The BIS is the most obscure arm of the
Bretton-Woods International Financial architecture but its role is
John Maynard Keynes wanted it closed
down as it was used to launder money for the Nazis in World War II.
Run by an inner elite representing the
world's major central banks it controls most of the transferable
money in the world.
It uses that money to draw national
into the talons of the IMF.
- The Tower of Basel -
Centralbahnplatz 2, 4051, Basel, Switzerland
BIS Official Website -
The Bretton Woods Project -
Wall Street an The Rise of Hitler - by Antony C. Sutton
The BIS - Ruling The World
of Money - Edward Jay Epstein
- Carrol Quigley Quote
The Network - Alfred Mendez
- Mark Evans
Board of Directors - July
The Basel Capital
1 - The BIS - Ruling The
World of Money
by Edward Jay Epstein
1983 Harpers Magazine
TEN TIMES A YEAR - once a month except in August and October - a small group
of well dressed men arrives in Basel, Switzerland.
Carrying overnight bags
and attaché cases, they discreetly check into the Euler Hotel, across from
the railroad station. They have come to this sleepy city from places as
disparate as Tokyo, London, and Washington, D.C., for the regular meeting of
the most exclusive, secretive, and powerful supranational club in the world.
Each of the dozen or so visiting members has his own office at the club,
with secure telephone lines to his home country.
The members are fully
serviced by a permanent staff of about 300, including chauffeurs, chefs,
guards, messengers, translators, stenographers, secretaries, and
Also at their disposal are a brilliant research unit and an
ultramodern computer, as well as a secluded country club with tennis courts
and a swimming pool, a few kilometers outside of Basel.
The membership of this club is restricted to a handful of powerful men who
determine daily the interest rate, the availability of credit, and the money
supply of the banks in their own countries.
They include the governors of,
the U.S. Federal Reserve
the Bank of England
the Bank of Japan
the German Bundesbank
The club controls a bank with a
$40 billion kitty in cash, government securities, and gold that constitutes
about one tenth of the world's available foreign exchange.
earned just from renting out its hoard of gold (second only to that of Fort
Knox in value) are more than sufficient to pay for the expenses of the
And the unabashed purpose of its elite monthly meetings
is to coordinate and, if possible, to control all monetary activities in the
industrialized world. The place where this club meets in Basel is a unique
financial institution called the Bank for International Settlements - or
more simply, and appropriately,
the BIS (pronounced "biz" in German).
THE BIS was originally established in May 1930 by bankers and diplomats of
Europe and the United States to collect and disburse Germany's World War I
reparation payments (hence its name).
It was truly an extraordinary
Although the BIS was organized as a commercial bank with
publicly held shares, its immunity from government interference - and taxes
in both peace and war was guaranteed by an international treaty signed in
The Hague in 1930. Although all its depositors are central banks, the BIS
has made a profit on every transaction. And because it has been highly
profitable, it has required no subsidy or aid from any government.
Since it also provided, in Basel, a safe and convenient repository for the
gold holdings of the European central banks, it quickly evolved into the
bank for central banks.
As the world depression deepened in the Thirties and
financial panics flared up in Austria, Hungary, Yugoslavia, and Germany, the
governors in charge of the key central banks feared that the entire global
financial system would collapse unless they could closely coordinate their
rescue efforts. The obvious meeting spot for this desperately needed
coordination was the BIS, where they regularly went anyway to arrange gold
swaps and war-damage settlements.
Even though an isolationist Congress officially refused to allow the U.S.
Federal Reserve to participate in the BIS, or to accept shares in it (which
were instead held in trust by the First National City Bank), the chairman of
the Fed quietly slipped over to Basel for important meetings.
policy was evidently too important to leave to national politicians.
World War II, when the nations, if not their central banks, were
belligerents, the BIS continued operating in Basel, though the monthly
meetings were temporarily suspended. In 1944, following Czech accusations
that the BIS was laundering gold that the Nazis had stolen from occupied
Europe, the American government backed a resolution at the Bretton Woods
Conference calling for the liquidation of the BIS.
The naive idea was that
the settlement and monetary-clearing functions it provided could be taken
over by the new International Monetary Fund. What could not be replaced,
however, was what existed behind the mask of an international clearing
house: a supranational organization for setting and implementing global
monetary strategy, which could not be accomplished by a democratic, United
Nations-like international agency.
The central bankers, not about to let
their club be taken from them, quietly snuffed out the American resolution.
After World War II, the BIS reemerged as the main clearing house for
European currencies and, behind the scenes, the favored meeting place of
central bankers. When the dollar came under attack in the 1960s, massive
swaps of money and gold were arranged at the BIS for the defense of the
It was undeniably ironic that, as the president of the BIS observed,
"the United States, which had wanted to kill the BIS, suddenly
finds it indispensable."
In any case, the Fed has become a leading member of
the club, with either Chairman Paul Volcker or Governor Henry Wallich
attending every "Basel weekend."
"It was in the wood-paneled rooms above the shop and the hotel that
decisions were reached to devalue or defend currencies, to fix the price of
gold, to regulate offshore banking, and to raise or lower short-term
ORIGINALLY, the central bankers sought complete anonymity for their
Their headquarters were in an abandoned six-storey hotel, the
Grand et Savoy Hotel Universe, with an annex above the adjacent Frey's
Chocolate Shop. There purposely was no sign over the door identifying the BIS so visiting central bankers and gold dealers used Frey's, which is
across the street from the railroad station, as a convenient landmark.
was in the wood-paneled rooms above the shop and the hotel that decisions
were reached to devalue or defend currencies, to fix the price of gold, to
regulate offshore banking, and to raise or lower short-term interest rates.
And though they shaped "a new world economic order" through these
deliberations (as Guido Carli, then the governor of the Italian central
bank, put it), the public, even in Basel, remained almost totally unaware of
the club and its activities.
In May 1977, however, the BIS gave up its anonymity, against the better
judgment of some of its members, in exchange for more efficient
The new building, an eighteen-story-high circular skyscraper
that rises over the medieval city like some misplaced nuclear reactor,
quickly became known as the "Tower of Basel" and began attracting attention
"That was the last thing we wanted, " Dr.
current president of both the BIS and the Swiss National Bank, explained to
me while watching currency changes flash across the Reuters screen in his
"If it had been up to me, it never would have been built."
Despite its irksome visibility, the new headquarters does have the
advantages of luxurious space and Swiss efficiency.
The building is
completely air-conditioned and self-contained, with its own nuclear-bomb
shelter in the sub-basement, a triply redundant fire-extinguishing system
(so outside firemen never have to be called in), a private hospital, and
some twenty miles of subterranean archives.
"We try to provide a complete
clubhouse for central bankers... a home away from home," said Gunther
Schleiminger, the super-competent general manager, as he arranged a rare
tour of the headquarters for me.
The top floor, with a panoramic view of three countries - Germany, France,
and Switzerland - is a deluxe restaurant, used only to serve the members a
buffet dinner when they arrive on Sunday evenings to begin the "Basel
Aside from those ten occasions, this floor remains ghostly empty.
On the floor below, Schleiminger and his small staff sit in spacious
offices, administering the day-to-day details of the BIS and monitoring
activities on lower floors as if they were running an out-of-season hotel.
The next three floors down are suites of offices reserved for the central
bankers. All are decorated in three colors - beige, brown, and tan - and
each has a similar modernistic lithograph over the desk. Each office also
has coded speed-dial telephones that at a push of a button directly connect
the club members to their offices in their central banks back home.
completely deserted corridors and empty offices - with nameplates on the
doors and freshly sharpened pencils in cups and neat stacks of incoming
papers on the desks - are again reminiscent of a ghost town. When the
members arrive for their forthcoming meeting in November, there will be a
remarkable transformation, according to Schleiminger, with multilingual
receptionists and secretaries at every desk, and constant meetings and
On the lower floors are the BIS computer, which is directly linked to the
computers of the member central banks, and provides instantaneous access to
data about the global monetary situation, and the actual bank, where
eighteen traders, mainly from England and Switzerland, continually roll over
short-term loans on the Eurodollar markets and guard against
foreign-exchange losses (by simultaneously selling the currency in which the
loan is due).
On yet another floor, gold traders are constantly on the
telephone arranging loans of the bank's gold to international arbitragers,
thus allowing central banks to make interest on gold deposits.
Occasionally there is an extraordinary situation, such as the decision to
sell gold for the Soviet Union, which requires a decision from the
"governors," as the BIS staff calls the central bankers. But most of the
banking is routine, computerized, and riskless. Indeed, the BIS is
prohibited by its statutes from making anything but short-term loans - most
are for thirty days or less - that are government-guaranteed or backed with
gold deposited at the BIS.
The profits the BIS receives for essentially
turning over the billions of dollars deposited by the central banks amounted
to $162 million last year.
AS SKILLED as the BIS may be at all this, the central banks themselves have
highly competent staff capable of investing their deposits. The German
Bundesbank, for example, has a superb international trading department and
15,000 employees - at least twenty times as many as the BIS staff.
do the Bundesbank and the other central banks transfer some $40 billion of
deposits to the BIS and thereby permit it to make such a profit?
One answer is, of course, secrecy. By commingling part of their reserves in
what amounts to a gigantic mutual fund of short-term investments, the
central banks create a convenient screen behind which they can hide their
own deposits and withdrawals in financial centers around the world.
example, if the BIS places funds in Hungary, the individual central banks do
not have to answer to their governments for investing in a communist
country. And the central banks are apparently willing to pay a high fee to
use the cloak of the BIS.
There is, however, a far more important reason why the central banks
regularly transfer deposits to the BIS: they want to provide it with a large
profit to support the other services it provides. Despite its name, the BIS
is far more than a bank.
From the outside, it seems to be a small, technical
organization. Just eighty-six of its 298 employees are ranked as
But the BIS is not a monolithic institution: artfully
concealed within the shell of an international bank, like a series of
Chinese boxes one inside another, are the real groups and services the
central bankers need - and pay to support.
The first box inside the bank is the board of directors, drawn from the
eight European central banks (England, Switzerland, Germany, Italy, France,
Belgium, Sweden, and the Netherlands), which meets on the Tuesday morning of
each "Basel weekend." The board also meets twice a year in Basel with the
central banks of Yugoslavia, Poland, Hungary, and other Eastern bloc
It provides a formal apparatus for dealing with European
governments and international bureaucracies like the IMF or the European
Economic Community (the Common Market).
