ALL CHANGE AT THE CENTRAL BANK FOR THE CENTRAL BANKERS
The Bank for International Settlements has a new chief – but it is unlikely to be any more open about its ‘exclusivity’ and dealings
There is a changing of the guard at the Bank for International Settlements (BIS), the little-known but influential organisation that sits at the heart of the world’s financial system.
Agustin Carstens, the former head of Mexico’s central bank, succeeded Jaime Caruana as its general manager on Friday.
He is 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.
The BIS headquarters towers over Basel like a 70-metre 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,” says 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 has not 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 his 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 has kept beating that drum even as central bankers in the United States, Europe and Japan slashed interest rates to record lows and launched unprecedented bond-buying programmes to fend off deflation. Mr 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 globalisation and technology on inflation, and should rethink their response to deflationary trends.
He called out Larry Summers, the former US Treasury secretary and a proponent of the “secular stagnation” theory, who argues weak US growth and inflation result from a persistent shortfall in demand.
Mr Summers, in response to questions, describes 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 is not alone in questioning the BIS’ stance. A review of the bank’s publications co-authored by Mr Bean and published in 2016 found the organisation “doing a lot right” on the research front, but expressed reservations about the BIS “generating results to support the ‘house view’”.
Mr Caruana, whose tenure began in the dark days of the financial crisis in April 2009, defends 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 says, referring to the bank’s preference for taking a medium-term, global perspective and highlighting financial stability risks.
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 have rowed back. Jens Weidmann, the president of Germany’s Bundesbank and the chairman of the BIS board of directors, says sometimes secrecy is necessary.
“Informed decisions on domestic
monetary policy require a nuanced understanding of international developments,” he says. “The privacy of the meetings facilitates a frank and open exchange of views.’’
The organisation 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 is 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 organisation and the committees it hosts contrasts with efforts at greater transparency elsewhere. The European Central Bank bowed to public pressure in 2015 and began publishing the minutes of its meetings, while the US 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 after its bi-monthly gatherings. Transcripts of the meetings in Basel are not made available, and actions are relayed through press statements, if at all.
That approach does not sit well with everyone. “You don’t know what were the discussions in the room, or who got bullied into what,” says Sharon Bowles, the former chair of the Economic and Monetary Affairs Committee of the European Parliament. “You get a fait accompli at the end.”
Mr Caruana insists there is a lot of communication from the bank through papers and reports, and that improvements have been made in transparency and accountability. What is more, rules set by the Basel Committee must be enacted by national legislatures, making them “subject to all the checks and balances”, he adds. Mr Carstens 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 says he will focus on the traditional BIS role of facilitating communication between central banks, while keeping a sceptical eye on cryptocurrencies such as 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,” Mr Carstens says.
He will also focus the Basel institution – often referred to as the central bank for central banks – on making payment systems and fintech applications more resilient to cyber attacks, an area where the BIS has “already been making some inroads”, he says.
Mr Carstens joins a chorus of personalities issuing warnings about bitcoin after its value rose more than 10-fold this year. The Credit Suisse chief executive Tidjane Thiam terms it the “very definition of a bubble”, while the Societe Generale chairman Lorenzo Bini Smaghi labels it a “scam”.
Mr Carstens was less categorical than some bitcoin critics, recognising that the technology behind it may have widespread, practical applications in areas of the financial system. “We have not only to look at things that might seem not to be very clear, but also to take advantage of some of the innovations issues that virtual assets like bitcoin have brought,” he says.
Yet there is 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,” says 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.”