Bank for International Settlements

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The Bank for International Settlements (or BIS) is an international organization of central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks." [1]

It is not accountable to any national government. The BIS carries out its work through subcommittees, the secretariats it hosts, and through its annual General Meeting of all members.

It also provides banking services, but only to central banks, or to international organizations like itself. Based in Basel, Switzerland, the BIS was established by the Hague agreements of 1930. The name of the BIS in German: Bank für Internationalen Zahlungsausgleich (BIZ), in French: Banque des Reglements Internationaux (BRI), in Italian: Banca dei Regolamenti Internazionali (BRI). It has representative offices in Hong Kong and Mexico City.

See also Basel Committee on Banking Supervision, Financial Stability Forum and national bank supervisor.

Contents

Top banks invited to BIS risk talks

"The Bank for International Settlements will gather top central bankers and financiers for a meeting in Basel this weekend amid rising concern about a resurgence of the “excessive risk-taking” that sparked the financial crisis.

In its invitation, the BIS cited concerns that “financial firms are returning to the aggressive behaviour that prevailed during the pre-crisis period”.

The BIS, known as the central banks’ bank, outlined in a restricted note to participants some specific proposals that it believes could create a healthier financial system. Those proposals including lowering return-on-equity targets for the banks as a way to discourage such risk taking.

Private sector bank chiefs attending the meeting at the BIS in Basel include Larry Fink of BlackRock, Vikram Pandit of Citigroup, and John Stumpf of Wells Fargo.

Lloyd Blankfein, Goldman Sachs chief executive, and Jamie Dimon, chief executive of JPMorgan Chase, were invited but are not planning to attend.

The meeting comes at a moment of intense uncertainty, with the global economy’s tentative recovery shadowed by “the overhang of private-sector debt and rapidly rising public debt”, and high unemployment.

“The concern here is that the prolonged assurance of very cheap and ample funding may encourage excessive risk-taking,” the BIS invitation note says.

“For example, low financing costs coupled with a steep yield curve may make participants vulnerable to future increases in policy rates – a situation reminiscent of the 1994 bond market turbulence which followed the Federal Reserve’s exit from a prolonged period of low policy rates.”

The note also expresses concern about deteriorating public finances and warned that doubt about fiscal prudence “could seriously disrupt bond markets if it triggered concerns about creditworthiness or inflation because of concerns with government incentives to inflate debt away.”

Among the charts included with the note is one indicating the cost of credit insurance against sovereign defaults.

In the past, the BIS has invited the top chiefs of private-sector banks to such gatherings in Basel on a yearly basis. But such meetings have been more frequent recently.

“These meetings are an attempt to bring a real world perspective to the deliberations of the wise men of the world,” one Federal Reserve official said. Central bankers “want to get a sense of what the markets are reacting to.”

Warned of financial collapse

Source: BIS slams central banks, warns of worse crunch to come June 30, 2008 , The London Telegraph

"...Dr White [of the BIS] says the US sub-prime crisis was the "trigger", not the cause of the disaster. This is not to exonerate the debt-brokers. "It cannot be denied that the originate-to-distribute model (CDOs, CLOs, etc) has had calamitous side-effects. Loans of increasingly poor quality have been made and then sold to the gullible and the greedy," he said.

Nor does it exonerate the watchdogs. "How could such a huge shadow banking system emerge without provoking clear statements of official concern?"

But there have always been excesses in booms. What has made this so bad is that governments set the price of money too low, enticing the banks into self-destruction.

"The fundamental cause of today's emerging problems was excessive and imprudent credit growth over a long period. Policy interest rates in the advanced industrial countries have been unusually low," he said.

The Fed and fellow central banks instinctively cut rates lower with each cycle to avoid facing the pain. The effect has been to put off the day of reckoning.

They could get away with this as long as cheap goods from Asia kept a cap on inflation. It seduced them into letting asset booms get out of hand. This is where the central banks made their colossal blunder.

"Policymakers interpreted the quiescence in inflation to mean that there was no good reason to raise rates when growth accelerated, and no impediment to lowering them when growth faltered," said the report.

After almost two decades of this experiment - more or less the Greenspan years - the game is over. Debt has reached extreme levels, and now inflation has come back to life.

