Brash Don: Reserve Bank of New Zealand Amendment Bill — Second Reading 
Brash Don: Reserve Bank of New Zealand Amendment Bill — Second Reading 
[Volume:610;Page:7603] 
Dr DON BRASH (NZ National) 
: 
 I am glad to speak in favour of this bill. It was in fact introduced into Parliament while I was still the bank’s governor by a narrow margin. I supported it then and I support it now. It continues a tradition in this House—running back at least 14 years—of cross-party support for Reserve Bank legislation. The 1989 Reserve Bank bill was introduced by the then Labour Government and was supported without dissent in the House. It is fair to note that Sir Robert Muldoon was in hospital at the time! 
The bill does four main things as the Minister has pointed out. Firstly it gives the Reserve Bank a few more powers to deal with a bank distress situation and those changes are entirely uncontroversial. Secondly it gives the bank a few more powers to prevent unscrupulous parties from misusing the words “bank” “banker” and “banking”. The bill as amended by the Finance and Expenditure Committee deals with that situation in an entirely appropriate way. Thirdly the bill changes the Reserve Bank governance arrangements in the way described by the Minister. 
As the Minister said that change is a result of the recommendations of Professor Lars Svensson in his report of February 2001. That review found that with the exception of about 18 months from mid-1997 to early 1999 the Reserve Bank had done a good job in running monetary policy—and modesty prevents my quoting too extensively from Professor Svensson’s report. Certainly he felt that monetary policy in New Zealand was “currently entirely consistent with the best international practice of flexible inflation targeting with a medium-term inflation target that avoids unnecessary variability in output interest rates and the exchange rate.” That is a pleasing outcome. 
But Professor Svensson did suggest as the Minister notes some changes in the Reserve Bank’s governance arrangements and more particularly the removal of the deputy governor from the board and the removal of the governor from the role of chair of the board. I am bound to say that I am not entirely comfortable with removing the deputy governor from the board. I feel uneasy about that in that it leaves the board somewhat vulnerable to having only a single channel of communication from the institution to the board. If the governor were unscrupulous it would reduce the prospects of the board discovering that until it was too late. Nevertheless I accept that the majority view of those looking at the report was in favour of removing the deputy governor and I will certainly not make an issue of that. 
I support the removal of the governor from the role of chair of the board. I think that in all other central banks the governor of the central bank also chairs the board. 
Sitting suspended from 6 p.m. to 7.30 p.m. 
Dr DON BRASH 
: Before the dinner break I was pointing out that one of the four things the bill does is to change the governance arrangements for the Reserve Bank. It removes the deputy governor from the board of the bank and I mentioned that I was not entirely happy with that. The disadvantage of doing so is that the board of the bank has only a single means of communication from the institution to the board. In my view that leaves the board somewhat vulnerable if the governor himself or herself has a less than straightforward way of dealing with the board. But that is not an issue on which I would wish to oppose the bill. 
The other major change in the governance arrangements for the bank involves removing the governor from the role of chair of the board. In every other reserve bank and central bank that I am aware of the governor is the chairperson of the board. So it is not surprising perhaps that when the 1989 Act was put through the governor was left in the chair. But the New Zealand Reserve Bank has an unusual governance arrangement. In fact the governor has all the decision-making authority in the bank. The board has no decision-making authority in the bank certainly not in respect of monetary policy. The board’s function is to monitor the performance of the governor. It is indeed somewhat odd that in those circumstances we have left the governor in the chair. It makes for a rather uncomfortable structure. Indeed between 1989 and the present time the bank has tried to deal with that by creating a committee of the non-executive directors who in turn elect a chair and that person has acted as a quasi-chairperson of the board in terms of monitoring the governor’s performance. So I strongly support that change. It is worthwhile and one that should have been unnecessary had we got the 1989 legislation right originally. 
The fourth point dealt with by this legislation as mentioned by the Minister is the establishment of designated payment systems designated clearing systems designed effectively to enable the New Zealand dollar to enter what is called CLS Bank International as mentioned by the Minister. “CLS” is an acronym for continuous linked settlement. In 1974 almost 30 years ago a bank called Herstatt Bank in Germany collapsed and that made the world aware of what has become known as Herstatt risk. It is to deal with Herstatt risk that this bill provides for designated payment systems. 
Herstatt risk is the risk that arises in the settlement of foreign exchange transactions across time zones. For example if a New Zealand bank buys US dollars from a bank in New York it has to credit the correspondent bank of that New York bank in New Zealand with New Zealand dollars and it does that of course in New Zealand trading hours. It may not receive the US dollars that it is buying for 6 8 10 or 12 hours’ time when the New York banking system opens for business. Should the New York bank collapse between the time the New Zealand bank pays out New Zealand dollars and receives US dollars the New Zealand bank is very vulnerable indeed to that exposure. It is not a minor exposure as banks have tended to assume but a very major exposure and for the last 29 years the central banks of the world and the banks of the world also have grappled with dealing with that particular issue. In the end they created CLS Bank International which effectively enables foreign exchange transactions across time zones to be dealt with with minimal risk because it enables currencies to be exchanged in real time rather than with the long time gap that is involved in the present structure. 
When I was governor of the bank I tried to get the New Zealand dollar into CLS Bank International. CLS Bank International has been operating now for about 12 or 18 months. It now has the US dollar the yen sterling the euro and the Australian dollar in it but not the New Zealand dollar. It has not got the New Zealand dollar precisely because until this bill is passed it is not possible for New Zealand to meet the conditions required by membership of CLS Bank International. 
I strongly support all aspects of the bill including that rather technical issue to significantly reduce the risk to the New Zealand banking system that is inherent in the current arrangements for settling foreign exchange transactions.