Treasury commissioned RBNZ review finds 'strong case' for reform
A review of the Reserve Bank's decision-making and governance by former State Services Commissioner Iain Rennie found a strong case for reform at the central bank that would strengthen its decision-making process and improve accountability.
The report identified four areas ripe for reform: formalising decision-making committees for monetary policy and financial regulation; formally acknowledging the broader remit of the bank in maintaining financial stability; narrowing the board's focus; and aligning legislation with practice.
The Rennie report was commissioned by the Treasury, which received it in April last year, but was only released on the government department's website yesterday with a selection of documents on the government's two-stage review into Reserve Bank Act chaired by Transparency International New Zealand chair Suzanne Snively.
Rennie recommended improving the clarity of the policy framework to develop a policy statement on financial sector regulation, establish separate decision-making committees for its monetary and prudential operations with ministerial appointments, have the State Services Commission advise on executive appointments, and release committee meeting minutes to improve transparency. He also recommended narrowing the board's focus to monitoring the governor's performance rather than the dual role of monitor plus adviser.
"Overall, the proposals seek to evolve the RBNZ's legislative framework in a way that is both consistent with practice seen elsewhere in the New Zealand public sector and in central banks internationally that have similar spans of business to that of the RBNZ," Rennie said. "Successful institutions seek to adapt in a timely fashion to changes in their environment and to developments in our knowledge about governance and decision making rather than have change forced on them in the aftermath of a significant performance failure."
The Treasury backed the basic thrust of Rennie's review in a Nov. 1 letter to Finance Minister Grant Robertson, with secretary Gabriel Makhlouf saying it was the right time to review the central bank's statutory framework, which could be strengthened by focusing on the act's financial stability provisions, the bank's own decision-making and accountability, and whether monetary policy operations were fit-for-purpose.
"In the Treasury's view, a comprehensive review of the RBNZ Act provides an opportunity to strengthen a fundamental pillar of NZ's macroeconomic framework, enhance and reinforce the Reserve Bank's independence and build institutional resilience," Makhlouf said. "It would put the bank in a strong position to meet the challenges of tomorrow's economy."
However, Treasury officials acknowledged the difference of opinion between themselves and the RBNZ in a Nov. 10 report to Robertson, saying "we understand that the Reserve Bank disagrees with some of the report's recommendations."
In an unattributed Dec. 11 memo to the legislative review panel, the Reserve Bank said Rennie's analysis underpinning the report was "insufficient" and his conclusions "unreliable" or needing deeper work.
"The report does not define the nature of the problem it is seeking to address and needs a clearer analysis of the current decision-making framework and why it needs amending," the document said. "In proposing a particular set of changes to the decision-making framework, 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 RBNZ conceded separate decision-making committees for financial and monetary policy decisions was "reasonable", but said the report didn't consider all the factors of having external members on those committees. It also scotched the notion of having the SSC advise on appointing the governor, saying the board was better placed to make a recommendation on executive appointments.
The central bank said a "significant limitation" of the report is that didn't fully articulate a governance proposal and that there wasn't any examination of the monetary authority's other functions, such as currency distribution, providing payments services, or its own internal arrangements.
Peer reviewers of Rennie's report were more forgiving, with American economist Donald Kohn and British economist Charles Goodhart largely agreeing with the main recommendations. Bank of International Settlements head of central banking studies David Archer, a former RBNZ assistant governor, also endorsed a shift to decision-making committees, making minutes available to improve accountability, and narrowing the board's focus to appointments and monitoring performance, but opposed strengthening the minister's role.