would struggle to justify existing as independent entities were it not for the supervisory roles.

But if we look at advanced countries that do have their own monetary policies, I could find only three others –  Czech Republic, Israel, and the United Kingdom –  in which the same agency is responsible for monetary policy as for prudential supervision.   The US is –  in this area as so many –  a curious hybrid system, in which the Federal Reserve has some –  but not remotely all – responsibility for prudential supervision.  But as far as I could tell, the following OECD countries have monetary policy and prudential supervision conducted by separate agencies:

Canada, Australia, Norway, Sweden, Korea, Japan, Poland, Chile, Turkey, Mexico, Switzerland, and Iceland

I’m not sure that Turkey or Mexico offer models of governance for New Zealand, but the presence on that list of small well-governed countries like Norway, Sweden and Switzerland –  as well as tiny Iceland –   gave me pause for thought.

And the more I reflected on the issue, the harder it was to identify good reasons why New Zealand should now stay with the all-in-one model:

• probably the most common argument made is about the possible “synergies” between financial regulatory and monetary policy functions.  But there are snyergies, connections, and potentially valuable information overlaps all over the place.  Between fiscal and monetary policy for example, and yet we –  and every other advanced country –  keeps fiscal policy advice and governance quite separate from monetary policy.   And I could mount arguments of possible synergies between the Reserve Bank’s financial market activities and the role of the Financial Markets Authority, and yet no one seriously argues for putting the FMA into a mega Reserve Bank.     Specialisation, and specialist agencies, has tended to be the way in which advanced country governments have organised themselves (often backed by information-sharing protocols, and effective working relationships across agencies –  eg a typical Cabinet paper will reflect perspectives or comments from a range of agencies with relevant perspectives on the topic),
• as it is, the synergies between the monetary policy related functions and the prudential regulatory ones are generally pretty slight –  almost vanishingly so in normal times (and there are some conflicts).   The timeframes are different, the instruments are different (indirect influence vs direct controls), the required mindsets are different, the Bank’s own financial market operations are typically quite mundane, and its research capability (developed mostly for monetary policy purposes) has rarely been used to produce research around the regulatory or supervisory functions.     One of my former colleagues likes to argue that one should conceptualise the Bank’s regulatory role as akin to that of a banker knowing his or her customers, and (eg) maintaining covenants on the credit facilities of those customers.  But mostly monetary policy isn’t about lending to banks –  and certainly not to insurers or credit unions –  and when there is lending involved in monetary policy, the Bank typically seeks to expose itself to minimum credit risk.   Crises can be, and are, different –  lender of last resort, and provision of emergency liquidity is a core part of a central bank role –  but it doesn’t seem to have been an obstacle to other small well-governed countries separating out the monetary policy and regulatory functions into different institutions.
• organisational cohesion and culture are likely to be better-fostered in institutions that have a single main purpose,
• the same goes for the senior leadership of the organisation.  20 years ago it would have been inconceivable that the Governor would be focused primarily on anything other than monetary policy –  that was overwhelmingly the Bank’s role –  but now it is not so at all, and yet the sort of skills, expertise, and even relationships that might be needed to be responsible for monetary policy –  with considerable macroeconomic discretion, and associated accountability, may be quite different from what best suits a regulatory agency.   We might well benefit from having both a highly capable macro and markets focused Governor of the (monetary policy) central bank, and the head of a specialised financial regulatory agency.
• governance structures and accountability models would be likely to develop more naturally if the two main functions were structurally separated into different institutions.   (And it is more difficult than it should be to hold the Governor effectively to account when he is responsible for two, quite different. big areas of policy).
• Specifically, the Bank’s regulatory activities would quite naturally fit with something much closer to a standard Crown entity sort of model (as with the FMA) –  in which key big picture policy matters were decided by the Minister of Finance (with advice from Treasury and the agency), while the Board of the agency was responsible (with operational autonomy) for the implementation of the framework.  The monetary policy (and related) functions don’t fit that sort of model, partly because of the inevitable quite substantial degree of policy discretion –  and hence need for ongoing transparency and accountability –  that are (largely rightly) seen to need to go with monetary policy.

