Legal Underpinnings of Good Governance Frameworks at Central Banks - - PDF document

Legal Underpinnings of Good Governance Frameworks at Central Banks

C E N T R A L B A N K G O V E R N A N C E F O R U M D U B A I D E C E M B E R 8 - 9 , 2 0 1 4 P R E S E N TAT I O N B Y M R . W O U T E R B O S S U 1 W B O S S U @ I M F. O R G

Key Take Aways:

2

 Designing sound governance arrangements for Central

B k i l b l i t Banks is a complex balancing act…

 ….between effectiveness and “checks and balances”  Central banks laws are critical in providing sound

governance arrangements

 But there is no “one size fits all”

Overview

3

 What is governance? Definition and Key Concepts  Daily Management  Oversight  Policy Formulation

R l f L l F k C t l B k L d

 Role of Legal Framework: Central Bank Laws and

Other Legal Instruments

 Conclusions

What is Governance?

4

• Governance is the ensemble of structures and

arrangements arrangements…

• …that ensure an organization can make decisions

effectively and soundly…

• …in the pursuit of its objectives.

F t l b k th t t d

 For central banks, these structures and

arrangements are always established in central bank law.

Key Concepts

5

 Daily management: Who runs the organization on

day-to-day basis? Who implements policy? y y p p y

 Oversight: Who keeps oversight over daily

management?

 Policy Formulation: Who takes key policy decisions

pertaining to the central bank?

 Clear Responsibilities: Ensures effective decision  Clear Responsibilities: Ensures effective decision

making.

 Checks and Balances: Ensures sound decision-

making.

Daily Management

6

 Traditionally, central banks were managed by one

person with presidential powers: the Governor person with presidential powers: the Governor

 Modern central banks increasingly move toward

collegial decision making in daily management

• I.e. in the form of Executive Board or Management Committee

C ll i lit h i t l t l

 Collegiality enhances internal controls…  …and establishes checks and balances within daily

management

Oversight - General

7

 Almost all central banks have a body charged with

• versight over daily management
• Many names: Board of Directors, Council of Regents, Supervisory

Board, Court…

 Should be composed of majority of non-executives

• Is uncontroversial, but challenging to implement
• Non-executives should be competent and autonomous

 Who chairs the oversight body?

g y

• Traditionally the Governor, but this is not best practice under

Corporate Governance standards

• Some central banks have non-executive chairperson
• Are central banks different?

Oversight and Decision Making

8

Oversight does not imply absence of decision-making i l d i i ki f h i h b d Typical decision-making powers of the oversight body:

• Approve Bye Laws, Code of Conduct
• Approve accounting, audit and internal control

frameworks

• Approve risk management framework
• Approve annual accounts, incl. profit reservation and

distribution

• Appoint external auditors

Oversight - Specialized Sub-committees

9

 Increasingly tasks are delegated to specialized sub-

committees

• Most prominently Audit Committees
• Also Remuneration and Appointment Committees

 Should only be composed of non-executives  Advisable to grant specialized sub-committees

explicit legal basis in central bank law p g

• Should be authorization or requirement?

 May be useful to foresee membership of external

advisers

Policy Formulation

10

 In most central banks, the oversight body also formulates

key policies

• Monetary, exchange rate, financial sector policies

 In some central banks, monetary policy formulation is

entrusted to separate body

• E.g. Monetary Policy Committee of Bank of England

 Both approaches have pros and cons

Ch i i f li t l

• Choice is one of policy, not law

 But whatever the choice, the central bank law should lay

down clear, adequate and consistent rules

• Which body oversees policy implementation by daily management?

Common Concern for All Bodies

11

Composition of Body(ies) is critical:

 Competence: Members jointly should have

sufficient understanding of, and experience in, the matters of their purview

• Requires both individual quality and collective diversity

 Autonomy: The members should individually be

autonomous from the Government and private autonomous from the Government and private interests

• Role of appointment procedures and code of conducts

Central Bank Laws - Overall Approach

12

 Central Bank Laws should allocate clear and

consistent responsibilities… consistent responsibilities…

 …for daily management, oversight and policy

formulation…

 …to the decision-making bodies (“organs”) of the

central bank… ce t a ba …

 …whilst ensuring that these bodies keep each other

in check.

Central Bank Laws – Typical Problems

13

 Conflicting allocation of responsibilities

• E.g. both policy formulation body and daily management have
• E.g. both policy formulation body and daily management have

powers over implementation of monetary policy

 Too much power for one person or body

• E.g., daily management is concentrated in Governor alone

 Daily management controls/influences composition

• f oversight body
• f oversight body

 Law suggests collegial decision making, whereas in

fact there is none

Role of Other Legal Instruments

14

 Whereas key features of central bank governance are

to be included in central bank law… to be included in central bank law…

 …other legal instruments may be relevant as well:

• Bye Laws: Set out in more detail how the decision-

making of the central bank operates

• C d f C

d t I t i d ti d

• Code of Conduct: Imposes certain duties and

transparency requirements on members of decision- making bodies

Conclusions

15

 Some governance issues are shared between central

banks and private firms banks and private firms

• Quality of board
• Checks and balances on CEO

 But some aspects of central banks are idiosyncratic

• Policy formulating oversight board vs. distinct policy formulation

body

• Autonomy requirement

Conclusions (2)

16

 Some aspects of private firms are feeding into central

bank governance bank governance

• E.g. Audit and other Committees

 But on some issues, central banks are actually ahead

• f most private firms
• E g collegial decision making within daily management
• E.g. collegial decision making within daily management

17

Questions?