(Highlights of the Exter Report)

"This clause provides for a monetary board of only three members. Experience in many countries has shown that a small board is likely to be more effective than a large one. Greater prestige attaches to membership on a small board, thus making it easier to attract outstanding men. In contrast with large boards where responsibility often tends to be diffused that members do not take sufficient interest, a small board makes for a healthy concentration of responsibility. Some central banks, such as the Commonwealth Bank of Australia, have gone so far as to place the entire responsibility for both policy and administration in the Governor of the bank. In Ceylon it was considered preferable to adopt the principle of a board in order to preserve the deliberative character of policymaking.

2. Governor of the Central Bank

"Although the ultimate authority rests in the Monetary Board, the draft law nevertheless recognizes need for a strong chief executive for the Central Bank. Accordingly, the Governor is made the Chairman of the Monetary Board, and is given control of the agenda for its meetings. He is to be responsible for the execution and administration of policies and measures adopted by the Monetary Board for the direction, supervision and control of the operations of the Central Bank, and for its internal management and administration. He is to be chief representative of the Bank in its relations with outside persons, including the Government and its agencies, foreign governments and their agencies, and international financial and other institutions. He will be required to devote his full professional time to the business of the Central Bank. Since the other two members of the Monetary Board will be part-time members and because the problems facing central bankers are frequently complex and technical, it is to be expected that the full-time Governor will ordinarily be the most influential member of the Board and will tend to dominate it.

"Accordingly, the Governor should be a man of recognized and outstanding competence in and understanding of the economic and financial problems of Ceylon, and of unquestioned integrity and responsibility. In order to attract such a man it is recommended that his salary be set at the highest possible level not inconsistent with remuneration in topranking posts elsewhere in the Government its agencies.

3. Independence of the Central Bank

"The exact degree and independence of the Central Bank is likely to vary from time to time. For example, central banks can ordinarily act more independently in stable, peace-time economic conditions than in time of war or other national emergency. They also tend to take stronger stands on issues which are primarily monetary in character than on related issues which may simply have monetary repercussions.

"The decision to make the Permanent Secretary to the Ministry of Finance a member of a board of only three grows out of the underlying conception of what the Monetary Board’s relations with the Government ought to be. This problem of the relationship of the Central Bank to the Government has vexed law-makers for many years. In most countries the exact relationship has not been precisely defined. However, various legal formulas have been attempted. ÉÉIt does not appear to be necessary in the case of Ceylon where a central bank is being established which from the very beginning is to be entirely under Government auspices.

"Such formulas come very close to making central banks department of finance ministries. This might conceivably be done, or it might even be possible to make the Central Bank a separate ministry. There are, however, sound reasons for doing neither reasons which may be understood in the light of a brief analysis of how a government-owned central bank ordinarily fits into the political and economic structure of a country. From the government point of view a central bank is basically an independent, regulatory, and supervisory agency of a type which ahs become increasingly common in many countries of the world in recent years and in connection with which there has grown up a whole body of administrative practices and political conventions.

"Central banking embraces problems which are of an unusually technical nature and which require a degree of expertness and specialization not often demanded of Government officials. Also, the administration of a central bank must necessarily be promptly adapted to economic conditions which change rapidly. From the economic point of view, a central bank puts the government into the business life of a country at especially critical points - namely, banking and other credit activities, capital markets, foreign exchange markets, and the supply of hand-to-hand currency. There is a very wide area in which the regulatory functions and business activities of a central bank are non-policy-making in character. For this reason alone it would be desirable that central banks should be non-political and should have a considerable amount of independence".

"There are, however, many important problems of monetary policy, especially those relating to fiscal policy, on which a central bank must necessarily work in close harmony with the government. On such problems experience in many countries has shown that a central bank with a degree of independence of the government proper can make economic analyses and hold views which are more detached and objective than those of a government department. Many governments have learned to value and to use the sort of independent and objective advice on monetary and other aspects of economic policy which central banks have been able to give. On matters of vital interest to the state, however, it must be recognized that even in the absence of some such formula as the British or the Australian, it would be impossible for the Central Bank to adopt a policy or pursue a course of action contrary to the policy of the government of the day. No agency which is a creature of the Government can be entirely independent of the Government.

"While the Government may be prepared to give an independent regulatory agency rather wide discretion in a field such as that of money, there is no gain saying that in the last analysis the Government must assume responsibility for monetary policy as for other policies. The Governor and the appointed member of the Monetary Board cannot help being acutely conscious of the fact that, since no Parliament can bind its successors, their independence and tenure in office under the proposed legislation is limited by the ultimate power of the Government to change the law."

The ideal which it is hoped that the proposed law will achieve is one in which there will be continuous and constructive co-operation between the Monetary Board and the Government. The principal instrument for achieving this co-operation should be the Permanent Secretary to the Ministry of Finance whose membership on the Board will ensure at all times that his Ministers’ views will be made known to the other members of the Board. The effectiveness of this co-operation and co-ordination between the Board and the Government will depend more upon the men occupying the key positions at particular time than upon any legal formula, no matter how carefully or elaborately it might be worked out. A relationship as complex, and sometimes as delicate as this one is certain to be, cannot be established full-blown by a piece of legislation. It must be the result, as in other countries, of years of experience and the slow growth of political conventions.Ó

"One further point is well worth making. There is a clear need in Ceylon for some sort of economic council at Cabinet level to achieve improved co-ordination of Government economic policies. If in future such a council is set up it is suggested that the Governor of the Central Bank should have a place upon it.

4. Bank supervision function of the Central Bank

"Banking is an economic activity which affects the public welfare to an unusual degree; it touches in one way or another, almost every phase of a country’s economic life. Sound banking is essential to healthy and vigorous economic development. Supervision of banks helps to protect the public against mismanagement, bank failures and loss of confidence in the banking system. It helps to protect depositors and stock-holders against loss and frequently enables bank directors and officers to manage the affairs of their banks more wisely and intelligently."

Should corporate governance be required in finance companies?

Some analysts who criticize the Central Bank for implementing rule-based governance code simultaneously propose to implement a similar code for finance companies. This means although they criticize the Central Bank on the basis of various biases, they recognize the need for good governance in institutions handling public funds. Some of the analysts are the key officials who worked in important organisations and they know the governance lapses in such organizations when they headed those.