I’ve argued previously that it seems mistake to push ahead with the proposed Stage 1 reforms flowing from the review of the Reserve Bank Act, without first completing an overall review of how the functions the Bank currently undertakes should best be organised, governed and held to account.

And so here is my model:

• the Reserve Bank becomes responsible for the conduct of monetary policy (and directly associated functions –  interbank settlement, notes and coins, foreign reserves management.   In my post on Monday I outlined how I would establish a statutory Monetary Policy Committee.   The same people, appointed the same way, would comprise the Board of the Reserve Bank, and would be responsible for all the functions of the Reserve Bank.  Specific statutory provisions –  of the sort outlined in Monday’s post –  would cover them when meeting as the Monetary Policy Committee.  Note that this model would also increase the chances that the executive members of the Monetary Policy Committee would be genuine experts in the area, devoting of their time and energy to monetary policy,
• a New Zealand Prudential Regulatory Agency –  parallel to APRA –  would be established to take responsibility for the regulatory and supervisory functions the Bank currently has  (but with a revision and streamlining of powers, so that  major policy framework decisions are once again matters for the Minister of Finance).    There is a variety of possible structures.  A typical Crown entity would have a non-executive Board responsbile for the institution, employing a chief executive to run the day to say organisation, generate advice, and implement the policies of the Board.   But a small executive Board (akin to APRA) is an alternative approach.
• perhaps the (formal) establishment of a Financial System Council, with representation from the Reserve Bank, the NZPRA, and the FMA, to offer advice –   perhaps especially systemic advice –  to relevant ministers.

There is no role in this model for anything like the current Reserve Bank Board.    That Board is almost totally useless, and I’m not aware of anyone who thinks it adds value.  In many ways that isn’t surprising.   The Board was designed as agent for the Minister and the public holding the Governor to account, in particular for his conduct of monetary policy (but also for his more general stewardship).   It isn’t a model found anywhere else in the New Zealand public sector, and for good reason.  The Reserve Bank Board has no independent resources, it meets at the Reserve Bank, its Secretary is a senior Reserve Bank manager, and the Governor himself sits on a Board whose prime purpose is to hold the Governor to account.   It is a highly successful recipe for “duchessing”:  the Board comes to see itself more as part of the Reserve Bank, acting to defend the Bank and the Governor, lulled by all the smart people who present to it (and with few/no formal powers), rather than as some sort of independent source of scrutiny or critical analysis.

Part of the failure is structural –  the system was set up in a way that meant it would almost inevitably fail (at least once monetary policy was conceived of as anything other than mechanical, and once the functions broadened out) –  but that doesn’t remove responsibility from the people (often otherwise quite able) who have served on the Board over the years.   In the 15 years the Board has been required to publish Annual Reports –  which, bad sign, they choose to publish buried in the midst of the Governor’s Annual Report –  they have never once made even a slightly critical or sceptical comment about the performance of the Governor or Bank, on policy or other areas of performance.  Disgracefully, they stood by silently while Graeme Wheeler and his senior management tried to silence Stephen Toplis’s criticism –  and, of course, they cheered on Wheeler’s public attack on me when I drew the Bank’s attention to an apparent leak of an OCR decision.    They serve no useful function, and should be disbanded as part of the current review, and amended legislation.

Of course, that doesn’t mean there is a reduced need for scrutiny and accountability.  My point about the Board is that, in effect, over almost 30 years they simply haven’t served that role –  they just function as a department of the Bank, protectors of the insiders.  Effective accountability doesn’t really involve the power to fire –  or to recommend dismissal –  the main formal accountability power the Board has: no Governor (or MPC member) will ever be fired for policy-incompetence related cause during their term (and nor should they be), and the same goes (and should) for independent financial regulators.  But reappointment is another matter altogether.  And much about accountability is the quality of the questions, the bringing to bear of alternative perspectives etc.    The new government has proposed –  in fact promised before the election, although nothing has been heard of it since –  to establish a Fiscal Council, to help provide genuinely independent scrutiny of fiscal policy and associated analysis.  I’ve argued previously –  and repeat the call today –  that this new entity should actually be set up as a Macroeconomic Review Council, responsible for independent scrutiny (published reports etc) on fiscal policy, monetary policy, and systemic financial regulatory policy.  Operating at arms-length from all the agencies –  Treasury, Reserve Bank, NZPRA, and FMA –  and not resourced by them, it would have a better chance of making a material contribution than the Reserve Bank Board has done, and could help promote scrutiny and associated debate.