The easy trade-off has metamorphosed into a vicious trade-off. This was utterly predictable, and was indeed forecast by the BIS, which plaintively suggested in this report that central banks might like to think of an "exit strategy" next time they try such ploys.

In effect, this is an indictment of rigid inflation targets (such as Britain's), which prevent central banks from launching a pre-emptive strike against asset bubbles. In the 1990s, they should have torn up the rule-book and let inflation turn negative in light of the Asia effect.

The BIS suggests that a mix of "systemic indicators" should be used. The crucial objective is to slow credit growth and make sure that the punchbowl is taken away before the drunks run riot. "We need policy measures to lean against credit-drive excess," it said. If there are going to be more bail-outs on both sides of the Atlantic - as there will be - the "socialised risks" should be taken on by political systems, and not dumped on the books of central banks."

Committee on the Global Financial System

The Committee on the Global Financial System (CGFS), which is chaired by Mr Mark Carney, Governor of the Bank of Canada, monitors developments in global financial markets for central bank Governors.

The Committee has a mandate to identify and assess potential sources of stress in global financial markets, to further the understanding of the structural underpinnings of financial markets, and to promote improvements to the functioning and stability of these markets. It fulfils this mandate by way of regular monitoring discussions among CGFS members, through coordinated longer-term efforts, including working groups involving central bank staff, and through the various reports that the CGFS publishes. The CGFS also oversees the collection of the BIS international banking and financial statistics.

The CGFS, formerly known as the Euro-currency Standing Committee, was established in 1971 with a mandate to monitor international banking markets. Its initial focus was on the monetary policy implications of the rapid growth of off-shore deposit and lending markets, but attention increasingly shifted to financial stability questions and to broader issues related to structural change in the financial system. Reflecting this change in focus, the G10 Governors decided on 8 February 1999 to rename the Committee and to revise its mandate. As of January 2010, the Chairman of the CGFS reports to the Global Economy Meeting, which comprises a group of 31 central bank Governors as members.

Organization of central banks

As an organization of central banks, the BIS seeks to make monetary policy more predictable and transparent among its 55 member central banks. While monetary policy is determined by each sovereign nation, it is subject to central and private banking scrutiny and potentially to speculation that affects foreign exchange rates and especially the fate of export economies. Failures to keep monetary policy in line with reality and make monetary reforms in time, preferably as a simultaneous policy among all 55 member banks and also involving the International Monetary Fund, have historically led to losses in the billions as banks try to maintain a policy using open market methods that have proven to be unrealistic.

Central banks do not unilaterally "set" rates, rather they set goals and intervene using their massive financial resources and regulatory powers to achieve monetary targets they set. One reason to coordinate policy closely is to ensure that this does not become too expensive and that opportunities for private arbitrage exploiting shifts in policy or difference in policy, are rare and quickly removed.

Two aspects of monetary policy have proven to be particularly sensitive, and the BIS therefore has two specific goals: to regulate capital adequacy and make reserve requirements transparent.

Regulates capital adequacy

Capital adequacy policy applies to equity and capital assets. These can be overvalued in many circumstances. Accordingly the BIS requires bank asset ratios to be above a prescribed minimum international standard, for the protection of all central banks involved.

The BIS' main role is in setting capital adequacy requirements. From an international point of view, ensuring capital adequacy is the most important problem between central banks, as speculative lending based on inadequate underlying capital and widely varying liability rules causes economic crises as "bad money drives out good" (Gresham's Law). Specific policies are explained below.

Encourages reserve transparency

Reserve policy is also important, especially to consumers and the domestic economy. To insure liquidity and limit liability to the larger economy, banks cannot create money in specific industries or regions without limit. To make bank depositing and borrowing safer for customers and reduce risk of bank runs, banks are required to set aside or "reserve".

Reserve policy is harder to standardize as it depends on local conditions and is often fine-tuned to make industry-specific or region-specific changes, especially within large developing nations. For instance, the People's Bank of China requires urban banks to hold 7% reserves while letting rural banks continue to hold only 6%, and simultaneously telling all banks that reserve requirements on certain overheated industries would rise sharply or penalties would be laid if investments in them did not stop completely.

