Finance Minister Nicola Willis rejected Treasury advice to remove the Reserve Bank’s governor from its board after the resignation of Adrian Orr, documents show.
Orr abruptly resigned in March this year in what the Reserve Bank of New Zealand at the time said was a “personal decision”, but later was revealed to have been over disagreements about the bank’s funding and concerns raised by board members.
The board’s handling of the matter led chairperson Neil Quigley to also resign in August.
Orr’s permanent replacement in the role of governor, Anna Breman, was announced last month.
A report from Treasury shows it provided advice to Willis in July proposing options for changes to governance settings at the central bank, with the Treasury recommending that a Financial Policy Committee (FPC) be set up in law and the governor be removed from the RBNZ board.
The aim was to separate the RBNZ’s prudential policy – relating to the bank’s relationship with regulated entities like commercial banks, insurers, and other deposit-takers – from its other responsibilities including setting monetary policy.
Other options Treasury put forward included setting up the FPC but not removing the governor from the board; removing the governor from the board but continuing to have the board make prudential policy decisions; or sticking with the status quo other than formally delegating prudential policy decisions to the Financial Stability Oversight Committee (FSOC) that had already been set up.
The preferred option of an FPC could be expected to cost between $200,000 and $400,000 a year or more, depending on design, require the work of progressing legislation, and could increase complexity for the RBNZ – which would then have two policy committees as well as its board.
However, Treasury argued it would enable more prudential policy expertise, and removing the governor from the board would mean clearer lines of accountability.
Treasury pointed out many Independent Crown Entities had boards with no members of the executive, but also noted central banks in other countries typically had the governor as a board member.
“It is difficult to identify ‘best practice’ arrangements applicable to the RBNZ,” Treasury wrote.
“RBNZ’s governance structure reflects its multiple functions, recognising that the MPC is a statutory, independent decision-making body within the structure of the RBNZ, and the special status of the governor and unique nature of their relation to the Board.”
Treasury said if the decision was made not to change the RBNZ’s governance through legislation, it would support the status quo with prudential policy formally delegated to the FSOC.
In the end, Willis decided to have the Reserve Bank set up a Financial Policy Committee – but not to remove the governor from the board.
