Against the backdrop of the government's review of the Reserve Bank Act, a report commissioned by the Treasury is recommending a series of changes to the Reserve Bank's decision making and governance arrangements.
The recommendations include shifting to a committee-based decision-making model for both monetary and financial policy to replace the current single decision maker model where the Reserve Bank Governor reigns supreme. It also calls for the minutes of monetary policy committee meetings to be released with a short time lag, and for the removal of the Reserve Bank board's governance responsibilities.
The report by Iain Rennie entitled Decision-making and Governance at the Reserve Bank of New Zealand has been posted this week on Treasury's website. Also posted are a summary of the report, a response from the Reserve Bank, and a series of other externally commissioned and associated papers. Rennie, now a public sector consultant, is a former State Services Commissioner and ex-Deputy Secretary to the Treasury.
Rennie's report says Treasury didn't commission, (and pay for), his review on the basis of criticisms of the Reserve Bank’s performance. And nor was the review commissioned with a view that different decision making and governance arrangements would necessarily have led to different outcomes in monetary and/or financial policy.
Nonetheless Rennie's recommendations for change have stung the Reserve Bank. In its response the central bank says Rennie makes several suggestions that are sensible, which it supports. This includes the view that committee-based decisions tend to be better than those made by individuals. However, the Reserve Bank labels much of the analysis underpinning Rennie's report as "insufficient" meaning his conclusions are "unreliable, or would require further analysis."
"The report does not define the nature of the problem it is seeking to address and needs clearer analysis of the current decision making framework and why it needs amending," the Reserve Bank argues. "...the report fails to provide options and does not demonstrate why the particular changes proposed would result in better policy decisions for monetary or financial policy in New Zealand," the Reserve Bank says.
"A significant limitation of the report is that it does not provide a fully articulated proposal for the governance of the Reserve Bank," the Reserve Bank adds.
Rennie makes recommendations in three key areas being the codification of a committee, the role of the Reserve Bank's board, and, the role of the Treasury. The key recommendations in each of these areas are summarised below.
Codification of a Committee
• The key recommendation is to legislate for a committee-based decision-making
model for monetary and financial policy to replace the current single decision maker
model (Governor). This move is motivated by a variety of academic
research pointing to better decision-making in committees, and an expanded
remit for the Reserve Bank since 1989. Committees for monetary, macroprudential
and micro-prudential policy are suggested.
• Each committee should have goal clarity, guidance on trade-offs with competing
policy objectives, and direction on how to manage particular economic shocks.
To achieve this, the report recommends retaining the Policy Targets Agreement
(PTA) and reframing it as an agreement between the Minister of Finance and
the committee members. An analogous statement on financial policy should be
• It is recommended that strategic policy documents such as the PTA be moved
from a person to time-dependent document reviewed every six years. By delinking
the agreement and the Governor’s appointment process, a Governor
could utilise advice from internal and external sources in negotiating the
agreement. The arrangement would also permit a more open and transparent
discussion of potential changes.
Legislation should stipulate a charter for each committee’s operation agreed
between the Minister of Finance and relevant committee members. This
agreement should be reviewed every five years. A periodically-reviewed charter
would allow flexibility for committees’ operations to adapt over time without the
need to amend primary legislation. Charter agreements can also provide public
transparency as to committee operations.
• Legislation should stipulate that policy committees have a membership of
between five and seven members, split between internal and external members.
The recommended committee size balances the benefits of increasing diversity
of opinions via larger committees with more effective deliberation in smaller
committees (and a limited domestic talent pool). The report sees a need to
balance internal and external members to reduce the risk of “group-think” from
the hierarchical relationship between the Governor and other executives.
• Minutes of monetary policy committee meetings should be released with a short
lag, including some individual attribution of contributions to the debate. It is
argued this set-up is likely to improve the incentives for individual members to
take care in terms of their role and exercise due diligence. These benefits need
to be balanced against the risk of transparency suppressing deliberation and
• A collegial public stance would be adopted by committee members for financial
policy. Micro-prudential policy requires clear guidance or direction to protect
soundness. Macro-prudential policy settings may remain in place for an
extended period, requiring a degree of certainty for business planning.
• The Minister of Finance should have the right to appoint and remove the
external monetary and financial policy-making committee members and senior
executive members, in line with the suggested move to committee-based
decision-making. This appointment right would reflect the delegation of
• The Minister of Finance should receive advice on the appointment of the
Governor and Deputy Governors from a panel convened by the State Services
Commissioner. This would bring the appointment process in line with that used
for other senior state sector executives. Advice on appointing external members
could be taken from a suitably qualified nomination committee, with a
requirement that the Minister consult other political parties, consistent with the
process used for the Guardians of the New Zealand Superannuation Fund.
