By Catherine Bosley and Alessandro Speciale
The Bank for International Settlements
- BIS hosts committees that hash out global financial rules
- But researchers say rate-cutting central bankers may be wrong
- There’s a changing of the guard at the Bank for International Settlements, the little-known but influential organization that sits at the heart of the world’s financial system.
Agustin Carstens, the former head of Mexico’s central bank, will succeed Jaime Caruana as general manager on Friday. He’s taking charge of an institution that stands out, in an age of increasing transparency and growing disillusionment with elites, as a bastion of global technocracy.
- Agustin Carstens
- Photographer: Simon Dawson/Bloomberg
The BIS headquarters towers over Basel like a 70-meter stack of copper coins, serving as a clubhouse for the world’s central bankers and financial rule makers. The likes of Mario Draghi, Janet Yellen and Mark Carney routinely hold confidential gatherings there with colleagues from around the globe.
“Maybe if it didn’t exist you wouldn’t invent it now, but it plays an important role in the central banking world,” said Charlie Bean, the former deputy governor of the Bank of England who co-authored a report on the BIS’s research last year. “It’s the glue that helps keep the fraternity together.”
That hasn’t stopped the BIS, which is owned by central banks and was founded in 1930, from challenging the economic orthodoxy of its own members. By 2003, William White, then economic adviser, and colleague Claudio Borio were pushing for preemptive monetary policy tightening to avoid dangerous asset bubbles, a contrarian view that looked prescient during the financial crisis.
It’s kept beating that drum even as central bankers in the U.S., Europe and Japan slashed interest rates to record lows and launched unprecedented bond-buying programs to fend off deflation. Borio, now head of the monetary and economic department at the BIS, argued in a September speech that central bankers may be underestimating the “generally benign” effects of globalization and technology on inflation, and should rethink their response to deflationary trends.
He called out Larry Summers, the former U.S. Treasury Secretary and a proponent of the “secular stagnation” theory, who argues weak U.S. growth and inflation result from a persistent shortfall in demand.
Summers, in response to questions, described the BIS as “an important source of thinking on issues relating to financial stability and economic performance,” while adding that he frequently disagrees with their conclusions.
He’s not alone in questioning the BIS’s stance. A review of the bank’s publications co-authored by Bean and published in 2016 found the organization “doing a lot right” on the research front, but expressed reservations about the BIS “generating results to support the ‘house view.”’
Joining the Debate
Caruana, whose tenure began during the dark days of the financial crisis in April 2009, defended the BIS. “You may agree with what we say or not, but I think there is a value to introducing these elements in the debate,” he said last week, referring to the bank’s preference for taking a medium-term, global perspective and highlighting financial stability risks.
- Jaime Caruana
Photographer: Simon Dawson/Bloomberg
Research aside, the BIS has grown in prominence in the years of monetary policy experimentation and banking regulation that followed the crisis. While some central banks made efforts to open up as their increasing powers drew scrutiny from voters and governments, in Basel they’ve rowed back. Jens Weidmann, president of Germany’s Bundesbank and chairman of the BIS’s board of directors, said sometimes secrecy is necessary.
“Informed decisions on domestic monetary policy require a nuanced understanding of international developments,” Weidmann said. “The privacy of the meetings facilitates a frank and open exchange of views.’’
The organization hosts the Financial Stability Board and the Basel Committee on Banking Supervision, which meet at the bank to hash out the rules that govern the international financial system. There’s also the Global Economy Meeting and its sister body, the Economic Consultative Committee, dubbed “the world’s most exclusive club” by Adam LeBor, the author of a book on the BIS.
These latter two groups convene once every two months, on a Sunday, for formal sessions followed by a dinner on a top floor of the BIS tower, with 360-degree views of Basel and the mountains. They seldom open themselves to scrutiny from the press and the public.
The clubby and shrouded nature of the organization and the committees it hosts contrasts with efforts at greater transparency elsewhere. The ECB bowed to public pressure in 2015 and began publishing the minutes of its meetings, while the Federal Reserve started holding quarterly press conferences in 2011.
As for the BIS, it has scrapped the press conference that used to accompany the publication of its annual report, while the Global Economy Meeting discontinued press briefings following its bi-monthly gatherings. Transcripts or minutes of the meetings held in Basel aren’t made available, and actions are relayed through press statements, if at all.
That approach doesn’t sit well with everyone. “You don’t know what were the discussions in the room, or who got bullied into what,” said Sharon Bowles, the former chair of the Economic and Monetary Affairs Committee of the European Parliament. “You get a fait accompli at the end.”
- Caruana insisted there’s a lot of communication from the bank through papers and reports, and that improvements have been made in transparency and accountability. What’s more, rules set by the Basel Committee must be enacted by national legislatures, making them “subject to all the checks and balances,” he added.
Eye on Bitcoin
Carstens, 59, is a long-standing member of the global financial elite. He earned a doctorate in economics from the University of Chicago and served as finance minister before taking up his role at the Bank of Mexico in 2010. In his new job, he said he’ll focus on the BIS’s traditional role of facilitating communication between central banks, while keeping a skeptical eye on cryptocurrencies like bitcoin.
“An area where the BIS will devote a lot of resources is to virtual assets, which traditionally are called cryptocurrencies, but we don’t believe that they are currencies,” Carstens said.
Yet there’s little sign the institution will raise the curtain on the secretive proceedings it hosts any time soon.
“There’s a sense of exclusivity among the governors,” said Stefan Gerlach, who worked there on two occasions between 1992 and 2007 and later served as deputy governor of Ireland’s central bank. “They like to be in Basel and talk among colleagues.”
— With assistance by Eric Martin, Carlos M Rodriguez, Zoe Schneeweiss, Jan Dahinten, and Donal Griffin