How to decide composition of Central Bank Board? A case from Belgium central bank…

How Governments keep thinking of ways to intervene in central banks is quite something. The way demonetisation was conducted in India was a wake up call on importance of  Central Bank Boards.

ECB is not just a central bank but also adviser to national European central banks both which have joined Euro or are members of European Union. In this space, the other central banks keep asking ECB for advise for instance on limits of cash usage and so on.

It was interesting to read this recent ECB advisory note on composition of board of Belgium Central Bank. The Belgian Government has recently proposed changes in the Board by lowering number of members from seven to five. Earlier legislation said maximum 8 members (Governor + Vice Governor+ 6 members) and minimum 6 members. The new legislation proposes reduction of maximum members from 8 to 6 (Governor + Vice Governor+ 6 members) but no minimum limit is suggested.

ECB sees it as a possible case of intervention in central bank affairs in future:

The purpose of the draft law is to reduce the number of directors on the NBB’s Board. Currently, under the NBB Organic Law, in addition to the Governor, who acts as chair, the Board is composed of at least five but not more than seven directors, one of whom is the Vice Governor. Under the draft law, in addition to the Governor, the Board is composed of a maximum of five members (including the Vice Governor). The draft law provides that the King determines the entry into force of this new provision.

In principle, the ECB welcomes any legislative amendment which seeks to establish more efficient decision-making structures within a national central bank (NCB), provided that these amendments do not interfere with the NCB’s independence.

While the draft law provides that Article 19 of the NBB Organic Law is to be amended to provide that the Board will have, in addition to the Governor, a maximum of five directors, instead of a maximum of seven as is currently the case, it does not provide for a minimum number of directors,
unlike the minimum of five directors as is currently the case.

. As the amendments foreseen by the draft law do not include a minimum number of other members for the Board, the size of the Board will, in effect be
determined in a Royal Decree, with the involvement of the Government and the King. Based on a literal construction of this provision, the Board could theoretically be reduced to one director (who would, incidentally, hold the title of Vice-Governor) and the Governor, on the basis of the
requirement in the draft law of parity between Dutch and French speakers. While the statutes of ESCB NCBs set out different compositions for their decision-making bodies, depending on national preferences and legal traditions, an institutional framework which provides a stable and long-term
basis for a central bank’s functioning is important from the perspective of central bank independence .

A legal framework which permits frequent changes to the institutional set-up of an NCB, thus affecting its organisational or governance stability, could adversely affect the NCB’s institutional independence.

The draft law should seek to avoid a situation in which the government may, on a discretionary basis, decide on the size of the Board, with potentially wide and frequent variations. Because the size of the Board directly impacts the institutional set-up of the NBB and the functioning of the Board as a decision-making body whose mandate includes involvement in the performance of ESCB-related tasks, the draft law should contain provisions which facilitate consistency in, and predictability of, the size of the Board. This will contribute to the NBB’s institutional stability and could be achieved, as it is for decision-making bodies of other ESCB NCBs, through, for example, the inclusion in the draft law of a fixed number of directors or a reasonably narrow range setting out a minimum and maximum number of directors.

Hmm… Interesting again.Intersection of law and central banking.

It is also interesting to note that the Board should have parity between  French and Dutch speakers excepting the Governor.

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