10: The Autism of the Bank for International Settlements
The Bank for International Settlements opened its doors in 1930 as a purely technical agency set up primarily to handle the payments of WWI reparations.
For the first time, under the Young Plan, the Germans were allowed to make their payments to France in German marks deposited with the BIS. These would serve as collateral for the hard-currency bond issue that it was hoped would bring dollars into the French treasury.
But it all came to naught. By the time the BIS was open for business the Great Depression had descended upon the world. There was no market for the bonds. And the concession the French had made to Germany to be allowed that bond issue–shortening the period of demilitarisation of the Rhineland to five years–served Hitler brilliantly in preparing for WWII. In other ways, too, BIS continued of service to the Nazis. When the Nazi army entered Prague in 1938, BIS could not wait to hand over the gold reserves the Czechoslo-vak government had entrusted to it. For this and other BIS kindnesses to Berlin, Resolution Five was passed at Bretton Woods to liquidate BIS at the earliest possible moment.
That led to BIS cultivating the lowest possible profile. For years some of its offices were located over a Basel pastry shop, and if you asked at the airport where to find BIS they would refer you to the pastry shop. That in turn commended it for the covert role that was central to the plans of bankers throughout the world. Because of their part in bringing on the Depression of the Thirties, the financial community spent the thirties in the doghouse. To avoid a recurrence of the globalised speculative orgy of the twenties, ceilings had been put on interest rates and severe restrictions on what banks what could invest in. It was to have these regulations repealed that the large banks were seeking ways of bypassing democratic government. The semi-underground status of the BIS filled the bill perfectly. To this day no Finance Minister or any one else connected with government is allowed to attend BIS sessions. It is strictly a club for central bankers, and central banks, of course, under its guidance have been declared independent of their government–either formally or de facto.
Now that the world is clucking over the American electoral college fiasco that decides presidential elections, they should take a look at how their economic destinies are decided by a foreign bank whose stock you can buy through your broker. So abhorrent is democracy to it, that even its current shareholders do not all have a vote. Even though some of the original shareholders like France, Belgium and Denmark along with the US syndicate that took up the American quota of shares that the US senate would not let the US government acquire, have since sold substantial portions of their holdings to the public. But only the original subscribers can vote, with voting rights proportional to the proportion of shares originally held.
Its conforming to Resolution Five of Bretton Woods by going semi-underground helped qualify BIS for this higher calling. It was not long before the US let it be known that it would have no objections to Resolution Five being ignored.
"Zero inflation," the whittling down of the statutory reserves that banks had to leave with their central bank to back the deposits they accepted from the public, all originated with the BIS. In Canada, of course, reserves were abolished altogether at its bidding. It devised and promoted all manner of schemes for deregulation and globalization of banking. And when this brought on massive insolvencies amongst banks throughout the world, it was there with its Risk-Based Capital Requirements. It had shifted the bank reserves from lower legal tender (i.e. cash) kept with the central bank on a non-interest-bearing basis, to the amount of capital the bank had to its assets.
And most amazing, apart from COMER, I am not aware of anybody else that has spoken up on the vast distinction between capital and cash reserves particularly in an age of ever higher leverage. Capital is raised as cash–by selling banks shares, or setting aside undistributed earnings. But capital is not allowed to remain as cash very long. For cash does not breed; it bears no interest. It therefore gets invested in equities or bonds that pay or promise the highest return. What is too frequently overlooked, and indeed was overlooked by the BIS in its Risk-Based Capital requirement Guidelines, is that there is a reason for a higher yield on junk bonds or stocks–they involve a higher risk. The BIS Capital Requirements declared the debt of OECD countries (the 29 most developed countries) to be risk-free, requiring no additional capital for banks to acquire. But the last two countries to be taken into the OECD were North Korea and Mexico–whose banks and industries are in perennial trouble.
Nonetheless, the Financial Times in an article by Doug Cameron informs us that "Global banking regulators may drop a commitment to maintain the current level of capital in the banking system as part of sweeping industry reforms, a senior official said yesterday. The disclosures were made as senior officials from BIS, the industry's de facto regulator, open a meeting in New York today to finalise revisions to the 1988 Basle Accord, which governs how banks manage risks on their balance sheets.
"The BIS plans to allow banks to use their internal systems for managing and monitoring risks, replacing the framework where central banks set minimum capital requirements to cover potential losses. The reforms are expected to give large sophisticated banks more freedom in managing their risks and the sum of capital they have to hold to cover potential losses."
Since 1988 when the BIS capital requirements were first drawn up, the leverage of Canadian banks (total assets to cash in the banks’ possession) increased from well under 102 to 1 to a peak of 405 to 1 in September 1988, and then dropped to 380:1 in October, 1999. Since September 1988 there have been at least four world-wide bank crises and we are now sinking into the fourth.
Despite this experience BIS has gone on advocating further deregulation which allows still higher leverage. The purpose is not to prevent further gambling losses by banks, but to cover up those already suffered, and thus prepare the way for the next. Between the two dates mentioned about the assets of Canada's banks shrank by $89 billion which is some $22 billion more than their total capital. At the latter of the two dates the North American market meltdown had still not begun, so that the havoc to the banks’ liquidity as it exists today is grossly understated by the latter figure. In addition by far the greater part of banks' assets are carried not at current market but at their original purchase price.
"Banking analysts suggested a move to more flexible capital levels globally would benefit large banks and widen the divide with smaller institutions. ‘It's hard to escape the conclusion that the ‘big’ banks will be able to use their sophistication either to have less nominal capital than currently required or to have more risk,’ says one analyst."
The alleged sophistication of "large institutions" in handling risk is at this late date is only a convincing proof of the wilful autism of BIS. A couple of years ago the Long Term Capital hedge insolvency prompted the Fed and the US government to rush in with a $50 billion standby credit to prevent a world-wide financial collapse. That hedge was managed by two "Nobel" Prize for Economics winners for their work on risk-management.
However, the government is always there to bail out the gamblers that are too big to be allowed to lose. And that, of course, encourages them to go on gambling at governments’ risk on an ever larger scale.
Further details on BIS–far more bizarre than the US presidential electoral college setup–are to be found in Meltdown: Money, Debt and the Wealth of Nations, COMER Publications, 1999, p.207.William Krehm, Editor Economic Reform Toronto, Canada [email protected]
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