A little anecdote of how the Reserve Bank’s Board seems to allow itself to be subsumed into the Bank

A month or so ago I lodged an Official Information Act request with the Reserve Bank’s Board –  explicitly asking for it to be delivered to the Board chair – asking them

• how many OIA requests the Board had received in 2016 and 2017, and
• for copies of the Board’s policies and procedures for handling OIA requests.

It seemed to be a pretty straightforward request.   The Board is, after all, statutorily distinct from the Bank, is required to publish its own Annual Report, and (in my experience) had good, well-filed, sets of Board papers.   With a new emphasis from SSC on agencies reporting on performance with OIA requests, I felt sure it would be an easy request to answer.  At most, surely, counting the number of OIA requests might require a quick flick through, say, 10 sets of minutes for each year.  I guess I also –  naively –  assumed that, with the current review underway, the Board would be keen to demonstrate the independent way in which it operated.

More fool me.

A couple of weeks ago, I had a response from one Roger Marwick in the Reserve Bank’s Communications Department telling me that under the Reserve Bank’s charging policy –  note nothing about the Board –  they would want to charge for this information, but noting that I might be able to reduce the charges by narrowing the scope of my request.

So I asked them what the cost would be if I simply restricted the request to the number of OIA requests.     And Mr Marwick responded that it would make no difference because all the costs were associated with that limb of the request.

So I then went back to him –  this was 12 days ago now –  suggesting that if that was the case, I presumed he could now provide me with the Board’s policies and procedures (since he’d just told me that all the costs were associated with the other limb of the original request.

I’ve heard nothing more since.  Last Friday, I went back to Mr Marwick and specifically asked for clarification as to whether the Board was refusing to release the policies and procedures, or were still considering the matter (as fast as reasonably practicable –  the statutory standard).  And again, I’ve heard nothing more.  My suspicion is that there are no Board policies and procedures for handling OIA requests, and that even though the Board’s whole role is to operate at arms-length from the Bank, holding it to account, they’ve just made themselves part of the institution, and left the same management they are paid to hold to account to handle such things.  And, clearly, have no interest themselves in the number or nature of requests being made of them.

In short, they are useless and ineffectual, at least for anything other than giving cover to the Governor.   But perhaps it shouldn’t really be surprising: this was the same Board that, on the basis of their own disclosed papers, doesn’t even comply with such basic requirements of good public sector governance as the Public Records Act.

UPDATE: A day after posting this, I had an email from the Reserve Bank backing down.  I have now been provided with the number of OIA requests made to the Board, and a copy of the Bank’s policies for handling OIA requests, with this observation

requests addressed to the Board are processed in the same way as those addressed to any other part of the Bank. The policy for handling OIA requests addressed to the Board is the same as the Reserve Bank’s policy. In the case of OIA requests made of the Board, the Bank informs and consults the Chair on the requests, and the Chair informs the Bank of the preferred response.

But since the decision to waive charges –  and thus avoid an appeal to the Ombudsman –  is described as having been made by the Bank, not the Board, I think it largely serves to illustrate my point, that the Board works hand in glove with management rather than serving as an sort of independent check on them.

As part of the review of (parts of) the Reserve Bank Act, The Treasury is inviting comments and suggestions, on how the changes in stage 1 of the review (statutory goal of monetary policy, establishment of a statutory monetary policy committee) should be implemented, and on what else should be reviewed in the forthcoming stage 2 of the review.

Last Thursday I went along to a Stakeholder Engagement Roundtable, in which Treasury had invited various private economists in to offer our perspectives on those issues.  My post on Thursday –  on the statutory goal of monetary policy –  was, in effect, part of my notes in preparation for that meeting.   In the discussion, opinion was fairly mixed on the merits of making a change, but it was generally recognised that the government had committed to change and so the main issue was how best to give it legislative form.