The Reserve Bank Board
• The Reserve Bank Board should retain its independent performance assurance
function. This recommendation acknowledges that an internal board with
access to a rich set of observations and information is likely better placed than
an external agency to assess the performance of the Reserve Bank.
• However, the Board’s governance responsibilities should be removed. The
ability of the Board to provide independent performance assessment is seen to
conflict with its current role in executive responsibilities (e.g. providing advice to
the Governor). Narrowing the scope of the Board’s role would provide clarity
and coherence to its role.
• The membership of the Board should be limited to non-executive directors. It
would be inappropriate for the Governor to sit on a Board focussed on
independent performance assessment. Similarly, the Minister of Finance should
appoint the Chair and Deputy chair of the Board, given its purpose would be to
provide advice to the Minister.
• The Board should be appropriately resourced and staffed to carry out its
independent performance assessment function. Board members should be able
to effectively contribute to high quality judgements surrounding the Reserve
Bank’s regulatory, monetary policy decision and implementation, and
organisational stewardship performance.
• The Treasury and the Reserve Bank would jointly lead the proposed public,
periodic review of the PTA. The Treasury would lead, in consultation with the
Reserve Bank, the proposed policy statement on financial regulation.
• Finally, the Treasury would be the administering department for the Reserve
Bank Act, with the exception of Parts 4 and 5 (which relate to banking
supervision, oversight of payments systems and regulation of settlements
systems), which would continue to be administered by the Reserve Bank.
Current Reserve Bank responsibilities a given
Rennie says his report takes the Reserve Bank’s current responsibilities as a given. He notes that internationally there's debate as to whether financial stability should be the responsibility of a separate authority leaving the central bank with a narrower mandate focussed around monetary policy.
Pressure has built for changes to be made to the Reserve Bank's decision making and governance processes for several years. This has followed the Reserve Bank's decision to implement loan to value ratio (LVR) restrictions on banks' residential mortgage lending, and after the four controversial hikes to the Official Cash Rate in 2014 that were reversed in 2015.
Five years ago bank lobby group the New Zealand Bankers' Association (NZBA) complained there's no official government departmental oversight of the Reserve Bank with its prudential policies effectively not subject to outside scrutiny. NZBA noted in contrast the Reserve Bank of Australia’s mandate focuses on monetary policy, with macroprudential responsibilities held by the Australian Prudential Regulation Authority, which is subject to a "different level of independence and oversight."
“The current Reserve Bank Act is now nearly 30 years old. While it has served New Zealand well in general, now is the right time to undertake a review to ensure our monetary policy framework still provides the most efficient and effective model for New Zealand," Robertson said.
“This review will be undertaken in two phases. An Independent Expert Advisory Panel will be appointed by the Minister of Finance to provide input and support for both phases. Phase One of the Review will focus on the election commitments made by Labour to add maximising employment to the price stability objective of the Bank, and to provide for a committee decision-making model for monetary policy decisions."
“In addition, the Review will consider whether changes are required to the role of the Reserve Bank Board as a consequence of the alterations to the decision making model," said Robertson.
Orr to lead Reserve Bank through a period of change
In December Robertson announced that NZ Super Fund CEO Adrian Orr would succeed Reserve Bank Acting Governor Grant Spencer in March, noting Orr has the skills to successfully lead the Reserve Bank through a period of change.
Also in December Robertson announced the members of an Independent Expert Advisory Panel for the Reserve Bank Act review. Robertson says the Panel will provide input and support for the Review, will be expected to test Treasury’s findings, and produce its own report of its views on the Treasury’s conclusions and recommendations to Robertson on Phase 1 of the Review.
Robertson's panel comprises Suzanne Snively who is a former Reserve Bank director and an economic strategist, Malcolm Edey who is a consulting economist and academic at the University of Sydney and a former Assistant Governor of the Reserve Bank of Australia, and Girol Karacaoglu who is head of the School of Government at Victoria University, ex-Deputy Secretary at the Treasury and former PSIS CEO.
"The Reserve Bank and the Treasury will jointly develop a list of areas for Phase 2 of the Review where further investigations of the Bank’s activities may be desirable. The Panel will assist in the development of this list. Phase 2 will also incorporate the review of the [Reserve Bank's] macro-prudential framework that was already scheduled for 2018," Robertson said.