Legal Underpinnings of Good Governance Frameworks at Central Banks 1 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 W B O S S U @ I M F. O R G Key Take Aways: 2 Designing sound governance arrangements for Central Banks is a complex balancing act … B k i l b l i t ….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 Role of Legal Framework: Central Bank Laws and R l f L l F k C t l B k L d 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 . For central banks, these structures and F t l b k th t t d 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 Collegiality enhances internal controls… C ll i lit h i t l t l …and establishes checks and balances within daily management
Oversight - General 7 Almost all central banks have a body charged with oversight 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 Typical decision-making powers of the oversight body: i l d i i ki f h i h b d • 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 Choice is one of policy, not law Ch i i f li t l 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 of oversight body of 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 Code of Conduct : Imposes certain duties and d t I t i d ti d 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 of most private firms E g collegial decision making within daily management E.g. collegial decision making within daily management
Questions? 17
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