The board defines the rules and
territories of the central banks with the goal of preventing governments
from meddling in their purview. For example, a few years ago, when the
Organization for Economic Cooperation and Development (OECD) in Paris appointed a
low-level committee to study the adequacy of bank reserves, the central
bankers regarded it as poaching on their monetary turf and turned to the BIS
board for assistance.
The board then arranged for a high-level committee,
under the head of Banking Supervision at the Bank of England, to preempt the
issue. The OECD got the message and abandoned its effort.
To deal with the world at large, there is another Chinese box called the
Group of Ten, or simply the "G-10."
It actually has eleven full-time
It also has one unofficial member:
This powerful group,
which controls most of the transferable money in the world, meets for long
sessions on the Monday afternoon of the "Basel weekend."
It is here that
broader policy issues, such as interest rates, money-supply growth, economic
stimulation (or suppression) , and currency rates are discussed - if not
Directly under the G-10, and catering to all its special needs, is a small
unit called the "Monetary and Economic Development Department," which is, in
effect, its private think tank. The head of this unit, the Belgian economist
Alexandre Lamfalussy, sits in on all the G-10 meetings, then assigns the
appropriate research and analysis to the half dozen economists on his staff.
This unit also produces the occasional blue-bound "economic papers" that
provide central bankers from Singapore to Rio de Janeiro, even though they
are not BIS members, with a convenient party line. For example, a recent
paper called "Rules versus Discretion: An Essay on Monetary Policy in an
Inflationary Environment," politely defused the Milton Friedmanesque dogma
and suggested a more pragmatic form of monetarism.
And last May, just before
the Williamsburg summit conference, the unit released a blue book on
currency intervention by central banks that laid down the boundaries and
circumstances for such actions. When there are internal disagreements, these
blue books can express positions sharply contrary to those held by some BIS
members, but generally they reflect a consensus of the G-10.
OVER A BRATWURST-AND-BEER lunch on the top floor of the Bundesbank, which is
located in a huge concrete building (called "the bunker") outside of
Frankfurt, Karl Otto Pöhl, its president and a ranking governor of the BIS,
complained to me about the repetitiousness of the meetings during the "Basel
"First there is the meeting on the Gold Pool, then, after lunch,
the same faces show up at the G-10, and the next day there is the board
[which excludes the U.S., Japan, and Canada], and the European Community
meeting [which excludes Sweden and Switzerland from the previous group]."
"They are long and strenuous - and they are not where the real
business gets done."
This occurs, as Pöhl explained over our leisurely
lunch, at still another level of the BIS:
"a sort of inner club," as he put
The inner club is made up of the half dozen or so powerful central bankers
who find themselves more or less in the same monetary boat:
along with Pöhl
Volcker and Wallich from the Fed
Leutwiler from the Swiss National Bank
Lamberto Dini of the Bank of Italy
Haruo Mayekawa of the Bank of
the retired governor of the Bank of England, Lord Gordon
Richardson (who had presided over the G -10 meetings for the past ten
They are all comfortable speaking English; indeed, Pöhl recounted
how he has found himself using English with Leutwiler, though both are of
course native German-speakers.
And they all speak the same language when it
comes to governments, having shared similar experiences. Pöhl and Volcker
were both undersecretaries of their respective treasuries; they worked
closely with each other, and with Lord Richardson, in the futile attempts to
defend the dollar and the pound in the 1960s. Dini was at the IMF in
Washington, dealing with many of the same problems.
Pöhl had worked closely
with Leutwiler in neighboring Switzerland for two decades.
"Some of us are
very old friends," Pöhl said.
Far more important, these men all share the
same set of well-articulated values about money.
The prime value, which also seems to demarcate the inner club from the rest
of the BIS members, is the firm belief that central banks should act
independently of their home governments. This is an easy position for
Leutwiler to hold, since the Swiss National Bank is privately owned (the
only central bank that is not government owned) and completely autonomous.
("I don't think many people know the name of the president of Switzerland -
even in Switzerland," Pöhl joked, "but everyone in Europe has heard of
Almost as independent is the Bundesbank; as its president, Pöhl
is not required to consult with government officials or to answer the
questions of Parliament - even about such critical issues as raising
interest rates. He even refuses to fly to Basel in a government plane,
preferring instead to drive in his Mercedes limousine.
The Fed is only a shade less independent than the Bundesbank: Volcker is
expected to make periodic visits to Congress and at least to take calls from
the White House - but he need not follow their counsel. While in theory the
Bank of Italy is under government control, in practice it is an elite
institution that acts autonomously and often resists the government.
1979, its then governor, Paolo Baffi, was threatened with arrest, but the
inner club, using unofficial channels, rallied to his support.)
exact relationship between the Bank of Japan and the Japanese government
purposely remains inscrutable, even to the BIS governors, its chairman,
Mayekawa, at least espouses the principle of autonomy. Finally, though the
Bank of England is under the thumb of the British government, Lord
Richardson was accepted by the inner club because of his personal adherence
to this defining principle.
But his successor, Robin Leigh-Pemberton,
lacking the years of business and personal contact, probably won't be
admitted to the inner circle.
In any case, the line is drawn at the Bank of England. The Bank of France is
seen as a puppet of the French government; to a lesser degree, the remaining
European banks are also perceived by the inner club as extensions of their
respective governments, and thus remain on the outside.
A second and closely related belief of the inner club is that politicians
should not be trusted to decide the fate of the international monetary
system. When Leutwiler became president of the BIS in 1982, he insisted that
no government official be allowed to visit during a "Basel weekend."
recalled that in 1968, U.S. Treasury undersecretary Fred Deming had been in
Basel and stopped in at the bank.
"When word got around that an American
Treasury official was at the BIS," Leutwiler said, "bullion traders,
speculating that the U.S. was about to sell its gold, began a panic in the
Except for the annual meeting in June (called " the Jamboree" by
the staff), when the ground floor of the BIS headquarters is open to
official visitors, Leutwiler has tried to enforce his rule strictly.
frank," he told me, "I have no use for politicians. They lack the
of central bankers."
This effectively sums up the common antipathy of the
inner club toward "government muddling," as Pöhl puts it.
The inner-club members also share a strong preference for pragmatism and
flexibility over any ideology, whether that of Lord Keynes or Milton
Friedman. For this reason, there was considerable apprehension last spring
that Paul Volcker would be replaced by a supply-side ideologue like Beryl
Sprinkel, and considerable relief when he was reappointed for another term.
Rather than resorting to rhetoric and invoking principles, the inner club
seeks any remedy that will relieve a crisis.
For example, earlier this year,
when Brazil failed to pay back on time a BIS loan that was guaranteed by the
central banks, the inner club quietly decided to extend the deadline instead
of collecting the money from guarantors.
"We are constantly engaged in a
balancing act - without a safety net," Leutwiler explained.
THE FINAL AND by far the most important belief of the inner club is the
conviction that when the bell tolls for any single central bank it tolls for
When Mexico faced bankruptcy last year, for instance, the issue
for the inner club was not the welfare of that country but, as Dini put it,
"the stability of the entire banking system."
For months Mexico had been
borrowing overnight funds from the interbank market in New York - as every
bank recognized by the Fed is permitted to do - to pay the interest on its
$80 billion external debt.
Each night it had to borrow more money to repay
the interest on the previous nights transactions, and, according to Dini, by
August Mexico had borrowed nearly one quarter of all the "Fed Funds," as
these overnight loans between banks are called.
The Fed was caught in a dilemma:
if it suddenly stepped in and forbade
Mexico from further using the interbank market, Mexico would be unable to
repay its enormous debt the next day, and 25 percent of the entire banking
system's ready funds might be frozen. But if the Fed permitted Mexico to
continue borrowing in New York, in a matter of months it would suck in most
of the interbank funds, forcing the Fed to expand drastically the supply of
It was clearly an emergency for the inner club. After speaking to
Miguel Mancera, director of the Banco de Mexico, Volcker immediately called
Leutwiler, who was vacationing in the Swiss mountain village of Grison.
Leutwiler realized that the entire system was confronted by a financial time
bomb: even though the IMF was prepared to extend $4.5 billion to Mexico to
relieve the pressure on its long-term debt, it would require months of
paperwork to get approval for the loan. And Mexico needed an immediate fix
of $1.85 billion to get out of the interbank market, which Mancera had
agreed to do.
But in less than forty-eight hours, Leutwiler had called the
members of the inner club and arranged the temporary bridging loan.
While this $1.85 billion appeared - at least in the financial press - to
have come from the BIS, virtually all the funds came from the central banks
in the inner club.
half came directly from the United States - $600 million
from the Treasury's exchange-equalization fund and $325 million from the
the remaining $925 million mainly from the deposits of the,
Swiss National Bank
Bank of England
Bank of Italy
...deposits that were specifically guaranteed by these central banks,
though advanced pro forma by the BIS (with a token amount advanced by the
BIS itself against the collateral of Mexican gold).
The BIS undertook
virtually no risk in this rescue operation; it merely provided a convenient
cloak for the inner club. Otherwise, its members, especially Volcker, would
have had to take the political heat individually for what appeared to be the
rescue of an underdeveloped country.
In fact, they were - true to their
paramount values - rescuing the banking system itself.
On August 31 of this year, Mexico repaid the BIS loan. But the bailout was
only a temporary, if not pyrrhic, victory. With the multibillion-dollar
debts of a score of other countries - including Argentina, Chile, Venezuela,
Brazil, Zaire, the Philippines, Poland, Yugoslavia, Hungary, and even Israel
- hanging like so many swords of Damocles over its sacred monetary system,
the inner club has "no choice," as Leutwiler has concluded, but to remain a
This new role has created considerable concern among the
outer circle, and even in the Bank of England, since the members who don't
entirely share the mentality of the inner club want the BIS to remain
primarily a European institution.
"Let the Fed worry about Brazil and the
rest of Latin America - that is not the job of the BIS," a blunt
representative of the Bank of England, definitely not part of the inner
club, told me.
Others at the BIS have argued that it does not have the
experience or facilities to become "a mini-IMF - putting out fires around
the world," as one staffer described it.
To mollify such dissent on the periphery, inner club members publicly pay
lip service to the ideal of preserving the character of the BIS and not
turning it into a lender of last resort for the world at large. Privately,
however, they will undoubtedly continue their maneuvers to protect the
banking system at whatever point in the world it seems most vulnerable.
After all, it is ultimately the central banks' money at risk, not the BIS's.
And the inner club will also keep using the BIS as its public mask - and pay
the requisite price for the disguise.
The next meeting of the inner club is Monday, November 7...