The PBoC is thus unusual in acting as a national bank, focused on the country not on the currency, but its desire to control asset inflation is increasingly shared among BIS members who fear "economic bubble"s, and among exporting countries that find it difficult to manage the diverse requirements of the domestic economy, especially rural agriculture, and an export economy, especially in manufactured goods.

Effectively, the PBoC sets different reserve levels for domestic and export styles of development. Historically, the US also did this, by dividing federal monetary management into nine regions, in which the less-developed Western US had looser policies.

For various reasons it has become quite difficult to accurately assess reserves on more than simple loan instruments, and this plus the regional differences has tended to discourage standardizing any reserve rules at the global BIS scale.

Historically, the BIS did set some standards which favoured lending money to private landowners (at about 5 to 1) and for-profit corporations (at about 2 to 1) over loans to individuals. These distinctions reflecting classical economics were superseded by policies relying on undifferentiated market values - more in line with neoclassical economics.

Tier 1 vs. Total capital

The BIS sets "requirements on two categories of capital, Tier 1 capital and Total capital. Tier 1 capital is the book value of its stock plus retained earnings.

Tier 2 capital is loan-loss reserves plus subordinated debt.

Total capital is the sum of Tier 1 and Tier 2 capital.

Tier 1 capital must be at least 4% of total risk-weighted assets. Total capital must be at least 8% of total risk-weighted assets. When a bank creates a deposit to fund a loan, its assets and liabilities increase equally, with no increase in equity. That causes its capital ratio to drop. Thus the capital requirement limits the total amount of credit that a bank may issue. It is important to note that the capital requirement applies to assets while the bank reserve requirement applies to liabilities." - from an extremely detailed and robust account of the use of reserve policy and other central bank powers in China by Henry C.K. Liu.

Goal: a financial safety net

The relatively narrow role the BIS plays today does not reflect its ambitions or historical role.

A "well-designed financial safety net, supported by strong prudential regulation and supervision, effective laws that are enforced, and sound accounting and disclosure regimes," are among the Bank's goals. In fact they have been in its mandate since its founding in 1930 as a means to enforce the Treaty of Versailles. See history below.

The BIS has historically had less power to enforce this "safety net" than it deems necessary. Recent head Andrew Crockett has bemoaned its inability to "hardwire the credit culture," despite many specific attempts to address specific concerns such as the growth of offshore financial centres (OFCs), highly leveraged institutions (HLIs), large and complex financial institutions (LCFIs), deposit insurance and especially the spread of money laundering and accounting scandals.

According to the late Professor Carroll Quigley of Georgetown University, the BIS serves a more hidden purpose.

Professor Quigley states his book "Tragedy and Hope: A History of The World in Our Time," "The powers of financial capitalism had another far reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements, arrived at in frequent private meetings and conferences. The apex of the system was the Bank for International Settlements in Basle, Switzerland, a private bank owned and controlled by the worlds' central banks which were themselves private corporations. The growth of financial capitalism made possible a centralization of world economic control and use of this power for the direct benefit of financiers and the indirect injury of all other economic groups." ("Tradegy and Hope: A History of the World in Our Time" (pg. 324))

History of the Bank

The BIS was formed in 1930, the main actors in the establishment of the BIS were the then Governor of The Bank of England, Montague Norman and his German colleague Hjalmar Schacht, later Adolf Hitlers finance minister. The Bank was originally intended to facilitate money transfers arising from settling an obligation arising from a peace treaty.

After World War I, the need for the bank was suggested in 1929 by the Young Committee, as a means of transfer for German reparations payments - see Treaty of Versailles. The plan was agreed in August of that year at a conference at the Hague, and a charter for the bank was drafted at the International Bankers Conference at Baden Baden in November. The charter was adopted at a second Hague Conference on January 20, 1930.

The Original board of directors of the BIS included two appointees of Hitler, Walter Funk and SS officer Oswald Pohl, as well as Herman Schmitz the director of IG Farben and Baron von Schroeder the owner of the J.H.Stein Bank, the bank that held the deposits of the Gestapo.

