Cabinet’s decisions announced today by Finance Minister Grant Robertson to reform the governance and accountability arrangements of the Reserve Bank are commendable. Key among the decisions is establishing a governance board that will be responsible for all functions of the Reserve Bank, except those undertaken by the Monetary Policy Committee.

The changes signalled by the Minister of Finance will resolve one of the most troubling public sector governance problems said New Zealand Initiative Chair, Roger Partridge.

“The Reserve Bank governor currently has unprecedented power, with sole decision-making responsibility over banks’ conditions of registration. As the Initiative disclosed in our April 2018 report, Who Guards the Guards? Regulatory governance in New Zealand, successive governors’ lack of oversight would not matter if our central bank’s regulatory performance were consistently exemplary. But our research found the Reserve Bank commanded neither the respect nor the confidence of the financial institutions it is tasked with regulating.” says Partridge.

Among other recommendations in Who Guards the Guards?, the Initiative recommended that the government should replace the Reserve Bank’s current “single-member decision-making model” with a board governance model that is common among other regulatory agencies, including the Reserve Bank’s sister regulator, the Financial Markets Authority. The Initiative is “extremely pleased” the government has adopted this recommendation, Partridge said.

The Initiative has reservations about other aspects of the Cabinet’s decisions concerning the Reserve Bank’s governance and accountability. For example, the proposals announced by the Minister of Finance will see the role of “external monitor” of the Reserve Bank transferred to The Treasury.

The Initiative had recommended that this monitoring function should be transferred to a new, independent specialist monitoring agency. This recommendation was echoed in Australia earlier this year by the Hayne Royal Commission into banking. Commissioner Hayne recommended a new and independent authority to oversee both the Australian Prudential Regulatory Authority (which performs the prudential regulatory function undertaken here by the Reserve Bank) and the Australian Securities and Investment Commission (Australia’s equivalent of our FMA).

“Like the Hayne Royal Commission, we recommended an independent oversight authority because of systemic shortcomings in oversight of regulatory agencies by government departments. These shortcomings were revealed by the Productivity Commission in its 2014 report, Regulatory Institutions and Practices. Time will tell whether The Treasury can perform its new external monitoring role better than other government departments.” Partridge said.

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