The second chunk of the discussion was about the establishment of a statutory monetary policy committee.  Here there seemed to be greater unanimity that reform was desirable, and that part of any reform should be a greater emphasis on transparency, including individual accountability.

I’ve covered my own views on various of these points in earlier posts, but for ease of future reference, I thought I’d bring them together in a single post.  My model would not replicate that in any single other country, but is probably closest to the monetary policy committees in the United Kingdom and Sweden.

Who should appoint the members of the committee?

All of the members should be appointed by the Minister of Finance.   People who exercise significant statutory power –  and the conduct of monetary policy is certainly that –  sholu.d either be elected themselves or appointed by those who are themselves elected.  That is the general approach we take to governing New Zealand:  whether it is Cabinet, the courts, the boards of Crown entities, the Commissioner of Police, or the Auditor-General.  There is no particularly good reason why members of a Monetary Policy Committee should be different.    There are probably unique aspects to all governance appointments, but nothing around monetary policy marks it out as warranting putting another layer between the elected and the decisionmakers.

This is, of course, in contrast both to the current model (single decisionmaker –  the Governor –  in effect appointed by the Bank’s Board), and to the model Labour campaigned on (where external members would be appointed by the Governor –  putting them at a further removes from someone who has to actually face the voters).  Allowing the Governor to appoint the external members would risk substantially undermining the reasons for the reforms.

In the United States nominees for the Federal Reserve Board of Governors are required to win Senate confirmation.  That isn’t our constitutional model.  In the United Kingdom, appointees are required to face a parliamentary select committee hearing before taking up the role.  The committee can’t block the appointment, but can report on the suitability of otherwise of the nominee.   This might be a useful feature to add here.  It isn’t an approach we take generally, but monetary policy makers exercise wide powers of discretion (much more, say, than a typical Crown entity Board member) and, with ex post accountability difficult to maintain, it seems reasonable that those taking up such roles should face some open scrutiny at the start.

There is a counter-argument that the Governor should be free to appoint his or her own Deputy (as might be normal in a commercial context).  To which my response would be that if the deputy was not serving on a statutory committee, exercising statutory powers, that model would be fine.  But if the Deputy Governor is to exercise statutory powers, they should be appointed by someone who was elected, and who is accountable to voters: as far as I can tell, that is the typical model (including, for example, in Australia and the United Kingdom).

How many members should there be?

I’d favour either five or seven.  Any larger number would make it unduly difficult to fill the roles with good people consistently through time.

Either way, I’d favour having two internals (executives) – the Governor and a Deputy Governor –  with the remaining members being part-time non-executives.  It is highly desirable to have a majority of members who are outside the managerial hierarchy of the Bank.  Put the structure the other way round and there is a high risk that, over time, the non-executive members will be neutered (with management coming to block vote), and that  then good people will be unwilling to put themselves forward to serve on the committee.  Non-executives will always be at some disadvantage –  re access to analysis, and ability to influence the research agenda etc – and only be holding the majority of votes on the committee will they be able, if they choose, to consistently push back against that pressure.

The counter-argument often made is often about technical expertise: the choice between internals and externals is often presented as a choice between experts and non-experts.  To which there are several responses to be made.  First, as the Reserve Bank is currently structured, the internals will often not be “experts” on monetary policy at all –  none of the Governors since 1989 could really be classed as “experts” on monetary policy, although of course over time they acquired considerable experience, and even among Deputy Governors there have been considerable differences of expertise and background.  And the skills of being a good chief executive –  running the organisation, generating the analysis, managing the operations –  also aren’t necessarily those of a leading monetary policy expert.

But perhaps as importantly, while I think it is vital to have expert advice and analysis, as inputs to decisionmaking, it isn’t clear that we want technical experts making policy decisions, and exercising the (inevitable) degree of discretion that monetary policy makers do.  Some people with technical expertise may be able to serve effectively as decisionmakers (and communicators) but the skills aren’t the same at all.  And if the internal members of a Monetary Policy Committee, with all the technical resources of the Bank staff at their command, cannot convince one or two non-executive members of the merits of their case, it seems unlikely that they will be able to convince the wider public.