After the Second World War, in 1944 at the Bretton Woods Conference The BIS became the crux in a fight that broke out between the Americans, Harry Dexter White, Henry Morgenthau, Jr., and the british delegation headed by John Maynard Keynes and Chase Bank representative Dean Atchison who tried to veto the dissolution of the bank.

As a result of allegations that the BIS had helped the Germans loot assets from occupied countries during World War II, the United Nations Monetary and Financial Conference recommended the "liquidation of the Bank for International Settlements at the earliest possible moment." (United Nations Monetary and Financial Conference, Final Act (London et al., 1944), Article IV.)

This task, which was originally proposed by Norway and supported by other European delegates, as well as the United States and Henry Morgenthau, Jr. and Harry Dexter White, was never undertaken. (R.F. Mikesell, The Bretton Woods Debates: A Memoir, Essays in International Finance 192 (Princeton: International Finance Section, Dept. of Economics, Princeton University, 1994), p. 42, ISBN: 0881650994)

In July of 1944 Atchison interrupted Keynes in a meeting fearing that the BIS would be dissolved by President Franklin Delano Roosevelt. Keynes went to Henry Morgenthau, Jr. to prevent the dissolution of the BIS, or have it postponed, but the next day the dissolution of the BIS was approved. The British delegation did not give up and the dissolution of the bank was held up just long enough until after Roosevelt had died, in April of 1945 the British and Harry S. Truman stopped the dissolution of the BIS.

The BIS was originally owned by both the governments and private individuals, since the United States and France had decided to sell some of their shares to private investors. BIS shares traded on stock markets, which made the bank a unique organisation: an international organisation (in the technical sense of public international law), yet with private shareholders. Many central banks had similarly started as such private institutions, for example the Bank of England was privately owned until 1946. In more recent years the BIS has forcibly bought back all shares held by private investors, and is now wholly owned by its member central banks.

Since 2004, the BIS has published its accounts in terms of Special Drawing Rights, or SDRs, replacing the Gold Franc as the bank's unit of account. As of March 31, 2007, the bank had total assets of U.S. $409.15 billion, given a dollar/SDR exchange rate of 1.51 for March 30, 2007. Included in that total were 150 tonnes of fine gold.

Role in banking supervision

The BIS provides the Basel Committee on Banking Supervision with its twelve-member secretariat, and with it has played a central role in establishing the Basel Capital Accords of 1988 and 2004.

There remain significant differences between US, EU and UN officials regarding the degree of capital adequacy and reserve controls that global banking now requires. Put extremely simply, the US as of 2006 favoured strong strict central controls in the spirit of the original 1988 accords, the EU was more inclined to a distributed system managed collectively with a committee able to approve some exceptions.

The UN agencies especially ICLEI are firmly committed to fundamental risk measures: the so-called "triple bottom line" and were becoming critical of central banking as an institutional structure for ignoring fundamental risks in favor of technical risk management.

Criticism

Source: Global Banking Economist Warned of Coming Crisis Spiegel Online, August 7, 2009

"William White predicted the approaching financial crisis years before 2007's subprime meltdown. But central bankers preferred to listen to his great rival Alan Greenspan instead, with devastating consequences for the global economy.

White, a Canadian, worked for various central banks for 39 years, most recently serving as chief economist for the central bank for all central bankers, the Bank for International Settlements (BIS), headquartered in Basel, Switzerland...

... White recognized the brewing disaster. The analysis department at the BIS has a collection of data from every bank around the globe, considered the most impressive in the world. It enabled the economists working in this nerve center of high finance to look on, practically in real time, as a poisonous concoction began to brew in the international financial system.

White and his team of experts observed the real estate bubble developing in the United States. They criticized the increasingly impenetrable securitization business, vehemently pointed out the perils of risky loans and provided evidence of the lack of credibility of the rating agencies.

In their view, the reason for the lack of restraint in the financial markets was that there was simply too much cheap money available on the market. To give all this money somewhere to go, investment bankers invented new financial products that were increasingly sophisticated, imaginative -- and hazardous.

As far back as 2003, White implored central bankers to rethink their strategies, noting that instability in the financial markets had triggered inflation, the "villain" in the global economy. "One hopes that it will not require a disorderly unwinding of current excesses to prove convincingly that we have indeed been on a dangerous path," White wrote in 2006.

