Independent Panel assisting the Government will recommend shifting ultimate power away from RBNZ Governor; also will suggest industry levies to fund RBNZ's prudential operations

By David Hargreaves 

The Independent Panel assisting the Government in its review of the Reserve Bank Act is to recommend making the board the governing body of the RBNZ - thus shifting the ultimate power that currently resides with the Governor.

The Panel is also set to recommend re-evaluation of the the RBNZ's funding model - including the option to fund the central bank's prudential operations through industry levies.

These are just early indications of changes the Independent Panel seeks as the RBNZ Act review enters its second and final stage - but it's worth noting that most of the changes that were recommended by the Panel in "Phase 1" of the RBNZ Act review were adopted by the Government, which suggests these new fairly far-reaching suggestions by the Panel have a good chance of being picked up later too.

At the moment the main power at the RBNZ resides in the hands of the Governor - with the board having mainly a monitoring role. 

The Panel will be fleshing out its views on the subject later on as part of "Phase 2" of the review. Also included will be more detail on its thoughts about the potential for a new funding model for the bank, possibly involving industry levies.

The Government on Monday released the outcome of Phase 1 of the review, which included creation of a new Monetary Policy Committee (MPC) to set interest rates and the widening of the monetary policy brief to include targeting employment alongside inflation.

The Phase 1 terms of reference actually included consideration of whether changes are required to the role of the Reserve Bank Board as a consequence of the changes to the decision making model.

Few changes have been made at this point, although one change not highlighted in the Monday release is that the Minister of Finance will now have the power to appoint the chair and deputy chair of the board. At the moment while all the board members are Government appointees the board itself then picks the chair and deputy.

'Governance changes warranted'

However, the Independent Panel of Suzanne Snively (Chair), Malcolm Edey and Girol Karacaoglu in its report on Phase 1 of the review says that while it recommended only limited governance changes in response to the introduction of the MPC, "some further governance changes may be warranted". The Panel notes "the unusual nature of the Bank’s governance arrangements, both in the New Zealand state sector and amongst central banks internationally".

"The Panel’s view is that wide consideration should be given to the Bank’s governance model and structure as part of phase 2 of the review."

Minister of Finance Grant Robertson said on Monday that Phase 2 of the Reserve Bank Act was currently "being scoped", with announcements on the final scope to be made by the middle of the year and subsequent policy work will commence in the second half of 2018. This phase of the review will incorporate the review of the macro-prudential framework that was already scheduled for this year.

The Independent Panel's report says that a "key issue" is the lack of separation between the governance and policy/operations roles in the Bank at present.

"Phase 2 of the review should consider the relative allocation of responsibilities between the Governor and the Board, and should provide advice on making the Board the governing body of the Reserve Bank," the Panel says.

'Reconsideration of the board's composition'

"Any such changes will require reconsideration of the composition of the Board and the required skills of members."

But there is more; the Panel also believes that the second phase of the review should consider the introduction of a committee(s) for financial policy and re-evaluate the Bank’s funding model, particularly for financial policy.

"Phase 2 should also consider the Board’s ability to undertake reviews of the Bank’s financial policy function."

So, specifically, the Panel's saying that a review of the Bank’s governance structure should be conducted in phase 2 of the review, and include "at least include consideration" of:

• constituting the Board as the governing body of the Reserve Bank;
• the introduction of a committee(s) for financial policy;
• the size and composition of the Board (including the Governor’s position on the Board);
• the Board’s advisory role beyond monetary policy;
• the skills required of Board members, including appointment criteria for Board candidates; and
• whether the Board should undertake periodic substantive reviews of the performance of the Bank in relation to financial policy.

"For the avoidance of doubt, the Panel’s views on the scope of phase 2 of the review as expressed in this report are not exhaustive but relate to issues directly related to the matters in this report," the Panel says.

The issue of the funding model for the RBNZ is therefore mentioned only briefly in the Panel's report.

At the moment the RBNZ receives no direct taxpayer funding through the Parliamentary appropriation process. Its main source of income is the return on investments held, which are funded by the issue of currency and by the RBNZ’s $2.8 billion of equity. 

Funding agreement

Under the Reserve Bank Act, the Minister of Finance and the RBNZ Governor have a five-year funding agreement specifying the amount of the RBNZ's income to be used to meet operating expenses in each of those years. The size of the dividend paid to the Crown is determined by the Minister of Finance each August on the recommendation of the RBNZ.

The RBNZ has noted that the "tight" current funding agreement, running until 30 June 2020, provides for annual funding increases of about 1%.

While any move to industry levies isn't likely to thrill the banks and would likely be opposed, the Financial Markets Authority, established in 2011, does obtain some funding directly from levies on the financial markets participants it regulates, so, there is an existing industry model - and these levies do include the banks.

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