What sort of non-executive members should be appointed?

I’m wary of making much of an internal vs external distinction, and instead focus on that between executives and non-executives.  After all, there has been no internal candidate appointed as Governor since 1982.

But in considering non-executive appointments (three or five in my model) there are a few relevant considerations:

• no one should be appointed to represent a particular interest group.  Of course, everyone has a background, but once one takes up a position on an MPC your commitment has to be to implementing the Act and serving the interests of the country as a whole,
• there should be no prohibition on non-resident or non-citizen members (although I would favour no more than one at a time).   We are a small country, and there can at times be valuable perspectives that people employed abroad can offer (and it is a model the UK has used), as one vote among five or seven,
• it would be desirable to have one member with some reasonable academic exposure to monetary policy, but undesirable to think of a Monetary Policy Committee as, say, a research conference or an academic seminar,
• people with sound general Board-level skills can make a valuable contribution to an MPC, regardless of their formal academic background.  One doesn’t typical want an telecoms company Board stuffed full of tech people, and there isn’t any obvious reason why a Reserve Bank MPC should be different.  The ability, and willingness, to ask hard questions, and even just to say “tell me that again, in ways I can understand” is a valuable part of the mix.

How long should MPC members’ terms be?

I would favour five year terms, perhaps with a limit of one reappointment each.  With five or seven members, one appointment would come up every year or so, enabling a government is the course of a three year term to replace gradually around half the members of the committee, but not to launch a purge on newly taking office.   Terms of this length seem reasonably conventional (and are the same as those of the Governor, and Board members, at present).

Individualistic or collegial?

I’ve outlined here previously why I strongly favour the sort of individualistic model adopted in the UK, the USA and in Sweden, in which individual members of the MPC are individually accountable for their votes.  The current management of the Reserve Bank really dislikes the model, but they have never been willing, or able, to articulate –  from the experience of other countries –  what the nature of their concerns is, and how they balance any such concerns against the interests of democratic accountability, in a model in which decisionmakers exercise considerable discretion.

As I’ve documented here over the years, formal effective accountability for monetary policy decisions is hard –  much harder than those who devised the current law thought at the time it was drafted.  In practice, accountability can be exercised only through public scrutiny and challenge, and at the point where a member of the MPC is up for reappointment.  Against that backdrop –  and in a game where there is so much uncertainty – it is highly desirable that individual MPC members’ votes should be recorded and published, and that members should have the opportunity to have their views recorded in minutes that are published in a fairly timely fashion.  The Reserve Bank’s management has at times expressed concerns about this approach –  used elsewhere –  “muddying the message”, but in fact there is so much uncertainty about the way ahead (what is going on with the economy and inflation) that over time it will usually be preferable to have in public the sorts of issues and concerns that were bothering decisionmakers, rather than just some sort of somewhat-artificial consensus about an immediate OCR decision.

In a similar vein, MPC members should all be free to make speeches, give interviews etc articulating their own views on the issues the MPC is facing.  I’m not suggesting some sort of chaotic free for all: it would no doubt be desirable for members to develop protocols in which members ensured that other members were aware of forthcoming speeches and interviews, agreed to circulate draft texts to each other in advance, and perhaps agreed to avoid comment altogether in the week or so (say) prior to an OCR announcement.  Commonsense and common courtesy can resolve many potential issues.

Who should chair the MPC?

The Governor.  I hadn’t particularly thought of this issue, but it came up at the Treasury meeting the other day. There is an argument for a non-executive chair –  the approach in most Crown entities – but provided there is a majority of non-executive members I’m not sure I see the case for departing from the universal international practice, in which the Governor chairs the MPC.    (It is also perhaps worth noting here that in other countries –  including the UK – it has not been a problem if the Governor has at times voted with the minority.  Smart people will often view the same data quite differently.)

Transparency

The amended Act should require the publication of minutes, and the record of individual votes, within a reasonable time –  perhaps to be determined by the Minister –  of the particular OCR decision.  As I’ve noted previously, I do not favour either keeping, or eventually publishing (even with very long lags), transcripts of MPC meetings.

