1 Jul 2022

Reserve Bank changes put financial stability as its core role - analyst

10:17 am on 1 July 2022

The running of the Reserve Bank faces its biggest shake-up in decades today as a board of directors takes control from an all-powerful governor.

Reserve Bank governor Adrian Orr.

Reserve Bank governor Adrian Orr retains his place on the bank's board but faces new constraints. Photo: RNZ / Dom Thomas

The new Reserve Bank of New Zealand Act was passed into law in August last year, replacing the old legislation from 1989.

The new board has eight members, including the governor Adrian Orr, and two from the last board, including chair Professor Neil Quigley.

Banking consultant Simon Jensen, from Buddle Findlay, said the new structure changes the RBNZ's core banking objective from soundness and efficiency to financial stability.

He said that matches international practice but believes the changes should have gone further and adopted the Bank of England (BoE) model, which he said was global best practice.

"What that [model] does is realise that there are three core parts to a Reserve Bank. There's the monetary policy part where we currently have a monetary policy committee and I think that works well.

"Secondly, the Reserve Bank has quite a large operational component, it runs a clearing system which for example is many times bigger than the NZX's.

"Lastly, which is where the Bank of England model differs from what we've done, is they've also separated out the prudential supervision part to the extent that it has a regulatory function," Jensen said.

He said the BoE had a separate committee with expertise in areas like banking, risk management, law, finance and economics "with a focus on prudential supervision of banks".

Jensen said that was the area where the RBNZ has the biggest gap compared to the BoE.

Former Reserve Bank official Michael Reddell backed taking sole power from the governor, but questioned if there were enough protections in the new setup.

"We've seen globally that there had been big problems with people who own banks or finance companies getting too close to the regulator, too close to ministers of finance who make these appointments.

"It's one of those areas where you want to lean over backwards to make sure there's no substantive conflict," Reddell said.

He did not have an issue with any of the rules that disqualified people from being on the board, but he believed the rules did not go far enough.

"For example, you can't be a director of a regulated institution and also on the board. But you can be a director of a company that owns a majority stake in a regulated institution."

Reddell recently criticised the appointment of Rodger Finlay to the RBNZ board.

Finlay was the chair of NZ Post (majority owner of Kiwibank), but it has since been confirmed he would depart the role prior to taking the RBNZ board position.

However, Finlay was involved in the central bank's transition board while chair of NZ Post.

The Reserve Bank's new board members:

  • Professor Neil Quigley (chair)
  • Adrian Orr (governor)
  • Susan Paterson
  • Rodger Finlay
  • Jeremy Banks (Rangitāne, Ngāti Kuia)
  • Professor Rawinia Higgins (Ngāi Tūhoe, Ngāi Tahu, Ngāti Ruapani ki Waikaremoana, Ngāti Kahungunu)
  • Byron Pepper
  • Hinerangi Raumati-Tu'ua (Ngāti Mutunga, Tainui)

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