In the restrained world of central bankers, it would have been difficult for White to express himself more clearly.

Now White has been proved right -- to an almost apocalyptical degree. And yet gloating is the last thing on his mind. He, the chief economist at the central bank for central banks, predicted the disaster, and yet not even his own clientele was willing to believe him. It was probably the biggest failure of the world's central bankers since the founding of the BIS in 1930. They knew everything and did nothing. Their gigantic machinery of analysis kept spitting out new scenarios of doom, but they might as well have been transmitted directly into space.

For years, the regulators of the global money supply ignored the advice of their top experts, probably because it would require them to do something unheard of, namely embark on a fundamental change in direction.

The prevailing model was banal: no inflation, no problem. But White wanted central bankers to take things a step further by preventing the development of bubbles and taking corrective action. He believed that interest rates ought to be raised in good times, even when there is no risk of inflation. This, he argued, counteracts bubbles and makes it possible to lower interest rates in bad times. He also advised the banks to beef up their reserves during a recovery so that they would be in a position to lend money in a downturn..."

Please see the link above to continue reading the article.

Source: ?

The UN agencies are echoing a broader complaint. It has been argued by critics of capitalism like George Soros, that there is no current will to enforce any significant regulation in the present competitive financial industry. In this situation nations effectively compete to offer less regulation.

Asserting that a stronger role for the BIS is a necessary hedge against the ideology prevailing at the International Monetary Fund, strict reserve and capital discipline are based on a non-ideological analysis of fundamental liabilities. To prevent disastrous cases like the IMF, the BIS must rationally and scientifically assess risk in order to prevent load disbursement from passing development policy trends.

Other doubts about the BIS's mandate, its program, its effectiveness, and the desirability of any existing institution taking the lead role in accounting reform, especially in light of serious failures of money-laundering law enforcement, major breaches of prudence and supervision in the United States (e.g. Enron), have led to some minor critique of the BIS in the anti-capitalism and anti-globalization movements. This is incidental usually to critiques of the IMF and World Bank, whose role is far more visible, and which have far more discretion in their policy.

The BIS is also a frequent target of allegations by conspiracy theorists,many of whom portray it as a front organization through which a wealthy elite controls the world. Some argue that the bank has not helped matters through a culture of secretiveness.

Board of Directors

  • Christian Noyer, Paris (Chairman of the Board of Directors - announced March 8, 2010)
  • Guillermo Ortiz Martínez, México
  • Hans Tietmeyer, Frankfurt am Main (Vice-Chairman)
  • Nout H. E. M. Wellink, Amsterdam
  • Axel A. Weber, Frankfurt am Main
  • Mario Draghi, Rome
  • Fabrizio Saccomanni, Rome (Alternate)
  • Mark Carney, Ottawa
  • Masaaki Shirakawa, Tokyo
  • William C Dudley, Federal Reserve Bank of New York
  • Ben Bernanke, Federal Reserve Chairman, Washington DC
  • Jean-Pierre Landau, Paris
  • Stefan Ingves, Stockholm
  • Mervyn King, London
  • Guy Quaden, Brussels
  • Alfons Vicomte Verplaetse, Brussels
  • Zhou Xiaochuan, Beijing
  • Jean-Claude Trichet, Frankfurt am Main

Management

  • General Manager: Jaime Caruana (1 April 2009 - present)
  • Past General Managers: Malcolm Knight (1 April 2003 - 30 September 2008). Andrew Crockett (British banker) (1 January 1994 - 31 March 2003)

Quotes

"...the powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basle, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations."

Carroll Quigley, Tragedy and Hope: A History of the World in Our Time (1966)

On November 21, 1933 President Franklin Roosevelt told Edward M. House 'The real truth .. is, as you and I know, that a financial element in the larger centers has owned the Government ever since the days of Andrew Jackson - and I am not wholly excepting the administration of W[oodrow]. W[ilson].

The country is going through a repetition of Jackson's fight with the Bank of the United States - only on a far bigger and broader basis. ("A March of Liberty: A Constitutional History of the United States Volume II From 1877 to the Present", 2nd Edition, Oxford University Press, 2002, page 674, ISBN: 0195126378)


References


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