Parliament's Finance and Expenditure Committee is recommending an amendment to the Reserve Bank of New Zealand Bill to make sure the potential impact of technological innovations such as cryptocurrencies on the New Zealand dollar are a focus.
This point is made in the committee's final report on the Bill.
The Bill reiterates the Reserve Bank's sole right to issue bank notes and coins in New Zealand. The Bill will replace the 1989 Reserve Bank of New Zealand (RBNZ) Act, and is part of the Government's wide-ranging review of the RBNZ Act.
"The Bill lists activities that are part of the Reserve Bank’s currency function. Those activities are relevant to currency in its traditional sense, such as issuing bank notes and coins, or managing the quality of notes and coins. The Bill as introduced does not make any specific provision for currency being affected by technological innovation: an example is the emergence of cryptocurrencies," the select committee report says.
"Technological innovations in currency could present risks to financial stability, the effectiveness of monetary policy, or monetary sovereignty."
"We therefore recommend amending the bill to include a provision stating that monitoring the impact of technological innovation on the needs of the public for bank notes and coins is a part of the Reserve Bank’s currency function (clause 113(c)(iv)). The bill as introduced would give the Bank a function to monitor the financial system, including the cash system. Although this would include monitoring and assessing effects on the system from innovation in money and payments technologies, our amendment would help by clarifying this role," the report says.
The clause as suggested says: "Monitoring the impact of technological innovation on the needs of the public for bank notes and coins."
Christian Hawkesby, Reserve Bank Assistant Governor and General Manager of Economics, Financial Markets and Banking, said last month the Reserve Bank is among dozens of central banks actively researching central bank digital currencies.
"We have a money and cash department which is in part dedicated to thinking about things like that. So we're working on it and we're planning to say more about it through the course of this year," Hawkesby said.
National Party opposition
The National Party's Shadow Treasurer Andrew Bayly, who is a committee member, told interest.co.nz his party's opposing the Bill for a number of reasons.
"There's a fundamental change to the whole governance structure of the Reserve Bank ... We think this is one of the few occasions where you want to work across the House, and work on a collaborative manner. Because what you don't want is Labour pass this Bill and in two-and-a-half-years we come back and have another bite at it because we disagree with it," Bayly says.
Describing the Reserve Bank as "the premier financial institution in New Zealand, " Bayly says; "The big question is do we need this change? Tell me what's so broken about the Reserve Bank?"
Announcing the RBNZ Act review during the last term of Parliament, Finance Minister Grant Robertson said it was being reviewed because it had been in place for 30 years, during which time the scope, focus and intensity of regulation and supervision had evolved. Additionally changes to the RBNZ’s statutory framework have happened through a series of separate, targeted amendments rather than through a comprehensive work programme.
“Now is the right time to do that work to ensure we have a fit for purpose financial stability and regulatory framework for the coming decades," Robertson said.
(There's also an interview here with Suzanne Snively who chaired the Independent Expert Advisory Panel appointed by Robertson to assist with the RBNZ Act review. And there's much more on the RBNZ Act review here).
Objective to protect & promote the stability of the financial system replaces the promotion & maintenance of a sound & efficient financial system
The Finance and Expenditure Committee, which is chaired by Labour's Christchurch Central MP Duncan Webb, notes the Bill would also introduce an overarching financial stability objective to protect and promote the stability of the financial system. This would replace the Reserve Bank’s current requirement, which is to promote the maintenance of a sound and efficient financial system.
Additionally the Minister of Finance would be required to issue a financial policy remit, setting out matters the board would be required to have regard to when acting in relation to the Bank’s prudential strategic intentions and prudential standards.
The Bill would also introduce a foreign reserves management and coordination framework agreed with the Minister of Finance, introduce new powers to manage cash quality, update the Reserve Bank’s information-gathering powers supporting its central banking and financial system oversight functions, and make "small changes" to the way the Reserve Bank is funded by allowing it to collect levies.
