How a secret club of central bankers responds to crises

Central banks have imposed themselves in recent years by printing money to keep economies afloat. Keystone / Lm Otero

Every two months, the world’s most influential central bank governors meet in Basel to exchange banknotes, strengthen personal bonds, and unravel the technicalities of money circulation around the world.

This content was published on December 21, 2021 – 09:00

Since the financial crisis of 2007-2008, central banks have emerged from obscurity to print trillions in multiple currencies. The pandemic has only heightened their resolve to buy back large slices of public debt and keep interest rates low, even in the face of inflation.

The mysterious private club of central bankers, which claims to promote “global monetary and financial stability through international cooperation,” has operated behind closed doors since its inception in 1930. There are no public records of debates or conversations. .

The legal status of BISExternal link allows it to operate as an independent fiefdom in Switzerland – the Swiss authorities are not allowed to enter its doors without authorization while its staff enjoy legal immunity and tax-free income.

“Opaque and elitist”

Given the increased importance of central banks over the past decade, some believe this should change.

“The BRI is an opaque, elitist and undemocratic institution, out of step with the 21st century,” says journalist and author Adam Lebor in his book, Basel Tower, published in 2013. “It shapes the regulatory future of global finance and calls for good governance, but its own affairs are firmly hidden behind a thicket of immunities and legal protections. “

So why this need for secrecy? “Central bank governors can go there and talk freely, complain about their finance ministers and politicians, without fear of it being disclosed to the public,” said Stefan Gerlach, former BIS staff member. , now chief economist of EFG Bank in Zurich.

“People think it’s a top-secret organization that runs the global financial industry, but it’s more of a conference center with a bank attached, hosting informal and confidential meetings of central bankers and regulators,” added Gerlach. “It provides meeting rooms, staff to write research papers, and manages central bank assets – but it doesn’t have a real personality.”

While the BIS has neither the power nor the will to make binding rules, central bankers and regulators come together to agree on financial stability policies, then return home to persuade their national governments to enforce them. The BIS tower is home to other bodies, such as the Basel Committee on Banking Supervision and the Financial Stability Board, which are developing measures to make the financial system more resilient to shocks.

These reflections led to the “Basel III” regulation in the aftermath of the 2008 financial crisis. These rules force commercial banks to set aside more funds to cover risky investments.

Save the economy

“Our work has helped prevent the Covid-19 pandemic from turning into another financial crisis,” BIS chief executive Augustin Carstens said recently during a rare press briefing at the organization’s headquarters. called BIS Tower.

Money printed by central banks has been used to keep the financial system afloat in times of distress and to bail out creaky national economies, from Greece and Italy to the United States. Low interest rates have mitigated the impact of debts that businesses still have to manage despite lost income during closings.

While each central bank sets monetary policy according to the needs of its country, coordination is also vital to keep money flowing around the world, especially during a crisis. Central banks act as lenders of last resort when commercial banks lose confidence in each other.

Since most international financing is done in US dollars, the US Federal Reserve must exchange dollars for the currencies of other central banks (including that of Switzerland) to prevent financial flows from stalling.

Regular meetings in Basel contribute to this coordination process.

“It’s better to have a cooperative approach than a confrontation,” Carstens said.

Some people are concerned about the extent of the money printing experience. Can it be safely reversed when economic conditions improve? Could this lead to uncontrollable inflation? A recent surge in prices has brought these issues to the fore.

Manageable risks

“In the face of Covid-19, which was unexpected and dramatic, it would have been socially and politically unacceptable for central banks to say: ‘Given the risk that this will not work well, we will not do anything,'” Carstens said.

“We had to react, but that doesn’t mean we’re blind or careless. It was not easy – and it could be more difficult in the future – but the risks that were taken are manageable.

Such arguments fail to convince everyone, including critics of the Swiss National Bank (SNB). The Swiss central bank has faced a constant stream of pressure since it adopted (and later abandoned) a peg of the euro to the Swiss franc, then pledged to print unlimited sums of money and introduce negative interest rates.

The sudden decision to decouple the franc from the euro in 2015 sparked an uproar after it surprised the markets. The move gave new impetus to political critics who wanted the central bank to be held to account for its policies.

But efforts to force the SNB to change monetary policy, add more gold to its balance sheet and take on the role of printing bank money have failed, even in referendums.

Swiss “success story”

In the meantime, the BIS continues its work calmly, spared by local disputes targeting certain central banks. It has gradually opened up to membership to incorporate 63 central banks and operates with over 600 employees and two regional offices, in Hong Kong and Mexico.

The BIS manages the assets of central banks, which has earned it the unofficial title of “bank of central bankers”. As a result of these activities, she made approximately $ 1.7 billion (CHF 1.6 billion) in profit last year from this activity.

He has also built a formidable reputation for his extensive research in the world of finance and is establishing a series of innovation hubs around the world to keep abreast of the latest financial innovations, including cryptocurrencies and the green finance.

“It is remarkable that BIS remains anchored in Basel and has not moved to London or New York,” said Gerlach. “It is a Swiss success story in the same way as the British started coming to Swiss hotels for the winter holidays 150 years ago.

The Bank for International Settlements

The BIS was established in Basel in 1930 to ensure that Germany paid financial compensation (reparations) to the victors of World War I.

This mission was only partially completed as the repairs were later abandoned as Germany sank into economic chaos.

This somewhat unfortunate start to life – combined with evidence that the BIS had been flexible to German demands during World War II – led the United States to request the disbandment of the BIS in 1944.

The BIS survived as a largely European-focused entity until the mid-1990s, when central banks in other countries, including emerging economies, began to take a more active role.

The BIS is made up of various committees: the Basel Committee on Banking Supervision, the Committee on Payments and Market Infrastructures, the Committee on the Global Financial System, the Markets Committee, the Central Bank Governance Group and the Irving Fisher Committee on Central Bank Statistics.

The Financial Stability Board, the International Association of Deposit Insurers and the International Association of Insurance Supervisors are independent from the BIS but have secretariats at the BIS Tower.

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