Dr Zeti Akhtar Aziz.
With the exit of Dr Zeti Akhtar Aziz, the Governor of Bank Negara, Penang Monthly considers the issue of central bank governance.
As the outstanding leadership of Dr Zeti Akhtar Aziz as Governor of Bank Negara Malaysia (BNM) draws to a close, this article aims to shed more light on global best practices for choosing a central bank governor and provides profiles of central bank governors worldwide.
The Importance of the Central Bank Governance Group
The Bank for International Settlements (BIS)1, also known as the bank of central banks, is the oldest international financial organisation that brings together central bank governors at their bimonthly meetings, either at its head office in Basel or in another member country. In the early 1990s, BIS set up the Central Bank Governance Group2, which has been chaired by Zeti over the past few years. The discussion of this group focuses on best practices for central bank governance3.
Why is this forum important for central bankers around the globe? It is only at BIS that central bank governors meet their peers from other countries and exchange confidential information behind closed doors. Being part of the central bank fraternity gives central bankers the moral support they might need when they come under attack from political circles or financial markets.
In her recent farewell dinner speech, Zeti acknowledged the important role of BIS as a forum for central bank governors: “The BIS has had a pivotal role in providing a platform that facilitates and strengthens engagement and cooperation among central banks4”.
The best practices have been enshrined in documents, such as the compendium on central bank governance published in 20095. Chapter 3 covers autonomy of central banks and the procedure for appointing central bank governors, and Chapter 6 covers financial resources (including governors’ remuneration) and their management.
As Figure 1 shows, central banks have various forms of legal status; the predominant ones are that they are an autonomous or self-administered institution within the government (38%) or a state-owned corporation (43%). BNM belongs to the first category.
A critical aspect of central banks’ autonomy pertains to the appointments procedure (Figure 2), their terms of office and the procedures for their dismissal. The understanding is that senior officials should have tenure and should be protected against arbitrary dismissal. The power to appoint central bank governors rests mainly with the Head of State (60%). This is the case in Malaysia, where the Yang di-Pertuan Agong appoints the Governor6. However, on the way, the BNM Governance Committee prepares a shortlist of candidates and submits it to the Government, which in turn proposes candidates to the King.
Having a number of institutions involved in the appointment process (Figure 3), i.e. a multifaceted appointment process which involves advice, recommendation or consent by another body, may mute the influence of any single political party in the selection of a governor.
In order to ensure tenure, the length of mandates and the conditions for reappointment are specified. As Table 1 shows, the most common length of term is five to six years with the possibility of being reappointed. This was the case in BNM7
, where Zeti was in office for three terms.
The Bank Negara Act 2009 provides for the appointment of the governor in line with best international practices without being specific in detail.
The remuneration of central bank governors has to be approved by the supervisory board as well as outside parties, such as the government and/or the parliament.The Principal-Agent Dilemma
The appointment of an agent (governor) by the principal (king) is a form of delegation:
“Many problems in politics are intrinsically dilemmas of delegation, in which a political executive (the principal) must choose a bureaucrat (the agent) to carry out her agenda. Granting discretion to an agent entails two dangers for the principal, both of which hinge on the agent’s informational advantages over her. First, there is the moral hazard that an agent might secretly benefit himself at the expense of the principal. Second, there is the possibility that, by adverse selection, the principal has unwittingly chosen an agent with dissonant policy preferences, who will implement a policy at odds with the principal’s agenda8
The informational advantages of a central banker are far bigger than any other such relationships. The reason is that the central bank has been endowed with a dual mandate to secure monetary and financial stability. Not only is the central bank governor bestowed with this mandate, it is also privy to the best information regarding this dual objective. In addition, taking into account the might of international financial markets, stabilising market expectations has rested in the domain of the central bank rather than in any government department. Zeti enjoyed the full confidence not only of her central bank peers, but also of the global financial markets.
Her successor will be well advised to continue this tradition, based on sound knowledge9
of the Malaysian economy, the functioning of monetary and prudential policies in such an environment and the functioning of global financial markets. Given the size of these markets as a multiple of real world GDP, even countries bigger than Malaysia have experienced turbulence recently when political authorities fail to communicate clearly with the financial markets.Profiling Central Bank Governors
Where do central bank governors come from? They might have different backgrounds10 which bestow on them different qualities to meet the challenges previously outlined. The survey of the University of Lille shows that the majority have a PhD or even a professorship, which highlights the trend of central bankers becoming more academic.
The professional backgrounds of central bankers are fairly balanced. They come from inside the central bank, the government sector, the private economy and most likely the financial sector and academia.
The new BNM governor to be appointed shortly in Malaysia should fall within any of the categories of qualification and professional background.
As of press time, the new BNM governor is yet to be appointed.
3 The documents are published on the website.
4 Governor’s Dinner Address at the BIS ClosingDinner (www.bnm.gov.my).
5 Issues in central bank governance, 2009, (www.bis.org/cbgov).
6 Central Bank of Malaysia Act 2009, para 15 (1).
7 Central Bank of Malaysia Act 2009, para 15 (4) and(5).
8 Adolph, Alan Christopher (2004): The dilemma of discretion: career ambitions and the politics of central banking, Doctoral thesis, Department ofGovernment, Harvard University.
9 As required by the Central Bank of Malaysia Act2009, para 15 (2).
10 Farvaque, Etienne, Mammadou, Hakim and Stanek, Piotr (2005): Central Bank Elites’ Composition and Performances. Evidence from the OECD and enlarged EU, University of Science and Technologies, Lille. Herbert Poenisch is a retired senior economist at the Bank for International Settlements.