(9 years later)
Investor's Business Daily, May 1, 1992 summed up the character of the BIS in
an article entitled:
Why a Global Credit Crunch? Some say Little-known BIS Is Partly to Blame -
Despite its global anonymity, the BIS is one of the most powerful financial
institutions in the world...
In the book Global Financial Integration: the End of Geography, author
Richard F. O'Brien further confirms the powerful role of the BIS:
In the financial marketplace, the trend towards some sort of global
governance is best represented by the efforts of bank supervisors under the
aegis of the Bank for International Settlements in Basel to impose common
minimum capital requirements on banks... and to integrate and coordinate
the supervision of banking, securities markets and insurance ...
Financial World Magazine - February 16, 1993 "Where Has All the Money Gone?"
explains how the BIS has more recently flexed its muscle:
Even before Japan's equity markets began to contract, regulations put into
effect in 1988 by the Bank of International Settlement's Committee on
Banking regulation and Supervisory Practices had begun to exact a
particularly heavy toll on Japanese lenders.
Those regulations require the
world's bankers to raise their underlying asset bases, the money against
which they lend, to 8% to total capital, more than double the asset average
of the 1980's.
- J. Epstein
Back to Contents
2 - The Bankers' Plan
by Carroll Quigley
"The Power of financial capitalism had [a] far reaching plan, nothing less
than to create a world system of financial control in private hands able to
dominate the political system of each country and the economy of the world
as a whole.
This system was to be controlled in a feudalistic fashion by the central
banks of the world acting in concert, by secret agreements arrived at in
frequent meetings and conferences.
The apex of the system was to be the Bank for International Settlements in
Basel, Switzerland, a private bank owned and controlled by the world's
central banks, which were themselves private corporations.
Each central bank sought to dominate its government by its ability to
control treasury loans, to manipulate foreign exchanges, to influence the
level of economic activity in the country, and to influence co-operative
politicians by subsequent rewards in the business world."
Hope, 1966 - [Bill Clinton's mentor and
Georgetown University professor]
Back to Contents
3 - The Network
The wealth of the country flees the land
Like cottonseed on a wind
Blown by the fetid breath
Of money-pimps in Bedlam
Pursuing the creed of masters
Who worship a market freed
Of all restraints on greed -
While politicians posture
And feed on delusions of power
The above graph [couldn't reproduce it here, see below ed.] was created in
order to bestow meaning in simplistic, delineated form to such terms as
'free market', 'new world order' and 'globalization' - terms that have
dominated political/economic terminology over the past two decades-or-so,
and the fact that it focuses on banks and bankers (a profession endowed
with the aura of authority in the eyes of the public) is quite simply
because, without money, those terms are meaningless.
Indeed, the title
itself emphasizes the role of money: After all, what is a banker if he's not
a trader in money? Similarly, 'globalization' would be equally meaningless
if such politically omnipotent groups as the
Bilderberg Group and the
Trilateral Commission were not taken into account when assessing it's (globalization's)
Moreover, how is it possible to disassociate banker from
politician from businessman when, at times, one individual is all three -
and, in any case, they are constituent parts of a single entity: the
corporate establishment? Hence the inclusion of these two groups within the
The Bilderberg (or BB from now on) was formed in 1954 out of the need of
corporate America to ensure cohesion of purpose on the part of its European
partners in the recently formed North Atlantic Alliance (NATO) - the twin
aim being to facilitate the flow of American capital into the region, and to
bring Germany into the Alliance (against, it should be noted, the wishes of
many of its partners).
That it is a group endowed with enormous political
clout can be attested to by:
examination of the lists of committee
members and conference attendees over the years - together with the gravity
and importance of the subjects discussed at these conferences (NATO,
understandably, being repeatedly a key subject)
take place under very strict security cover supplied by the respective host
countries - even though implicit within the structure of this cabal is its
unaccountable, secretive nature.
The Trilateral Commission (or TRI from now on) was formed in 1973, its
agenda determined by the corporate-funded Brookings Institute and the
Kettering Foundation - with not-a-little-help from David Rockefeller of the
That its projected formation should have been so
enthusiastically acclaimed by the BB Conference in Knokke (Belgium) in 1972
should cause no surprise. Both corporate-controlled organizations, with
linked membership, they shared the same aim: increasing globalization of
their wealth and power.
Certainly, the BB with its total lack of any
'democratic accountability', must be in agreement with the TRI's declaration
(published in their "The crisis of Democracy") that what the West needs most
"is a greater degree of moderation in democracy".
Though, on second
thoughts, the former probably thinks the 'the degree of moderation' somewhat
A further examination of both graph and list of bankers' names reveals that,
of the banking organizations, the Banks for International Settlements (or
BIS from now on) is self-evidently of prime importance on the international
scene - not only because of its prestigious membership (embracing as it does
the head bankers of the leading industrial nations) - but also because of
the significance of its links with other groups.
This article will focus on
it, at the expense of the other better-known banking institutions, for two
its prime ranking in the international hierarchy
so little knowledge of it is in the
The BIS is the world's oldest international financial institution, having
been set up in 1930 with the twin aim of,
coping with reparations/loans
from/to a very unstable post-World War one Germany
importantly, to act as a forum for central bankers in the future
it was the epitome of supranationality - able to circumvent all those
orthodox ideals that had, over the years, become synonymous with the concept
of the 'nation state' - such as 'love of country', 'patriotism' etc., - the
danger, of course, being that, in certain circumstances (such as a state of
war), such circumvention of patriotism by any of its board members could
lead to them being accused of treasonable offences.
In order to appreciate what followed, it is essential to offer a brief
résumé of the political/economic situation at the turn of the century: the
Industrial Revolution, having fostered the rapid growth of a capitalist
economy, inevitably gave birth to an ideal/dogma exposing the
socio-political discord inherent within that same system which was based on
the concept of one comparatively small group of people garnering profit from
the wealth created by the labor of a much larger group.
Thus was Marxism
born - leading to the Bolshevik revolution in 1917.The USSR, now perceived
by the industrial nations as representing the very antithesis of capitalism,
was henceforth 'the enemy'.
The 'cold war' had begun, and its most blatant
expression was the birth of fascism in the aftermath of the Bolshevik
revolution - a birth both induced and nurtured by corporations such as
I.G.Farben, SKF, Ford, ITT and
DuPont - corporation which were fast
becoming multi-national in nature.
Enter BIS. Set up in 1930 (see above), it
consisted, initially, of a group of 6 central banks and a 'financial
institution of the USA'. Granted a constitution charter by Switzerland, it
was henceforth based in that country.
That America was by then a financial
force to be reckoned with on the international scene is borne out by the
fact that the first President appointed to the BIS was Gates W. McGarrah
(ex-Chase National Bank & Federal Reserve Bank).
By the late 1930's the BIS had assumed an openly pro-Nazi bias - much of it
disclosed by Charles Higham in his book "Trading With the Enemy", and years
later corroborated by a BBC Timewatch film "Banking With Hitler" (broadcast
in late '98).
Two examples of such bias (there were many more) were:
The BIS had arranged transfers into the account of the German's Reichbank of
$378 million of what was, in effect, gold looted from the coffers of the
invaded countries of Austria, Czechoslovakia, Holland and Belgium
In the summer of 1942, plans for the projected American invasion of Algeria
were leaked to the governor of the French National Bank, who immediately
contacted his German colleague in the BIS, SS Gruppenfuehrer Baron Kurt von
Schroder (of the Stein Bank of Cologne), and by transferring 9 billion gold
francs to Algiers - via the BIS - the Germans and their French subsidiaries
made a killing of some $175 million in this dollar-exchange scam
membership of the BIS at that time, this was hardly surprising.
On the board
were the following high-profile representatives of the Axis powers (there
were 4 others):
Walther Funk (Pres. of the Reichbank)
Kurt von Schroder
(above); Dr. Hermann Schmitz (Jt.Chm. of I.G.Farben)
Emil Puhl (V/Pres. of
Yoneji Yamamoto; and Dr. V. Azzolini (Gov. Bank of Italy)
It should be added that, of the non-Axis members on the board, many - such
as Montagu Norman (Gov. of the Bank of England) were Nazi sympathizers, and
that the President of the BIS from 1939 to 1946 was Thomas McKittrick, an
American corporate lawyer who had been both Director of Lee, Higginson & Co.
(a company which had made substantial loans to the Third Reich) and Chairman
of the British-American Chamber of Commerce in London.
presidency of the BIS after America's entry into the war in December1941 was
approved by Germany and Italy with this significant addendum to their note
"McKittrick's opinions are safely known to us".
With the above noted disclosures in mind, the policy of appeasement pursued
by Britain and France towards Germany in the pre-war period can now be more
By concluding a pact with Hitler, Britain and France -
in effect - gave him the green light to advance eastwards (ref. "Mein Kampf").
Furthermore, the fact that they shared his endemic anti-communism blinded
them to the risk that they were running by negotiating from a position of
comparative military weakness - of which Hitler was perfectly aware - and
for which they paid a heavy price. It should also be added that the
architect of this act of appeasement, Prime Minister Chamberlain, was a
shareholder in ICI, which had ties with
In the late '30's, and more particularly during World War 2, given America's
great wealth - as opposed to Europe's straitened circumstances - it was
inevitable that the trade between the two would be of a one-way nature, from
the former to the latter.
And not surprisingly, in view of the close
relationship between American and German corporations (as noted above), a
substantial portion of supplies went to Germany - often via fascist Spain -
by ship and tanker under flags of neutrality.
Many of the financial
arrangements covering such trade were handled by BIS in neutral Basle.
example of how substantial this trade was: in mid-'44 America was supplying
Germany with 48 thousand tons of oil, and 11 hundred tons of much-needed
wolfram (tungsten) per month! The fact that this trade was illegal in the
USA for much of this period - and particularly after America's entry into
the war in December '41 - did little to stop such trade.
corporations, such as Standard Oil and ITT, saw to that. After all, then -
as now - the US Administration was effectively under corporate control (as
it has been since 1933, during FDR's term of office).
Even the Secretary of
Treasury, Henry Morgenthau, and his Assistant, Harry Dexter White, aware as
they well were of the part played by BIS in this, could do little about it.
In July '44, 730 delegates from 44 countries met at Bretton Woods to plan a
framework for post-war international trade, payments and investments - a
conference which subsequently resulted in the setting up in'47 of both the
International Bank for Reconstruction & Development (IBRD, or World Bank)
and the International Monetary Fund (IMF).
The apparent inviolability of the BIS referred to above was perhaps best illustrated by the fact that
Resolution 5, calling for the dissolution of BIS, was subsequently ignored
and proven ineffective. The corporate establishment had seen to that - as
indeed, it had seen to all such previous attempts.
