Future of International Settlements Bank in doubt

Press, 28 June 1989, Page 35

Future of International Settlements Bank in doubt

The Bank for International Settlements, the central bankers’ central bank, held its annual meeting in Basle recently. Not for the first time in its 59-year history, the bank’s future could be in doubt.

If a European central bank ever comes about, the doyen of multilateral institutions will lose a limb. At present, the joint activities of the Community’s central bankers take place at the Bank for International Settlements (BIS) in the solid Swiss town of Basle, far from the political pressures of any national capital. If these are removed, will the BIS again have to fight for survival?

That the BIS is thought of as essentially a European institution is partly due to the odd way it has developed. Its founders were the central banks of Belgium, France, Germany, Britain, Italy and Japan. There was also an American contingent of private banks (J. P. Morgan, National Bank of New York and First National Bank of Chicago), because the Federal Reserve was unwilling to participate.

lines, providing the logistics for whatever centralbanks want. Basle may not be everyone’s cup of tea; hiring and keeping staff there between the ages of 30 and 45 is not easy. But the BIS is not restricted by national quotas in staffing and there are enough stayers to provide continuity.

Hungarian-born but now a Belgian national, Mr Lamfalussy, aged 60 this year, joined the BIS in 1976 as economic adviser, having previously gone from economist to chairman at Banque Bruxelles lambert. So he has mixed theory with soiling his hands. His deputy, Mr Richard Hall, formerly a Bank of England man, has been in Basle for 17 years, looking after the

Established in 1930, in a former hotel opposite Basle’s railay station, the BlS’s original brief was to promote central bank cooperation, to maintain the gold standard and to solve German reparations problems after World War I.

Neither of the two nonEuropean members of its group of seven founders, America and Japan, is today represented on the bank’s board.

Japan was thrown out after World War 11. Other than that each founder member has two seats, taken up by its centralbank governor and, usually, his predecessor. America, though regulary represented at Basle, has never exercised its privilege to join the board because it wants to avoid the sort of political interference that Congress likes to exercise over American voting in such institutions as the IMF and World Bank. The rules allow nine more central-bank governors on the board, but usually only those from Holland, Sweden and Switzerland have served. Housed since 1977 in a cylindrical building in Basle, the BIS holds board meetings every second Tuesday morning of the month. They are usually run-of-the-mill affairs, taking 15 minutes, 30 at most. As a matter of convenience, more important forums have gathered round these meetings — such as the meetings of the governors of the G-10 industrial countries, chaired now by the Bundesbank president, Mr Karl Otto Pohl, which Mr Alexander Lamfalussy, the BlS’s general manager for the past four years, attends; and the get-to-gether of EEC governors.

The bank’s glory was brief; the depression years, abandonment of the gold standard and World War II crippled it. In 1947, it had fewer staff, a bare 100, than when founded. With the arrival of the International Monetary Fund (IMF), the Americans wanted to close the BIS; the Bretton Woods conferees in July 1944 passed a resolution to do just that. It was never put into effect. Marshall aid for Europe allowed the BIS to stage a spectacular recovery. The bank acted as agent for intra-European payments and subsequently for the European Payments Union (1950-58), which gave the BIS its first big postwar job.

Then came the crisisprone 19605. Central banks propped up each others’ finances, nannying the dollar and protecting the pound against speculative attacks. The BIS frequently acted as co-ordi-nator and participated financially.

The bank also monitored the infant Eurodollar market, being big enough in a tiny market to smoothe operations. And from 1961 to 1968, the so-called gold pool was operated from Basle on the basis of directives issued by the Group of Ten (G-10) central bankers.

Some reckon that central bankers have become less important, especially now the Group of Seven finance ministers arrange currency pacts. Mr Lamfalussy disagrees. First, he says, they still have the short-term running of foreign-exchange regimes. Trup, in some countries ministers are looking over their shoulder and giving the orders, but the Bundesbank and the Swiss, Belgian and Dutch central banks, for instance, are in the front line, intervening in their own right. Second, the management of shortterm interest rates is more important than ever, often being the only macroeconomic tool available. Third, the prudential security of international banking has become more complex.

In today’s floating-rate currency regime and with capital markets now able to mobilise huge amounts of private money at short notice, the BlS’s role as a shock absorber has all but disappeared. True, it lent to the IMF in 1981-84 and could do so again. It has also helped third-world countries survive debt crises by providing bridging loans, usually linked to IMF programmes. But even this role has diminished.

In the past 25 years, the functions that the BIS performs for the European Community have grown, even though (perhaps because) the bank is based outside the Community. It provides the small secretariat for the committee of EEC central-bank governors. It acts as agent for the European Monetary Co-operation Fund (EMCF), which was set up in 1973 following the creation of the currency “snake,” and now has bigger responsibilities under the more sophisticated European Monetary System (EMS).

It is in this last area that the BIS is developing fastest. It is not just that it provides the secretariat for the Basle supervisors’ committee drawing up international capital-ade-quacy standards, nor that it also has a Eurocurrency standing committee that meets about four times a year. The BIS also harbours working groups on many technical subjects, such as the payments system, computers and data banks.

BIS has also taken on the agency job for the private clearing and settlements system in the European currency unit, the ECU — a rare instance of a service for which it gets direct paymet. These activities are at risk if Mr Jacques Delors, president of the European Commission and a strong advocate of monetary union, has his way.

In February, the bank published a paper from the experts on payments systems (a G-10 working party chaired by Mr Wayne Angell from the Federal Reserve), which focused on the changes in the credit and liquidity risks produced by the netting of interbank transactions.

The BIS does much more than service the Community. If offers opportunities for bankers to think, providing intellectual input to meetings generated by its own research. It also acts as banker for central banks. Some 80 to 85 of them have money and gold on deposit with the BIS. Currency deposits have risen from $39 billion to $6B billion in three years.

It raised important questions about the quality of central banks’ supervision of settlements in their currencies and of the evolving offshore paymentts systems. Yet the report only touched the tip of the iceberg. Even with all this going on, the BIS remains, in its own words a "very modest” instituion, on OECD rather than IMF

banking departmetn for most of the time. Personalities matter more than in other multilateral organisations because rules do not govern

every turn and twist. The character of the chairman governs the efefetiveness of the many committees. — “The Economist,” London.