"We believe one of the most significant reforms that will be introduced by the Bill would be to implement a governance model based on collective decision-making. The Bill would reform the Reserve Bank’s governance arrangements by establishing a governance board, and in effect moving from a model that relies on a single decisionmaker (the Governor of the Reserve Bank) to a board model. The board would be responsible for making decisions on all matters aside from monetary policy," the report says.
The committee recommends an amendment making the Reserve Bank Governor a member of the governance board.
"Other than as chair of the MPC [Monetary Policy Committee], the Governor has no independent statutory authority or powers. On the MPC itself, the Governor is only one vote out of seven. As chief executive of the Bank the Governor’s functions and powers are as delegated by the board. The board is responsible for the performance of the Bank. However, while it is responsible for recommending the appointment, and in some cases the removal, of the Governor, these decisions ultimately lie with the Minister."
"We are concerned that aspects of this model in the Bill as introduced could create a risk in terms of blurred accountabilities for the Governor, and the potential for tensions between the Governor and the board. These issues could exacerbate the challenges ... in coordinating monetary policy, financial policy, and the balance sheet. It may also create challenges as to whether the chair of the board or the Governor would be seen as the head of the Reserve Bank," the report says.
The committee recommends making the Governor a member of the newly established governance board, allowing the Governor to act as a conduit between the board and the Monetary Policy Committee.
"This would promote communication between the Reserve Bank’s two major decision-making bodies, and help to facilitate coordination between financial policy and monetary policy. It would also promote the coordination of monetary policy with the board’s duties regarding financial responsibility. In addition, it would mean that the Governor is explicitly involved in board decision making. They would therefore be better placed to act as the spokesperson for the Reserve Bank on both financial and monetary policy matters."
The report also says that making the Governor a member of the governance board would ensure the Bill’s governance arrangements are consistent with the International Monetary Fund’s advice, albeit adding that the Governor shouldn't be allowed to be chairman or deputy chairman.
'A significant structural change needs to be enduring'
Within the report the National Party says the reforms represent a significant structural change and need to be enduring.
"National’s view is that this process should have sought to reflect a cross-party consensus. Unfortunately the Government has chosen to pursue these reforms without that support."
Bayly says among other things National opposes the removal of “efficiency” from the Reserve Bank’s objectives.
"If you don't have an efficiency what you can end up with is policy being made that sounds great academically and theoretically, but doesn't actually drive efficient outcomes. So we believe efficiency should be in there," Bayly says.
Additionally the removal of an efficiency element from the revised financial stability objective is poorly supported by the policy analysis and does not improve what the Reserve Bank should be seeking to achieve, National argues.
"Reinserting efficiency would address significant concerns that have been raised in public submissions without creating any problems that have not been able to be surmounted in the past," National says.
"Under the new arrangements, the board takes on an executive role rather than acting in an oversight capacity which is common with non-executive boards. This is a fundamental change to the model of decision making in respect of prudential policy and oversight of deposit takers and insurers. The proposed model relies heavily on finding suitable candidates to operate at an executive level on the board."
Bayly suggests such candidates could be hard to find.
"Given the important role that the Reserve Bank plays in the country’s economic settings, National also considers that Parliament should have a greater degree of oversight over the monetary policy remit. Such oversight need not impinge on the ultimate power of the Minister of Finance in issuing the remit but would acknowledge the cross-party interest in the central bank’s monetary policy objectives," National adds.
"Similarly, National considers that the Minister of Finance and the Reserve Bank should both have the ability to initiate changes to the functions of the Reserve Bank. However, in the Bill, this may only occur upon the request of the Reserve Bank but is subject to agreement by the Minister of Finance. It is our view that changes in functions should be subject to some oversight by Parliament such as occurs with an Order in Council that is also a confirmable instrument."
"National also considers that the proposed measures, which were introduced during the select committee process and have not been publicly consulted on, to enable the Minister of Finance to manage the fiscal risk to the Crown associated with Reserve Bank activities fall well short of what any Minister of Finance would require to properly manage risks to the Crown’s financial position," National says.
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