With war's end now calling for a clearing of conscience, BIS's method of
achieving this was by stressing its somewhat euphemistic neutrality, while
playing down its less palatable, but quintessential supranationality.
annual report of 1946 - as quoted in the Times - stated:
"It is noted that
the Bank has continued to supply the principles of strict neutrality, but
that circumstances have caused a further decline in the volume of its
"Wars are the worst cause of monetary convulsions, and
the first condition for enjoying the benefits of an ordinary monetary system
is to establish and maintain a reign of peace".
In view of their recent
previous history, the term 'irony' hardly does justice to the above
This report was, incidentally, the last to be signed by its
President, Thomas McKittrick: in June 1946 he was appointed Vice/Chairman of
the Chase National Bank by its owners, the Rockefellers - presumably as a
mark of gratitude for the assistance rendered to them by the BIS during his
In view of the somewhat puzzling fact that this now meant that there were in
this post-war period three international financial/banking institutions -
all with the self-evidently similar aim of resolving the world's serious
economic problems - a brief, close look is called for in order to clarify
The first (and intriguing) fact to be noted here is that,
whereas the IMF and The World Bank have been frequently and conspicuously in
the public eye from birth, the BIS has adopted a low profile and remained
This was an expedient tactic for the latter to adopt - for
it thus eluded any investigation into its previous
financial dealings with the Third Reich
more importantly, by so disassociating itself from the IMF and World Bank, the latter would
henceforth be widely (though erroneously) regarded as the sole guardians of
the worldwide economy, thus allowing the BIS more latitude to follow the
agenda set by the corporate establishment - to whom, it must be
recalled, they owed their survival
This ambivalent relationship between the IMF/World Bank vis-a-vis the BIS/commercial
banks in the 70's is epitomized by Anthony Sampson in his book "The Money
"The commercial banks in the meantime had created a very different
perspective, for the IMF now controlled much less of the world's money. In
1966, the quotas which made up its capital amounted to 10% of the total
world imports; but by '76 they made up only 4%"... "by '76 world annual
deficits had reached $75 billion : of this, 7% financed by the IMF; 18% by
other official international bodies (governments and World Bank) - remaining
three-quarters financed by banks (commercial)".
(Today, some two-and-a-half
decades later, the board members of BIS, between them, control 95% of the
money in circulation).
The reason for this apparent taking over of such
responsibility by the BIS from the IMF/World Bank is twofold:
collapse of the Bretton Woods system of exchange convertibility in the early
seventies exposed the irrelevance of the latter as agents for European
the latter being statutorily-appointed agents of the
UN, were therefore - ostensibly - accountable to a much wider constituency
than the BIS, and therefore politically less manageable by the corporate
establishment, whose primary aim in the aftermath of World War 2 was to
ensure the unrestricted flow of American capital into Europe
considerably eased by subsequent European integration, in which both NATO
and the Bilderberg played a crucial role.
This aim was furthered by means of
the US Congressionally-authorized European Cooperation Act (ECA) of 1948,
and implemented by its subsidiary, the European Payments Union (EPU) of 1950
- both under the aegis of the Marshall Plan of 1947.
Predictably, the BIS
was the institution chosen by the EPU to oversee this movement of capital (a
point worthy of note here is that the head of the EPU at that time was one
Richard Bissell, an economist who, years later, was to be the CIA Deputy
Director of Planning overseeing the Bay of Pigs fiasco in April '61!).
The BIS was now firmly ensconced in the heart of European integration, and was
subsequently to play a critical role in the events leading to its (Europe's)
eventual evolvement into the European Union, a bureaucratic
politico-economic body occupying a position of crucial importance within the
wider global hierarchy envisaged by the corporate establishment.
The significance of the American's key central role in this sequence of
events is underscored by the fact that, in the aftermath of World War 2,
they (the Americans) set up the Bundesbank in Frankfurt (in their zone of
control), ensuring that the bank would be independent of government and
follow a strict monetary policy - in effect, another Federal Reserve System.
In 1948 they replaced the existing Reichmarks with approximately 11 billion
Deutschmarks, and Germany's subsequent conduct vis-a-vis European
integration must be viewed with this in mind. In any case, the fact remains
that Germany's subsequent frequent delaying tactics enabled the dollar to
consolidate its dominance.
In their published précis entitled "Profile of an International
the BIS states that its "predominant tasks are summed up most
part of Article 3 of its original Statutes.
They are 'to promote the
co-operation of central banks and to provide additional facilities for
international financial operations'".
To achieve this aim it has 3
A Board of Directors, comprising the Governors of
the central banks of Belgium, France, Germany, Italy, the UK and the USA,
each of whom appoints another member of the same nationality - plus the
central bank Governors of Canada, Japan, Holland, Sweden and Switzerland: a
total of 17
A Management Board
An annual General Meeting in June of
That this is an organization carrying enormous
clout is readily confirmed by a closer look at said synopsis, pertinent
quotes from which follow:
"Since September 1994, the eleven countries from which the members of
the Bank's Board of Directors are drawn have been identical with the
countries which comprise the Group of Ten (G-10), with which the BIS has had
a long and close association".
"As well as making resources available to the IMF under the GAB (General
Arrangements to Borrow) the G-10 has, since 1963, been a principal forum for
discussion of international monetary questions. From the outset, the BIS has
been a participant in G-10 Meetings, above all because the Governors of the
G-10 central banks meet regularly on the occasion of the Basle monthly
meetings. The G-10 meetings have, over time, become the pivotal forum in
which much wider activities have been set in motion by the G-10 central
banks in the pursuit of financial stability". (Meetings, it should be noted,
hosted by the BIS in their high-rise office block in Basle).
"As early as 1971 concern among central banks about the evolution of the
Eurocurrency markets led to the establishment of a Standing Committee of the
Group of Ten central banks which has met periodically in Basle ever since"
In December 1994 the G-10 Governors set up "The Basle Committee on
Banking Supervision, the secretariat for which is provided by the BIS".
"The BIS hosts meeting of, and provides the secretariat for, the
Committee on Payment and Settlement Systems and its various working
"...the BIS in a joint initiative with the Basle Committee on Banking
Supervision is establishing an Institute for Financial Stability ahich is
expected to commence its activities sometime in the second half of this
"From 1964 until the end of 1993 the BIS hosted the Secretariat of the
Committee of Governors of the Central Banks of the Member States of the
European Economic Community (theCommittee of Governors). From 1st of June
1973 until the end of 1993 the Secretariat of the Committee of Governors
also served the Board of Governors of the European Monetary Co-operation
Fund (EMCF) and the Bank (BIS) acted as EMCF agent. Until they were replaced
by the European Monetary Institute on 1st January 1994, the Committee of
Governors and the EMCF were the Community bodies which provided the
institutional framework for monetary co-operation in the European
(It should be added that the above quotes are by no means a comprehensive
listing in the synopsis of the BIS's activities on the global scene).
Three news items concerning the role played by the BIS are worthy of note:
In 1994 the Belgian banker, Baron Alexandre Lamfalussy resigned from his
post as General Manager of the BIS in order to become Head of the European
Monetary Institute (EMI) - forerunner of the European Central Bank (ECB).
reported in the Times of 10/11/'93: Andrew Crockett (Executive Director of
the Bank of England), who was replacing Lamfalussy as General Manager of the
..."said he did not foresee the ENI... impinging on the work of the
Basle-based BIS which is widely regarded as the central banker's central
and adding that... "The EMI would enable the BIS to re-focus on global
issues, and develop its role as a forum for collaboration between central
banks in the monetary and regulatory fields".
C. Fred Bergsten, Head of the Institute for International Economics, told
the Washington Post on the 3rd of January '99,
"The adoption of a common
currency is by far the boldest chapter of European integration. Money
traditionally has been an integral element of national sovereignty"...
decision by Germany and France to give up their mark and franc "...represents
the most dramatic voluntary surrender of sovereignty in recorded history.
The European Central Bank that will manage the euro is a truly supranational
In the Independent On Sunday of the 21st February '99 it was reported
that Andrew Crockett (see above) has been appointed Chairman of a
newly-established 'Stability Forum' (see quote 'F' above), whose aim is to
monitor global markets (this was the idea of Hans Tietmeyer, President of
Certain conclusions can be drawn from a recapitulation of the facts noted
The BIS occupies a central role within the global/European financial
scene - to the extent that such institutions as the G-10 and ECB (among
others) play a surrogate role.
The goal of the corporations is precisely the same today as it was at
the end of the Great War. This is inevitable, inasmuch as inherent within
the capitalist system is its obligation to the aggrandizement of profit.
As a consequence, sovereignty - in the sense of a country's or
organization's political independence - can be ignored and overridden. This
is happening today. The signs are there for all to see: Is America really in
the Gulf Region for the benefit of its inhabitants ('ragheads' in American
parlance)? Ask any oilman.
Are the two terms 'NATO' and the "International Community' really
synonymous? Ask any country not in the Alliance.
Is the 'Cold War' really dead? Ask NATO why it is still in existence.
Is it not clear that NATO's primary role in Europe is to act as corporate
America's anti-Marxist enforcer (even though the Marxism in question may be
of a purely nominal nature)? Ask the head formulator of NATO, George Kennan
(he may be dead, but his disclosure of the real reason for NATO's birth is
on record in the BBC's Lord Reith Lecture of 1957).
Has not the UN's sovereignty been by-passed time-and-time again over the
years? Ask its main debtor - America.
And finally, why is so little of the BIS in the public domain? Ask the
owners/controllers of the means of communication - the media.
Alfred Mendez' Bankers' Network chart proved impossible to transfer to a web
page so it is available here as a Microsoft Word 6 file - and a Rich Text
file - so you can print it out.
DAVIES, Glyn "A History of Money" (University of Wales '94)
DEDMAN, Martin "The Origins & Development of the European Union - '45 to '95
HIGHAM, Charles "Trading With The Enemy" (Robert Hale '83)
MARSHALL, Matt "The Bank" (Random House '99)
SAMPSON, Anthony "The Money Lenders" (Hodder & Stoughton '81)
BIS Précis '98
Back to Contents
4 - Global Financial Institutions
by Mark Evans
The "big five" prime banks of Wall Street, the owners of the "Class A" stock
of the New York Federal Reserve Bank, are:
Class A stock of the Federal Reserve has not been sold or traded on the open
market since it was hermetically sealed from the public at the end of the
summer of 1914.
It is the exclusive property of Wall Street and European
prime banks, whose major stockholders are the trans-Atlantic Ruling Class.