I would also favour moving to a system where the background papers for MPC meetings are routinely and pro-actively published (perhaps six weeks after the OCR decisions to which they relate).  Ideally, I would not consider this something that should be legislated, but given the obstructiveness of the Bank, and the willingness of successive Ombudsmen to aid and abet the Bank in keeping such papers secret even well after the relevant decision, the legislative option may need to be considered.

As I’ve noted repeatedly before, the Reserve Bank is quite transparent about stuff it knows little abour –  eg where the OCR might be a couple of years hence –  but isn’t very transparent at all about what it does know about.  Transparency is valuable in itself –  an essential part of democracy –  but in a small country with limited pools of expertise, the ability of greater transparency to facilitate more informed and debate and scrutiny of the issues is almost instrumentally useful.

Should there be a Treasury representative on the MPC (in a non-voting capacity)?

I don’t have a strong view on this issue, but it is a model that is used in a number of countries, and could help to formalise a recognition of the relationship between various bits of economic policy.    The model appears to have worked, without undue problems, in the UK.     But if it is to be done, it needs to be recognised that it would involvement a non-trivial time commitment by someone reasonably senior in Treasury –  and time/resources are scarce.

The Policy Targets Agreement

At present, Policy Targets Agreements are (a) signed with the Governor personally, consistent with the single decisionmaker model, and (b) have to be agreed with an incoming Governor before that person is formally appointed or takes office.  It is a poor model, and not one that is much imitated abroad.

Under my reform model, the MPC as a whole would be responsible for monetary policy and the onus of a PTA should also rest on them.  To do that probably requires rethinking the PTA model, and might suggest moving to the system adopted in some countries –  eg the UK –  where the goal (PTA) is specified by the Minister of Finance, and the MPC is simply responsible for conducting policy consistent with that goal.  The UK model isn’t ideal – the target can be changed at the Chancellor’s whim in the annual Budget –  but a system in which the target is specified every few years, after  advance consultation with the MPC of the day (and ideally with the wider public, and with FEC), would seem to have some attractions.  To get the right balance between responsibility for setting overall goals –  resting with the elected government –  and a degree of stability, perhaps the appropriate review period might be six months after a change of government (with provisions for other changes to the PTA only in exceptional circumstances –  say with the agreement of the majority of the MPC.)

The final issue Treasury asked us about under this heading was about the role of the Bank’s Board.  There seemed to be pretty universal agreement among attendeees that the Board adds little or no value.  But, as I’ve noted here previously, you can’t really answer the question about the appropriate role of the Board without thinking harder about the overall organisation of the institution (rather than simply one function –  monetary policy).  I’ll come back to that on Wednesday.

And on a completely different topic

Regular readers will know that I live in Island Bay.  Some will have seen the story in yesterday’s Sunday Star-Times suggesting that our local primary school was “New Zealand’s richest primary school”, based on reported donations in 2016 of $490000.    This qualifies as pretty poor journalism.  Island Bay School is a decile 10 school (although I suspect in the poorest 10 per cent of the top 10 per cent of neighbourhoods).  It was reported that

“Island Bay school’s 460 students contributed $490000 donations in 2016 –  an average of $1065.46 per student for the year’s schooling”

In fact, those parents who paid the scheduled annual donation paid around $250 per child, in other words only around a quarter of the total.   But one, very wealthy, old boy made one very generous donation.  Here is the Principal’s newsletter from 10 March 2016

I awoke to the best news ever this morning: Sir Ron Brierley, an old boy of the school, has generously agreed to donate a sizeable sum to the Rimu Block modernisation project. This gift, combined with Ministry of Education funding, gives us sufficient funding to realise our full vision for the modernisation of Rimu. This would not have been achieved without the generosity of Sir Ron, who has been a wonderful friend and supporter of Island Bay School over the years. In 2011 he kindly contributed towards the Learning Hub and now he has made this contribution towards Rimu Block.

As a parent, it always amused me that such a left-leaning school (and successive Principals) were taking such large amounts of money from a generous capitalist.  It is a real gain to the school, but it is almost totally irrelevant to the debate around the “donations” that parents are asked for each year.