The Risk Of Creating An Untouchable

Sydney Morning Herald

Wednesday May 28, 2008

Malcolm Turnbull

How's this for a financial nightmare: the governor of the Reserve Bank is discovered to have been engaged in insider trading - using his position to influence the outcome of a takeover of an Australian bank.

When the news breaks, the market drops 10 per cent. The governor refuses to resign. Confidence in the Australian financial system plummets. The International Monetary Fund refuses to admit the governor to its upcoming meeting of central bankers. Calls are heard from around the world for the governor to be fired. As every week goes by, the situation at the top of Martin Place gets worse. But the law does not allow him to be sacked.

Fantasy? Well, it happened in Italy in 2005. Antonio Fazio had been the governor of Banca d'Italia since 1993. He was a pillar of respectability - as noted for his devotion to the central bank as he was for his religious piety.

Then he was found to have been improperly involved in a takeover of a commercial bank. The scandal was overwhelming. He refused to resign and under Italian law could not be sacked.

The Fazio affair was absurd. Who in their right mind would have a central bank with an unsackable governor?

How about Wayne Swan?

This week the Treasurer introduced a bill that would give the governor the same exemption from being fired by the government of the day that the Australian statistician and the commissioner for taxation enjoy.

Under the law as it stands, the Reserve Bank governor and deputy governor serve "subject to good behaviour".

The act also provides that if the governor or his deputy becomes "permanently incapable" or bankrupt, or engages in outside paid employment, the Treasurer shall terminate their employment.

Of course, bankruptcy or having an outside job are simple factual matters, and even "physical or mental incapacity" is unlikely to be contentious.

A court order demonstrates bankruptcy, a doctor's certificate incapacity and outside employment is proved by a contract. So automatic termination makes practical sense.

On the other hand, if the tax commissioner or statistician were guilty of "misbehaviour" they can only be removed by a vote of both houses of Parliament.

Mr Swan's bill removes the mandatory obligation on the Treasurer to sack a Reserve Bank governor who is incapable, bankrupt or engaged in outside employment. It makes those three conditions the only grounds on which both houses of Parliament may, if they choose, vote to request the governor be terminated.

So why would Mr Swan want to give the Parliament the right to keep in office a Reserve Bank governor who was bankrupt?

So poorly is Mr Swan's bill drafted that no less an authority than the Parliamentary Library has concluded in its official Bills Digest that the consequence of the new provisions is that there is no longer any power at all to terminate a Reserve Bank governor if he or she is guilty of misbehaviour.

In other words, the fantastic scenario I painted at the beginning of this column could be made possible by this incompetently drafted piece of legislation.

If in the future a governor is bankrupt, or in a coma, both houses of Parliament will have to meet and deliberate on whether he or she should stay in office.

On the other hand, if the governor is caught inside-trading or taking bribes, there is considerable doubt whether anybody - Treasurer or Parliament - will be able to remove him.

Mr Swan says the library is wrong. He agrees the Government could not terminate a governor for misconduct, but argues it would be able to go to a court to seek a declaration that "misbehaviour" had occurred. Why would the legislation allow any element of doubt as to its effect?

And why, in the cause of greater Reserve Bank independence, give Parliament the right to consider whether a bankrupt or incapacitated governor should stay in office but not whether allegations of misconduct are validly made?

The Government has used its numbers to carry the bill through the House of Representatives. A Coalition amendment to double the number of Reserve Bank meetings with the house economics committee was defeated.

But on Friday the "Enhanced Independence" bill is being considered by the Senate committee and then the Senate itself. One hopes this will see Mr Swan's bungling exposed and rejected.