This pattern holds true of Central Banks throughout the nations of the
advanced capitalist sector.
The Big Five have interlocking directorates with
the "Seven Sisters," the Anglo-Dutch-American oil cartels:
Oil of California (SOCAL)
Several of these trans-Atlantic money and commodity cartels financed
Mussolini and Hitler and actively maintained their connections with the
Reich throughout World War II.
They were also all actively involved in
Stalin's Russia by the beginning of the first Five Year Plan in 1928. None
of this is really secret-anyone can discover the facts by doing a little
research. Nor should it be considered a "conspiracy" (either by those who
promote or deny the essential facts of the matter) - bankers and businessmen
have been "trading with the enemy" for centuries.
It is just one more
example of "the wise investment policy" of cartels like J.P. Morgan and Co.
and Standard Oil of New Jersey.
Global Financial Centre - B.I.S.
The seat of first world finance capital is Basel, Switzerland, where the
Central Banks of the Group of Seven (G-7) form the directorate of the Bank
for International Settlements (BIS).
G-7 include Britain, France,
Germany, Italy, Canada, the U.S., and Japan.
The G-7 are called the "Hard
Currency Countries" because their Central banks, corporations privately
owned by the Prime Banks of these nations, have acquired most of the mined,
milled, and ingotted gold of the world. Approximately 80 percent of this is
in the vaults of Credit Suisse, under the Berghoff, the airport in Zurich.
somewhat larger formation, called the
G-10, includes Belgium, Holland, and
The U.S. has become the greatest debtor nation on earth because the Prime
Banks of the other nations of the G-10 (especially Britain, Holland, and
Japan) have purchased the U.S. government debt in the form of semi-annual
and tax-exempt U.S. Treasury Securities through the operations of the
Federal Open Market Committee, the Fed's window on Wall Street.
Of these U.S. Treasury Securities, 95% have been floated since the end of
World War II to finance the Cold War against the "Evil Empire."
Communism has been deflated as an enemy; nativist fascist movements are
being pumped up all around the globe and the aggregate Debt is approaching
the net worth of all the real estate and movables on the planet.
the U.S. and Russia are joining their military and space programs, the U.S.
is becoming by degrees a full-blown totalitarian state, and the bankers are
beginning to foreclose upon the bankrupted minions and dupes within their
new global condominium.
The World Central Bankers' Bank
The Bank for International Settlements (BIS), the "first beast", was founded
in 1930 and was the first entity to be called a "World Bank."
gold-based, it functions as a clearing house for the balance of payments
between nations. It operated throughout WWII as an interlocking directorate
and a clearinghouse for joint Allied and Axis high finance.
World Bank/International Monetary Fund (IMF), the "Second Beast," was
founded in 1946, after being drafted at
Bretton Woods, New Hampshire, during
the war in 1944. The IMF functions as the collection agency for the World
Bank, much as the IRS functions as the collection agency for the Federal
The Wall Street branch of the Federal Reserve is the "fiscal
agent" for the IMF in the USA. The capital pool of the IMF consists of the
Prime Banks of the First World, which interlock with the First World (G-7)
military-industrial complexes and the oil conglomerates.
The IMF functions under the aegis of the United Nations, as a Keynesian
paper credit-mill, extending credit in the form of Special Drawing Rights (SDRs)
to the Second and Third World debtor nations, requiring that they purchase
specified amounts of the currency of the G-7 nations, imposing "austerity
terms" upon their internal economies, and looting them by means of
"repayment schedules" of their natural resources and minerals.
channeled through the General Agreement on Tariffs and Trade (GATT) to the
multinational cartels, also headquartered in Geneva, Switzerland.
With the implementation of NAFTA and the Uruguay Round of GATT, the real
wages of blue and white collar workers in the U.S. will be leveled in time
to near parity with the Third World.
The last "Superpower," the United
States, is not the primary head of the G-7 Beast, but is, owing to its
debtor status, the last head, appropriately close to the horned tail,
engaging disproportionately in UN Security Council "police actions" around
International Capital, having gone "global," will increasingly employ the
blue-helmeted troops of the UN to enforce the hegemony of Capital in the
Back to Contents
BIS - Board and Senior Officials - July 2001
Board of Directors:
Urban Bäckström, Stockholm (Chairman of the Board of Directors, President of
Lord Kingsdown, London (Vice-Chairman)
Vincenzo Desario, Rome
David Dodge, Ottawa
Antonio Fazio, Rome
Sir Edward A J George, London
Alan Greenspan, Washington
Hervé Hannoun, Paris
Masaru Hayami, Tokyo
William J McDonough, New York
Guy Quaden, Brussels
Jean-Pierre Roth, Zürich
Hans Tietmeyer, Frankfurt am Main
Jean-Claude Trichet, Paris
Alfons Vicomte Verplaetse, Brussels
Nout H E M Wellink, Amsterdam
Ernst Welteke, Frankfurt am Main
Bruno Bianchi or Stefano Lo Faso, Rome
Roger W Ferguson or Karen H Johnson,
Jean-Pierre Patat or Marc-Olivier
Ian Plenderleith or Clifford Smout,
Peter Praet or Jan Smets, Brussels
Jürgen Stark or Stefan Schönberg, Frankfurt am Main
Andrew Crockett, General Manager
André Icard, Deputy General Manager
Gunter D Baer, Secretary General, Head of Department
William R White, Economic Adviser, Head of Monetary and Economic Department
Robert D Sleeper, Head of Banking Department
Renato Filosa, Manager, Monetary and Economic Department
Mario Giovanoli, General Counsel, Manager
Günter Pleines, Deputy Head of Banking Department
Peter Dittus, Deputy Secretary General
Josef ToÆovský, Chairman, Financial Stability Institute
Representative Office for Asia and the Pacific:
Carlo Azeglio Ciampi - Italian politician
Lamberto Dini - Italian politician and banker - board of directors BIS
Antonino Occhiuto Italian central banker - BIS 1975 - now
Tommaso Padoa-Schioppa - Italian central banker - BIS 1993 - now
Back to Contents
Unraveling The Basel Capital Accord
The Basel Committee on Banking Supervision (BCBS) is a committee of bank
supervisory authorities from the G10 (i.e. the wealthiest 10 nations).
meet regularly at the Bank for International Settlements in Switzerland and
are in the process of putting together the international agreement known as
the Basel Capital Accord (BCA). This sets bank supervision, risk-based
capital and disclosure requirements for banks operating internationally.
These concepts are described more fully in Sections 2 and 3. The new BCA
will effect the activities of all large international banks, and will
probably be adopted by more than 100 countries.
While such an Accord might seem rather obscure and irrelevant to the general
public, this is perhaps more a feature of the general ignorance, secrecy and
complexity surrounding the operations of the international banking and
monetary systems than anything else.
The purpose of this paper is to act as
a discussion document to start gathering concerns from various NGOs working
on monetary/finance system issues so that more comments representing public
interest issues can be submitted to the BCBS for its next comment period in
This Accord is of particular interest because of:
Increasing Power of International Creditors over Debtors
banks affected by BCA create the bulk of the money we all use in day-to-day
living, especially the US currency which is the backbone of the
international monetary system. The power of international creditors,
particularly those responsible for money creation in the US Dollar, over
debtors is increasing. This, in combination with the collapse of the gold
standard and the original Bretton Woods structure in 1971, as well as the
trend for western corporations to seek financing outside the banking sector,
has lead to increasingly reckless behavior of these bank creditors. This is
especially true where they can exercise their "powers" to access
"collateral" (real assets) crucial to less powerful debtors - e.g. through
IMF Structural Adjustment Programs internationally, and through predatory
lending and foreclosures domestically. Such activities are increasing income
and wealth gaps globally. Good supervision of, and appropriate capital
standards for, powerful creditors can help curtail this recklessness.
Increasing Financial Consolidation
Both domestic and cross-border
consolidation of financial services companies is continuing to escalate in
the wake of global financial deregulation and the collapse of banks in
various countries after financial crises. This is leading to the emergence
of huge global "financial empires" domiciled in the same G10 countries that
create the "hard currency", dominate institutions such as the IMF and set
the rules for international banking. Also, the bigger a financial
corporation becomes the more it becomes "too-big-to- fail". Big creditors at
the heart of the international financial system are very likely to get
bailed out no matter what they do, for their collapse could collapse the
entire global financial system. This creates a tremendous "moral hazard"
proportional to size and global reach. This further increases the powers of
large western creditors over sovereign nations.
Trends in Bank Supervision and Financial Convergence
The new BCA comes at a
time of significant changes in the supervision of large banking operations.
In the Western nations, over the past decade or so, we have seen insurance,
banking and brokerage operations all merge together. One of the last
countries to jump on this bandwagon was the United States with the
Gramm-Leach-Bliley act of 1999. This made the Federal Reserve, the central
bank of the United States, the new umbrella supervisor of financial
conglomerates. The potential for conflicts of interest arising from the
driver of monetary policy for the linchpin currency also regulating and
supervising large financial players are enormous. Most other countries
employ a fully separate government body for this regulatory role and one
under democratic control. This strange move in the US could have significant
Moral Hazard Created by the IMF
The larger international banks affected by BCA also seem to be the primary beneficiaries of the IMF bailouts associated
with many recent financial crises. IMF bailouts are the insurance provided
by the general public if the risk-management strategies of large creditors
(including the holding of risk-based capital) fail. In one sense strong
risk-based capital requirements can provide an antidote to the increasing
"moral hazard" created by the IMF bailouts. Risk-based capital can be used
to prevent crises by forcing international creditors to take more
responsibility for the risks they assume and this will help prevent the need
for severe "cures". It forms a "capital charge" on banking institutions,
similar in effect to what the Tobin Tax would do to international
speculators in general. A charge on the banking sector is most crucial
because they are the most likely to get bailouts.
Increasing Complexity of Financial Instruments
Convergence of financial
players, increasing consolidation of wealth in fewer hands, hedging
strategies and innovative regulatory avoidance have created whole new worlds
of complex financial instruments. The regulators themselves are admitting
that this makes it increasingly difficult to really understand what is going
on at these financial conglomerates and, in fact, to regulate them. As we
shall see, this is reflected extensively throughout the new BCA with the
development that "sophisticated" banking operations will be able to set
their own capital requirements to a very large extent. This may be the first
step toward "self-supervision" of banks, which is especially dangerous as
"too-big-to-fail" risks and dependence on IMF "cures" increase.
Domestic Predatory Lending and Credit Access for Low/Middle Income
the US, in the sub-prime market, banks have been incented to assess good
credit risks (that should get a prime rate) as sub-prime because they could
charge a higher interest rate without having to hold higher capital.
