Every New Zealander has a stake in the performance of the Reserve Bank of New Zealand. As we have seen this year, if the Bank gets monetary policy settings wrong, it can trigger inflation, pushing up the cost of living and causing stress for consumers and businesses alike.

The RBNZ's regular reviews of Official Cash Rates also have economy-wide effects. The OCR has a direct effect on interest rates for both borrowers and depositors. By increasing or decreasing interest rates, the RBNZ can stimulate or suppress both economic activity and levels of employment.

The RBNZ's other functions include prudential regulation of banks and insurance companies. This too is a critical role. A banking collapse facilitated by loose regulation could affect millions of Kiwis. At the other extreme, expensive gold-plating of the banking system from over-regulation comes with a higher cost of credit for all Kiwis.

In a real sense, the RBNZ sits at the centre of the economy.

Consequently, news over the last couple of months about hiccups in the Minister of Finance's appointments of a newly reconstituted RBNZ board should concern everyone.

"A resignation and an apology accompany Reserve Bank Appointments" was the headline of last week's contribution to a series of articles by the Herald's Wellington business editor, Jenée Tibshraeny, about the vexed process of appointing a new RBNZ board.

The apology was from Treasury Secretary Dr Caralee McLiesh to Minister of Finance Grant Robertson. It was tendered for Treasury failing to alert Cabinet to a potential conflict of interest of (now) RBNZ board member Rodger Finlay. At the time, Finlay was chair of NZ Post, then majority owner of Kiwibank. But as a proposed RBNZ board member from July 1, 2022, he would have ultimate responsibility for regulating Kiwibank. The issue was overlooked in the papers presented to Cabinet relating to Finlay's appointment to the RBNZ board. No wonder the need for an apology.

The resignation involved a second recent RBNZ board appointee, Byron Pepper. At the time of his appointment, Pepper was a director of insurance company Ando Insurance Group. Ando is not regulated by the RBNZ. But it is substantially owned by another company that is subject to the RBNZ's prudential regulatory oversight. Finance Minister Grant Robertson was quoted saying Pepper had resigned from Ando "to avoid any perception of issues".

The messy appointment process hardly invites confidence in the newly reconstituted RBNZ board. And it raises questions about fundamental processes within the machinery of government.

In its 2014 report, Regulatory Institutions and Practices, the Productivity Commission found that appointment processes for government roles in regulatory agencies were widely variable. Despite multiple safeguards, the Commission found that ministerial certification of proper process "is generally a mere formality".

That criticism may not be the root of the problem here. But it is clear that the process for vetting appointments to the RBNZ board had shortcomings. If that were not the case, there would be no need for ex-post apologies or resignations.

A bigger problem

But the problems with process are perhaps dwarfed by a bigger issue. Does the new RBNZ board have the skills it needs to meet its responsibilities? And, if not, why not?

Before attempting an answer to these questions, an understanding of the context in which they arise is critical.

The Governor of the RBNZ has historically enjoyed sole statutory authority for both the monetary policy and prudential regulatory functions.

This changed in 2019. In March of that year, the Government conferred responsibility for monetary policy on a new Monetary Policy Committee chaired by the RBNZ Governor. The RBNZ board was given powers in relation to the appointment and review of the MPC and its members.

A second important change occurred on July 1 this year. The Government shifted direct statutory responsibility for the RBNZ's prudential regulatory function from the Governor to the reconstituted RBNZ board. The board is permitted, in turn, to delegate prudential regulatory powers back to the Governor. But the new governance arrangements mean that for any powers the board chooses to delegate, the Governor is now accountable to the board for their exercise.

To perform their tasks well, board members – or at least a good number of them – need a deep understanding of prudential regulation and monetary policy.

Both are specialised fields. Monetary policy is the preserve of economists. Think Dr Alan Bollard (himself a former RBNZ Governor) or Professor Arthur Grimes (a former RBNZ chair and now a professor at Victoria University of Wellington's School of Government).

Prudential regulation is also a specialised field. Policy setting in this area requires deep expertise in both economics and banking – either from the industry or central banking sides of the banking fence.

Without this expertise, a board has no prospect of setting policy or critically examining and evaluating regulatory strategy or its enforcement. In the words of the Productivity Commission in its 2014 report, "Governance systems will come to little if an organisation does not have capable leadership with the right mix of skills."

A recent Official Information Act release to former RBNZ economist and blogger Michael Reddell from the Minister of Finance reveals the following were the "priorities agreed for recruitment" for RBNZ board members:

• Governance excellence
• Cultural awareness and expertise (a Te Ao Māori and/or Pasifika world view) and a strong belief in the values of diversity and inclusiveness
• Senior-level experience in financial and prudential regulation and supervision
• Financial and commercial acumen, and
• People leadership, stakeholder engagement, and ESG experience.

A few important observations from this list of priorities are obvious. First, there is no reference to monetary policy or other economic expertise. In a role where a deep understanding of economics is essential, this is a glaring omission.

Secondly, in the list of priorities, expertise in prudential regulation is only ranked third. And it ranks after race-based cultural awareness and other values-based beliefs.

Whether explicitly signalled to potential candidates or not, the Government's list of requirements reveals expertise in monetary policy and prudential regulation were not the Government's principal priority.

The outcome of the recruitment process was perhaps inevitable. Aside from the existing RBNZ chair, Professor Neil Quigley, no one appointed to the newly constituted RBNZ board on July 1, 2022, has any identified economics expertise. And none have first-hand banking industry or prudential regulatory experience.

As Reddell notes in a blog post on his Croaking Cassandra website, both Finlay and Pepper have worked in financial institutions. But "neither has any apparent background in prudential or related policymaking, financial stability, etc ..."

Each of the newly appointed RBNZ board members may have impressive credentials in their own fields. But collectively they lack the expertise required to perform the RBNZ board role effectively.

Late last year, The New Zealand Initiative surveyed New Zealand's largest 200 companies about the performance of regulatory agencies. The results were revealing – but, in light of the RBNZ board appointment process, not surprising.

While the RBNZ came out relatively well in the survey, out of 23 KPIs, the transparency and robustness of appointment processes for the leadership of regulatory agencies generally ranked second to last.

The survey also raised concerns about the increasing politicisation of regulatory agencies. And about the lack of regard for regulators' statutory objectives.

Following various scandals involving political appointments to regulatory agencies in the 1990s, the United Kingdom parliament created an independent agency to provide assurance on regulatory board appointments. The Commissioner for Public Appointments is tasked with ensuring "the best people get appointed to public bodies free of personal and political patronage."

The New Zealand Initiative recommended the Government follow this model in our 2018 report, Who Guards the Guards? Regulatory Governance in New Zealand. We repeated that recommendation this year in Reassessing the Regulators, reporting on our 2021 survey results.

If a change in approach is not forthcoming, the malaise that has plagued the RBNZ board appointment process will continue to spread.

Citizens and businesses are expected to know the law. So, shouldn't regulators and their governing bodies understand what they regulate? It is hardly asking too much.