Financial bodies call for ‘dual board’ in RBA reform

A number of significant changes to the Reserve Bank’s governance arrangements have been proposed in submissions made to the RBA review by industry association.

The Australian Banking Association (ABA) has suggested that a dual board structure should be considered consisting of a corporate governance board and a monetary policy board, with a limited number of seats on each board. 

According to ABA, the corporate governance board would be chaired by an independent director instead of the RBA governor, while board minutes and deliberations would be reported to the Treasurer and summarised publicly.

Meanwhile, the monetary policy board would continue to execute on monetary policy and meet per its regular monthly schedule.

This board would reflect a broader skills matrix by consisting of a limited number of voting members — such as the governor and the deputy governor — alongside monetary policy experts from outside of the central bank and experienced representatives of key sectors of the real economy. This latter category would be to “reflect the practical impact on the real economy of monetary policy implementation”. 

ABA is unsure whether these experienced representatives should be granted voting powers. It did, however, suggest that if granted voting powers, they would need to cut all ties to for-profit or not-for-profit entities in the private sector. 

This board would also include a Treasury department member in a non-voting capacity to support the alignment of fiscal and monetary policy and to confirm the RBA’s independence from the government.

In its submission, the Business Council of Australia (BCA) floated a similar idea, noting that the RBA is quite unusual in that it does not separate governance from monetary policy decision-making. 

The BCA argued that by separating monetary policy decision-making from the board into a separate committee, the board could perform more of a governance role and include non-executive board members who would report independently to the Treasurer and Parliament on the performance of the bank and monetary policy. 

Commenting on the board makeup, BCA said that while current external, part-time board members have the benefit of high-level business and commercial board experience, the board may also benefit from more members with the technical expertise to further scrutinise the policy recommendations. 

“In practice, this could enhance external scrutiny and input into monetary policy decisions,” BCA said.

Regarding the Treasury secretary’s current ex-officio role on the RBA board, the BCA said that this appeared to be out of step with international practice.

“Having a representative of the government in the board room could be perceived as compromising the independence of the bank and is a potential conflict of interest in so far as fiscal and monetary policy are at a cross-purposes,” the BCA claimed.

“The RBA Act already mandates consultation and coordination with Treasury, so it is not clear what the Treasury Secretary’s presence on the board adds to those statutory provisions and obligations.”

Touching on board appointments, the BCA said while they are currently made by the Treasurer from a list of candidates maintained by Treasury and the RBA, “it is not clear why Treasury and the RBA should enjoy an effective veto over appointments to the board”.

“Appointments to the position of governor and deputy governor should be made on the basis of an open and internationally competitive selective process, such as that used to recruit governors of the Bank of England,” the industry association said.

“This would better align with global best practice and help to ensure the global talent pool can be accessed. It could, however slow an already glacial rate of career progression at very senior levels within the bank, although this is a challenge for all organisations.”

In line with international peers

The Australian Financial Markets Association (AFMA) also expressed support for reform of the RBA’s board structure in its submission.

“In our view the RBA board should have multiple monetary policy economists and separately multiple experts in financial markets, given that financial markets are the mechanism by which monetary policy is implemented and that market data helps inform monetary policy,” it said.

“With the data available today from banks there are far more efficient and accurate ways to gain the insights into business activity that were once provided by the current breadth of business representatives on the board.”

AFMA opined that its recommendation would bring the board more in line with international peers and allow for a more open dialogue on the range of views on monetary policy matters.

“We do not suggest that it would be necessary to name individuals (unless they so desired) in relation to the variety of views expressed in the Minutes, but being able to see the range of views will assist the market in understanding how finely balanced decisions are and what potential they might have to change over time,” AFMA said.

Additionally, AFMA said that it may be helpful for the RBA board to have expertise on the economic challenges of climate change amid the transition to a low-carbon economy.

In an update late last month, the panel responsible for the RBA review said it had heard suggestions for ways to increase the clarity of the board’s role and strengthen its accountability and composition to support effective future monetary policy decision-making.

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