Presently in the US extensive problems have emerged with respect to bank's
activities in low and middle-income groups. Bank capital requirements should
address such exploitation of the poor, and supervision requirements in
general should address the whole issue of credit access on reasonable terms
for low/middle income groups. These issues are not presently addressed at
all in the existing BCA.
In the following sections I wish to unravel some of the main features of the
Basel Capital Accord and highlight what I perceive as some of the issues
that the general public should be concerned about.
In doing so I will
attempt to relate the significance of BCA to these above-mentioned issues of
global finance sector deregulation, mergers and acquisitions, IMF bailouts,
low income credit access, bank supervision trends, and the general imbalance
in creditor/debtor relations.
However it should be noted that I am making these observations and drawing
conclusions based on public information analyzed using skills acquired in my
own training as an actuary who has been primarily concerned with the
insurance industry throughout my career. In looking at the banking sector
extensive information about exactly what is going on underneath is not easy
to find in the public domain.
Based on public information it is not easy to fully understand a bank's risk
exposures and it has been widely acknowledged by many bank industry watchers
that this is a key part of the success of the monetary system. For the
monetary system is no more than a confidence game and this requires
confidence in the banks at all times, especially those responsible for the
creation of the linchpin currency - the US Dollar.
This necessary "secrecy" surrounding the monetary system in order to keep
confidence in the ($US driven) financial system probably has a lot to do
with the secrecy that surrounds institutions like the IMF.
information from the IMF does not reveal how bailout sums are determined or
what creditors are at the other end of the bailout packages. Nor do public
bank financial statements reveal such details. It is highly likely that the
main beneficiaries of IMF bailouts are large western creditors with banking
licenses (and therefore those "regulated" under BCA standards) since these
institutions sit closest to the heart of the international monetary system.
Any large hit to their balance sheet is most likely to threaten global
In no way do the opinions expressed herein reflect the views of my employer
nor the views of the professional actuarial societies of which I am a
member. In fact the International Actuarial Society, representing these
organizations, has submitted public comments on BCA that do not overlap at
all with the concerns expressed herein.
Nevertheless I consider it the duty
of any professional to consider the broader public implications of the
goings on in their profession.
My profession is built around the practice of
financial risk management and it is my opinion that the financial and other
risks to the broader public of the global financial order are unacceptable,
so this is why I write this paper. I do not consider this exercise to be
inconsistent with my duty as an actuary to sound alarm bells when risks are
getting out of hand.
2. Background to Development of Basel Capital Accord (BCA)
The first BCA came into existence in 1988. More information about the
original Accord can be found at the web site of the Bank for International
Settlements (BIS) at
The BIS is an international bank for
central bankers, whose dominant members are the central banks (NOT
governments) of the G-10 + Switzerland. More recently other countries'
central banks have been able to join the BIS but it is dominated by the
G-10. I cannot be certain of all the things the BIS does but I think it is
important to note that this is the main place for the meeting of minds of
the world's most powerful central bankers.
These meetings are conducted in
private, as are the Federal Reserve's Open Market Committee and Federal
Advisory Council meetings. No doubt, very key decisions about the
international monetary system - the same monetary system we all depend on -
are made behind these closed doors.
The BCA of 1988, according to the BIS web site, came out of the need to set
consistent capital standards for international banks so that one country's
banking sector would not have regulatory advantages over another.
"behind-the-scenes look" would reveal that in the late 1980s the US and
other bank regulators saw the need to introduce better risk-based capital
requirements in the wake of the emerging Savings and Loans Debacle and the
Latin American Debt Crisis. In both crises the banks were holding capital
way short of what the risk of default of their loans implied and this
ultimately led to the need for bailouts (from US public and Latin American
The BIS web site also states that the new BCA is coming out of a need to get
away from "one size fits all" requirements, and the need to better
incorporate operational and market risks (to be discussed in Section 3) into
They also state that "sophisticated" banks should be
allowed to use their own internal risk management techniques to set their
own capital levels. A behind-the-scenes look reveals that the financial
crises of the 1990's and subsequent IMF bailouts scared the heck out of
those at the helm of the financial system. They found that the old BCA did
not have a sufficient capital charge for very risky cross-border loans over
that for safer ones.
Hence many creditors were incented to engage in very
risky cross-border financing which played a large role, not only in
triggering the crisis, but also in all the trouble the western creditors
found themselves in once the crisis emerged.
The meetings of the Basel Committee on Banking Supervision (BCBS),
responsible for the BCA, are hosted by the BIS and are also conducted behind
closed doors. Public input into draft BCA documents has been welcomed,
however, and this opportunity has certainly been utilized by the global
finance sector. So far the major groups of NGOs opposed to the Bretton Woods
institutions and the global financial order have not provided input and I am
certain the BCBS is not expecting them to.
Therefore it would be very nice
to give them the big surprise of public input from the members of the public
who are not large, powerful financial players. This makes sense especially
because this public is called upon to bailout banks whose capital can't
cover their risks.
The latest "public" comment period ended on May 31st 2001. Due to the
extensive complaints received from the banking sector (who, of course, wish
to hold less capital and be less supervised) the BCBS is saying that they
will have another round of comments for another (more bank friendly, no
doubt) revised draft in 2002.
It is important to note that the BCBS is
currently chaired by William McDonough, the current President of the
Reserve Bank of New York, and who therefore sits on the
Federal Open Markets
Committee - THE committee that determines monetary policy for the world's
As noted, the BCBS is composed of central bankers from the G-10. This is a
critical observation for several reasons. First, bank supervision standards
are being set only by the wealthy countries that create all the "hard
currency". Second, bank supervision standards are being set by those
responsible for monetary policy, not by separate national government bodies
responsible for bank supervision.
The domination by central bankers in this
process means that most of the input will come directly out of the banking
sector, rather than the general public or their elected representatives.
In a better world a large part of the role of bank supervision would be to
protect some balance of power between creditors and debtors. Instead the
large international banks seem to be moving into a world where they are
gaining more ability to "supervise themselves" and this will become more
evident as we study BCA. The structure of the BCBS and its role in producing
the BCA is consistent with this observation.
In a much better world the actual process of money origination would be
democratic, which it is far from today. The reality is that we are stuck
with the international monetary system based on the US dollar because that
is what people all over the world have placed their confidence and trust in.
This is unlikely to change in any hurry, though baby steps are being taken
with the emergence of local currencies. In the meantime it makes sense to
focus attention on the supervision of those with credit creation powers in
the dominant "trusted monetary system", regardless of how unsavory this
system and its major players have become.
It is important to note that BCA covers ONLY international banking
institutions. It does not cover non-bank financial institutions (NBFI).
one sense it is quite reasonable that banks should have tougher capital
requirements and supervision standards on them for the following reasons:
They have the special privilege of being able to "create money out of thin
air", and must use that privilege responsibly else the safety of the whole
financial system is put at risk.
They have various guarantees or bailout mechanisms backing them up such as
FDIC funds and, of course, the IMF bailouts that nobody wants to give us too
much information on.
However the emergence of the NBFIs poses a problem and this is giving the
banks a lot of leverage in arguing against tough capital requirements.
Basically NBFIs have emerged as a result of huge accumulation of financial
capital into few hands and the development of new instruments such as
loan-backed securities. This means that large NBFIs without a banking
license (who do not create M3 money) can compete with bank financiers, so
they may have an advantage if banks have to comply with tougher capital and
Hence many banks are approaching the BCBS with the complaint that the BCA
unfairly penalizes them for being a bank. Rather than ignoring these
arguments on the basis that the banking sector has privileged access to
various bailout mechanisms that NBFIs don’t, I fear that the BCBS may cave
in to such arguments.
Hence it is important for the concerned public to
remind the BCBS of these things and this makes it even more important to get
access to the list of creditors benefiting from the IMF bailouts.
If NBFIs are also benefiting from these bailouts then maybe the solution is
that NBFIs also need something similar to the BCA.
In any case that would be
recommended from the point of view of prevention of crises for tougher
capital requirements help curtail speculative activity.
3. Overview of BCA Standards (Very Brief)
The BCA contains what are known as the three pillars of bank supervision.
Pillar 1: Risk-Based Capital Requirements
Pillar 2: Supervisory Review Process
Pillar 3: Market Discipline = Reporting and Disclosure Requirements
Each of these are now discussed in turn:
Pillar 1 - Risk-Based Capital Requirements
Capital is the excess of a bank's assets (mostly loans to the non-bank
public, including security holdings) over its liabilities (primarily
deposits of the non-bank public).
Risk-based capital requirements demand that a bank's capital (or equity) be
at least as large as something specified as minimum capital.
Minimum capital requirements act like a safety net and are set based on the
riskiness of a bank's assets. If a bank makes lots of risky loans or holds
risky securities, then it must hold more capital -more of a safety net -
than a bank that takes less risks. Thus capital requirements act like sort
of a charge on risky speculations.
This helps to curtail risky speculation
(which can often serve to destabilize markets) and provides institutions
with a capital buffer big enough to absorb the higher expected losses on the
asset. In turn this helps reduce the need for publicly funded bailouts of
the banking industry such as what happened with the S&L Debacle and what
seems to happen with IMF bailouts.
Advocates of the so-called Tobin Tax should be rather fond of well-crafted
capital requirements for banks and also other non-bank speculators.
Therefore it would be appropriate for such advocates to have some input into
To see how banks view capital requirements and to see why they like this
charge to be as low as possible (especially since handy public bailouts are
often available anyway) it is useful to look at an example.
Example of the "Cost of Capital" Charge:
Suppose shareholders have 10 units of equity capital to invest in a bank.
Let's suppose the bank's assets will earn 5% and its liabilities will
If capital requirements are at 10% assets, then the bank can create a
total of 100 units in assets by lending with 90 in liabilities and 10 in
capital. Then shareholders Return on Equity (ROE) is:
(100 * 5% - 90 * 3%) / 10 = 23%
If capital requirements are at 5% assets, then the bank can create a total
of 200 units in assets by lending with 190 in liabilities and 10 in capital.
Then shareholders Return on Equity (ROE) is:
(200 * 5% - 190 * 3%) / 10 = 43%
Banks refer to the "cost of capital" as the earnings that are given up by
holding capital earning whatever the assets are invested in (usually a low
risk bond rate) versus the required shareholder return rate, which for banks
is normally around 20% after tax.
In the case of the example above we might
like to calculate the cost of capital of the extra 5 units of capital that
had to be held as capital in the 10% requirement, but got to be released and
invested in banking business (making loans) for another 100 in loans in the
The costs of capital of these 5 units is:
Earnings on 5 units in 5% Capital Requirement - Earnings on 5 Units in 10%
= (100 * 5% - 95 *3%) - 5% * 5 = 1.9
This equates to an ROE cost of 1.9/5 = 38% = 43% - 5%.
So you can see why banks like lower capital requirements on the same set of
assets and why good risk-based capital requirements help deter certain risky
or speculative activities.
Minimum capital is defined in BCA as:
8% * Risk Weighted Asset Base
The risk weighted asset base brings assets into capital requirements
commensurate with the risks associated with them.
These risks are:
Credit Risk = Default risk
Market Risk = Risk of loss on market
positions in the "Trading Book" (defined later)
(Note that Interest Rate Risk is NOT
explicitly addressed here but rather is addressed under Pillar 2)
Operational Risk = other risks such as
computer failure, mistiming trades, fraud
In what follows I will focus primarily on Credit Risk requirements because
this is the primary risk for banks and is the main culprit in financial
Explanation of how this risk is being treated under the new BCA will
serve to illustrate the direction things are headed in and will sound most
of the necessary alarm bells.
Credit Risk Assessment
The contribution of bank assets (loans or securities) to the risk weighted
asset base for credit risk can be calculated using one of these methods:
Standardized Approach to Credit Risk: Each bank asset is assigned
one of the following weights to enter into the Risk Weighted Asset Base:
0%, 20%, 50%, 100% or 150%
The factor will be selected based on the claim counter-party type
(sovereign, bank, corporate) and their rating from an independent body such
as Standard and Poors, or the Export Credit Agencies.
For claims such as
retail mortgages a blanket 50% is used and for unrated entities a blanket
100% is used. Interestingly a risk weighting of 100% for commercial real
estate is being proposed because this area has been so much of the cause of
recent financial crises.
Though a passing statement is made about higher risk weights for higher risk
loans, no explicit mention is made of certain types of loans that caused
great shocks to the financial system in the late 1990s. Specifically I am
talking about the loans underlying the Long Term Capital Management (LTCM)
crisis whereby major US banks lent heavily to this high-risk, highly
leveraged hedge fund whose losses almost collapsed the global financial
Given the growth in these hedge funds and similar vehicles, their
tendency to get debt capital from banks on favorable terms, and the fact
that they are NOT REGULATED because they involve "sophisticated investors"
the BCA should address this explicitly. The unnamed high risk activities
with discretion for setting capital requirements is an area wide open for
BCA also sets out the capital relief that will be given for various credit
mitigation techniques, such as collateral against loans, guarantees, and
This is based on the amount of the asset covered by such
risk mitigation techniques.
The Internal Ratings Based (IRB) Approach
First bank assets are categorized into one of the six categories of
corporates, banks, sovereigns, retail, project finance, and equity.
Under the IRB approach banks will use their own internal measures and
techniques for setting the Probability of Default associated with each
borrower grade. Either the regulators (under the Foundation Approach) or the
banks themselves (under the Advanced Approach) will set the other variables
for assigning a risk weighting - these include Loss Given Default, Exposure
at Default and treatment of guarantees and credits.
The risk weights for each asset are derived using a continuous formula
specified by the BCA which assumes a normal default distribution, and is
function of both the probability of default, the loss given default and the
maturity of the loan under the advanced approach. Another adjustment is made
to the group of assets for concentrated risk exposure to single borrowers.
No adjustment appears to be made for single groups of related borrowers,
which might be a problem, and has certainly been a problem in recent
Under these approaches capital relief is also given for credit risk
mitigation such as collateral, guarantees, and credit derivatives based on
the amount of the asset covered.
There are very detailed sets of rules for the circumstances under which
banks may be able to set capital requirements under the Standardized, IRB -
Foundation and IRB - Advanced techniques.
Without going into this detail here I think it suffices to use the
terminology that the BCA uses - that sophisticated banks with sophisticated
risk management techniques will be the ones that get to set their own
capital requirements, which are then to be reviewed by the Bank Regulators
under Pillar 2.
This means that, generally, the self-setting of capital
requirements will be done by the largest international banks who also suffer
most from the "too-big-to-fail" moral hazard risk.
These are the same banks that tend to exercise power over their regulators
rather than the other way around. Furthermore the complexity of both the
methodology for the subjective approaches and the complexity of the
underlying financial instruments will make it very difficult for the
regulators to adequately monitor capital requirements.
instruments like credit derivatives are very new, and will often be used for
purely speculative, as opposed to risk-mitigation, purposes. Self-setting of
capital requirements for such new, complex and speculative investments is
wide open for abuse.
It is very interesting that the insurance industry
regulators do not yet allow such capital relief on credit derivatives.
Market Risk, Interest Rate Risk and Operational Risk
Market Risk is now referred to as "trading book" risk and covers those
positions in financial instruments and commodities held with trading intent
or to hedge other risks in the trading book.
Trading intent includes
benefiting from short term price movements and locking in arbitrage profits.
Evidence of trading intent must be available.
The BCA specifies asset valuation techniques for trading book risks and
specific risk capital charges as a percentage of these asset values and
capital relief for various hedging strategies. Without having assessed the
impact or implications of these separate requirements I will just note that
these types of distinctions between trading book and non-trading book assets
can create regulatory arbitrage opportunities from the decision of where to
place assets based on where they have the least capital requirement.
Interest Rate Risk arises from duration mismatch between assets and
liabilities which is a major profit source for all financial operations. It
is interesting to note that capital requirements for this are being dealt
with under Pillar 2, to be assessed on a case-by-case basis in the
supervisory review, rather than having any minimal capital requirements or
basic tests specified under Pillar 1.
It is also interesting to note that the insurance industry, for many years,
has had specified minimum capital requirements for mismatch risk based on
the nature of liabilities as well as mandated asset adequacy tests whereby
interest rate shocks are applied to asset/liability portfolios to test the
adequacy of assets. The subjectivity of the banking industry's approach
could leave this need for capital open for abuse.
Operational Risk arises from all other major sources of risk - such as
systems failure, mistiming of trades, fraud and so forth.
It is extremely
difficult to assess and, like with other risk measures, a range of options
are available from specified % income to highly subjective requirements for
the "sophisticated" banks.
Pillar 2 - Supervisory Review Process
This section of the BCA describes the role of bank supervisors in making
sure that banks are managing their risks appropriately.
This involves review
of banks' risk monitoring techniques and ensuring that banks comply with
minimum capital requirements. Obviously this role of the supervisor will
become many times more complicated than it has been for those classified as
This is because of the level of subjectivity and
complexity involved in these banks being able to set their own capital
In my view an adequate supervisory effort in the context of increasingly
complex and subjective capital setting methodologies, in conjunction with
the convergence of financial services, the increasing cross-border
acquisitions, and the growing complexity of financial instruments is
becoming almost impossible for the largest financial players.
earlier this is also where the "too-big-to-fail" moral hazard and associated
risk is also greatest.
Interestingly the current BCA draft states, in its section on Pillar 2 that
"Bank management clearly bears primary responsibility for ensuring that the
bank has adequate capital to support its risks". This sounds very nice. If
only it were true!
Then we might have avoided so many nasty financial crises
whose costs were ultimately borne by the public and generally by those who
could least afford it. In this statement I would have to say that the BCBS
is wrong, and that this view they have is leading bank supervisors down a
very dangerous path.
Because banks sit at the heart of credit (money)
creation - at the heart of the international monetary system that we all
depend on - it is the PUBLIC in general, not bank management, who bear
ultimate responsibility for whether or not the banks have adequate capital
and risk management techniques.
The BCBS, and bank supervisors in general,
clearly need to be reminded of this as they seem to have forgotten that they
have any responsibility to the public at all.
Pillar 3 - Market Discipline or Public Disclosure
This includes disclosure of risk exposures and calculations of risk-based
capital, risk mitigation techniques, and comparison of minimum capital to
Without seeing an example or explicit list of reporting
requirements it is difficult to know how detailed this will be. Nevertheless
it sounds like it has potential for the general public to understand just
what kind of risks the banking industry is getting us into.
What already has become clear is that the major banks are complaining about
the amount of detail of disclosure required under this Pillar.
given the statements above about who ultimately bears responsibility for
bank risks, the public should prefer very detailed disclosure, and maybe
even add some additional requirements - such as details of loans rescued by
4. Problems with the new BCA from Public Interest Perspective
Bank supervision and the setting of risk-based capital requirements are very
Mandating risk-sensitive capital requirements for banking
book assets is very complex because of the diverse range of complex assets
and loan structures banks can invest in (or really, create money for). The
mandating of quantitative capital requirements tends to lump together assets
with different risk profiles into the same minimum capital requirement
This then leads to problems with banks investing predominantly in the
most risky of this class where the returns are higher, but capital
requirements the same, as for a lower risk asset.
This reality played a major role in laying the foundations for the Asian
financial crisis whereby so many loans made by large creditors were related
to overpriced real-estate that didn't carry a capital charge over safer
loans. There is no question this was also a primary cause of the Latin
American Debt crisis, the aftermath of which helped create the first round
of Basel Accords.
There is also little doubt that this facilitated the Long
Term Capital Management Crisis, heavily funded by large US banks.
It is highly likely that this problem of mandated % capital requirements for
broad asset groups and the extensive "regulatory arbitrage" it generates is
a large part of the rational behind the BCA recommendations of Internal
Ratings Approaches. Here banks largely set their own capital requirements
based on their internal assessments of risk for the specific assets they
It is then thought that the supervisory role of regulators and various
disclosure requirements will ensure that banks' capital levels and risk
management techniques are adequate.
In a world where bank regulators truly represented the interests of the
public, and the public had extensive oversight and input into banking system
operations and risk management, this would sound like a pretty good idea. It
would also require that bank regulators actually have the resources and
ability to properly monitor bank risk exposures and capital levels, as well
as the necessary authority to make banks improve their practices where
Unfortunately none of these conditions hold today and this is
discussed in more detail in the following points.
Trends in Bank Supervision
As noted earlier bank supervision has undergone radical shifts in recent
decades in part due to the worldwide convergence of financial services -
banking, brokerage and insurance - operations.
This has created large
conglomerates involved in all aspects of financial services and resulted in
new regulatory structures in the form of "umbrella supervision" of the new
conglomerates. This has complicated financial supervision and also may
create a shift towards more uniform supervision across financial operations
(though we are not there yet, or even close).
The last major industrialized nation to merge financial services was the
United States in 1999. Under such changes the Federal Reserve became the US
Umbrella Supervisor of Financial Services Conglomerates, in addition to
retaining its previous powers as bank holding company and state-chartered
bank supervisor. While the US Government body known as the Office of the
Comptroller of the Currency still retains some powers as supervisor of
national banks, today the Federal Reserve is the "king of regulators".
seems that the Federal Reserve will have the ultimate responsibility for the
supervision of all big financial operators based in the United States. It is
the Federal Reserve in the United States who will ultimately oversee the
standards set by BCA, because BCA applies to the international players that
will be supervised by the Fed.
This reality is potentially fraught with peril for a number of reasons.
First, although the Federal Reserve has some government oversight its
operations are disproportionately controlled by the private banking sector
itself, the very same group supervised by the Fed.
This domination by the
banking sector comes partly from the role of the Federal Advisory Council,
who are the primary Federal Reserve Board advisors and are 100% bankers. It
also comes from the fact that most (67%) of the directors of the 12 Federal
Reserve Banks are appointed by the banks, and that the Federal Reserve Board
is generally dominated by Wall Street choices.
Second is the fact that the Federal Reserve is first and foremost
responsible for the monetary policy of the world's linchpin currency, the US
Dollar. The role of supervisor - concerned with safety and soundness in the
banking system - can and does often directly conflict with the goals of
This creates the potential for very harmful conflicts of
interest with worldwide consequences. A classic example of this arose before
the Latin Debt Crisis when the Federal Reserve, from a monetary policy point
of view, wanted to raise interest rates to squash inflation. At the same
time, based on earlier years' desire for credit expansion (a monetary goal),
the Federal Reserve (as bank holding company supervisor) had allowed banks
to expand loans well beyond what their capital levels could support.
the end of the 1970's past credit expansion had led banks into a situation
where defaults on Latin loans could not be swallowed by their low capital
levels, and the Fed's desired increase in interest rates would surely
trigger such defaults. The end result that solved this conflict - hike up US
interest rates, trigger the Latin Debt Crisis and have the IMF and World
Bank come in as lenders of last resort to bail out the US banks!
paid for this crisis for which the conflict of interest in supervisory
structure/monetary policy was largely responsible? The people of Latin
America, of course!
The recognized dangers of having the umbrella financial regulator be the
same entity as that responsible for monetary policy are illustrated by the
fact that no other major industrialized nation has put these two, often
conflicting, functions under the same body. The fact that this has been done
only in the country that is responsible for credit creation in the linchpin
currency could have serious global ramifications as the example of the Latin
debt crisis indicates.
The situation in the United States before Gramm-Leach-Bliley was that the
Federal Reserve as bank holding company supervisor would basically assign
staff either from Washington and/or the local regional Fed bank to work
permanently on the supervision of the larger banks.
These staff work mostly
on site at the big banks, sort of like permanent fixtures there, or actually
like staff of the banking group itself. These close relations are likely to
get even closer under the "self-regulation" approach proposed by BCA for the
larger banks, and don't bode well for independent supervision of the larger
The incredible complexities of monitoring the capital adequacy of financial
conglomerates in a world of increasingly complex instruments and loan
structures under the "self-regulatory" methods of the Internal Ratings Based
(IRB) approach (specified by BCA) will likely made adequate bank supervision
a Herculean task!
Given that a potentially talented bank supervisor would
makes pots more money working for the banks themselves, the job is close to
impossible and therefore wide open to abuse by those banks most likely to
adopt IRB. That is, the big banks, and the ones for which bailouts are most
These new rules have the potential to increase both the frequency and
severity of IMF bailouts by allowing more risks to be taken and by allowing
those most in need of bailout mechanisms the most leeway for "bending the
rules" during their "self-regulation".
Global Financial Consolidation and "Too-Big-to-Fail" Risks
International treaties like GATT, administered by the WTO, and under which
new financial services agreements have been added, are accelerating the pace
of cross-border acquisitions by large Western institutions.
contributor to this activity was the Asian financial crises, in the
aftermath of which various countries and investors were forced to sell off
their bankrupt financial institutions at fire-sale prices to the Western
institutions who benefited from the IMF bailouts.
Domestically, within the borders of the G-10 countries, mergers and
acquisitions between financial institutions have also been accelerating.
This is creating huge "financial empires" that are increasingly
too-big-to-fail and, as noted earlier, will also be able to set their own
internally determined capital requirements.
The incentives for abuse of
minimal capital requirements created by the "too-big-to-fail" moral hazard
are tremendous. This may also give the larger players extra competitive
advantages via lower capital charges and thereby facilitate more
Furthermore these financial empires seem to be acquiring greater powers over
their own supervisors, meaning that supervisors may not be able to control
them anyway, even if they wanted to.
Further compounding the problem is that
these same regulators are allowing mergers and acquisitions to proceed
The best example of that recently was the Federal Reserve's speedy
approval of Citigroup's acquisition of the Mexican banking giant Banamex.
The Federal Reserve completely ignored all public opposition to this deal,
and gave no justification for its approval or for overlooking public
One can conclude from this that the Federal Reserve, now the
financial regulation king, does not consider itself at all subject to the
discipline of democratic accountability.
Addressing Causes of Financial Crises
We saw earlier that some of the requirements in the new BCA are aimed at
addressing some of the causes and excessive risk taking that ended in
various crises such as the Latin American Debt Crisis, the Asian Financial
Crises and the US Savings and Loans Debacle.
Yet other areas of concern are notably absent. The past few years have seen
a rise in what are known as hedge funds which are generally high risk,
highly leveraged investment funds for the extremely wealthy. They are also
completely unregulated on the premise that they involve "sophisticated
As we saw in the case of the Long Term Capital Management fund,
banks have been making significant loans to these hedge funds without any
corresponding capital charge commensurate with the risks involved.
Fortunately the banking industry was able to bail itself out of this crises
and the public did not have to bear the costs of the associated
However the new BCA does not appear to address this increasing
risk of exposure to hedge funds explicitly at all. With no extra capital
charge on hedge fund financing, banks are probably taking excessive risks in
This also exacerbates the risks that hedge funds introduce into
the markets by providing them with an easy source of financing.
The new BCA also does little to address the issue of bank speculative
activity, outside more traditional loans, and what risk this introduces into
the financial system in general.
For example some disincentive on
speculative activity like currency attacks would go a long way towards
reducing major risks in the financial system.
Credit Creation for the Poor and Predatory Lending
The fact that under both the old and new BCA there are no additional capital
charges for sub-prime loans seems to have created a situation whereby banks
are originating a significant amount of sub-prime loans to prime risks.
tends to happen with mortgages in the lower income markets and, in fact, in
2000 the Chairman of Fannie Mae reported that about one third of sub-prime
home loans in the US actually could have received a prime loan if credit
assessment had been done properly.
It seems that the lack of capital charge differential has incented a number
of banks to offer higher yielding sub-prime loans which reflect a higher
risk in the return but not in the capital charge. This has had tragic
consequences for these borrowers with many people losing their homes in
I am pretty sure that the folks who meet in Basel don't have
lower income customers much on their minds, therefore it is very important
for NGOs to make this point.
In general the whole area of predatory lending and credit creation powers
over the poor must be addressed in bank supervision standards and is
currently nowhere to be found in BCA. In the US for example, the banking
industry has a long history of discrimination in providing credit to various
groups and a poor record of providing credit on reasonable terms in low and
middle income neighborhoods.
Part of the tremendous growth in both overseas lending and sub-prime lending
by US banks has surely been driven by the fact that domestic non-bank
corporations have sought financing from non-bank sources such that only 20%
of their financing actually comes from banks. This has lead to banks
increasingly accessing the retail and overseas markets for credit creation.
In both of these markets the banks have not behaved well, and have abused
their power over financially weaker debtors. Only stronger bank supervision
representing the interests of these debtors can help remedy such problems.
Supervision of US financial holding companies by the Federal Reserve does
not bode well for any representation of the interests of poorer and foreign
creditors in bank supervision. The Federal Reserve has a long track record
of ignoring the interests of these groups and indeed has been lax in
enforcing standards such as the US Community Reinvestment Act.
preview of how the Federal Reserve may respond to interests of these groups
in the future was provided by the Fed's speedy approval of Citigroup's
recent acquisition of the Mexican banking group Banamex. In this approval
the Federal Reserve completely ignored all complaints from NGOs representing
low income groups who have been harmed by Citigroup's widespread predatory
The total non-response by the Fed to all complaints about
the merger has lead many observers to wonder whether Citigroup actually
supervises the Federal Reserve now.
Non-Bank Financial Institutions
BCA does not cover non-bank financial institutions. However we are seeing
various countries' umbrella supervisors feeling the pressure to streamline
regulation in the wake of financial services convergence.
One the surface it might not make too much sense for a non-bank lender to
have different capital requirements than a lender with a banking license.
However it does make more sense if one considers that banks are backed up by
various bailout mechanisms including the IMF and FDIC, due to their special
status of being creators of money for the (M3) money supply.
Because of this
central role in money creation it is more important for confidence to be
maintained in banks than in non-bank institutions. This is what maintains
the overall confidence in the international monetary system.
likelihood of bailout is much higher for banks, particularly the large ones,
and bank capital requirements are of much greater interest to the public
than those of non-bank financial institutions.
That said, there could also be a very important role for risk-based capital
requirements on non-bank financial institutions to curtail the type of
speculative activity often responsible for causing crises in the first
People opposing the Bretton Woods institutions and advocates of the
Tobin Tax might want to keep this in mind as risk-based capital standards
develop across other financial players.
5. Need for Public Input
The previous sections have been prepared to present a case for public input
into the Basel Capital Accord for the majority of the public who are not
aligned with the interests of big financial players, but are certainly
affected by such international banking agreements.
Supervision of banks and
their risk management practices are important public issues for reasons
However the unfortunate reality is that, of the 200+ public comments
received by the BCBS, only 1 or 2 are public concerns from outside the
finance sector. These comments can be viewed at the BIS web site at
The majority of comments coming from the larger banks (e.g.
comments from Citigroup and the American Bankers Association) are generally
asking for more leeway in setting their own capital requirements, and
basically requesting lower capital standards. Furthermore there have been
many complaints from the big banks about the proposed disclosure
Originally the last comment period was supposed to be the one ended May
31st, 2001 but due to the number of comments about the current draft the
BCBS has stated on its web site that it will issue another draft for
comments in early 2002.
Hopefully this will provide opportunity for various
NGOs to compile and submit a list of concerns.
This document is intended as
a discussion document to begin the process of collecting comments and
concerns from various NGOs working on monetary system issues.
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