London: European Central Bank (ECB) president Jean-Claude Trichet and US Federal Reserve chairman Ben S. Bernanke will meet about 250 of their colleagues from around the world on 23 and 24 June at the Bank for International Settlements’ (BIS) copper-coloured, cylindrical headquarters after a year in which investors ignored their calls for prudence.
With hedge funds and private equity firms pumping record sums of money around the world, central bankers fear investors are taking on too much risk. So the bankers are increasingly turning to the Basel, Switzerland-based BIS, the oldest international financial institution, for research and advice and to coordinate damage-control plans.
The bank’s most important role may be in providing a venue for swapping information and ideas among those charged with maintaining the stability of the global economy. “If the BIS didn’t exist we’d have to invent it,” said Laurence Meyer, 63, vice-chairman of Macroeconomic Advisers, Llc. and a former US Federal Reserve governor.
The “central banks’ central bank” now performs many of the functions of a monetary authority, churning out research on everything from derivatives to inflation-targeting. It also holds about 6% of central banks’ currency reserves on their behalf.
“Funds are flowing across the world with unbelievable speed, and central bankers feel they are in uncharted territory,” Meyer said. “Central bankers want to talk to each other about this, and the BIS is the best vehicle.”
Market blowouts such as the Asian crisis of 1997 are always hard to spot in advance, say policymakers, but the increasing popularity and complexity of the derivatives used by investors to hedge their bets are making the task even tougher.
“The rapid development of global financial markets points towards the importance of strengthening the cooperation within the worldwide community of central banks,” Malcolm Knight, 63, general manager of BIS, said in an emailed response to questions.
Providing a forum for central banks to discuss financial globalization is only the latest incarnation of an organization set up in 1930 to manage Germany’s World War I reparation payments. In the interim, it handled gold looted by the Nazis, helped oversee the post-World War II global currency system, bailed out a Communist government during the cold war and midwifed ECB.
US treasury secretary Henry Morgenthau tried to shut down the bank at the 1944 Bretton Woods conference; only intervention by John Maynard Keynes saved it. The US soon saw the usefulness of BIS as an arena to fine-tune the Bretton Woods global currency regime.
BIS also straddled the divides of the cold war, giving central bankers from both sides of the Iron Curtain a rare forum. In the early 1980s, it helped bail out Yugoslavia after a debt crisis hobbled the country’s ability to meet its international obligations.
The first foundations for European currency union were laid at BIS and in 1994 the European Monetary Institute moved from Basel to Frankfurt, where it later became ECB.
As barriers to capital flows fell in the 1990s and countries such as China and India become more integrated into the global economy, BIS membership has swelled to 55 from 36 over the past decade.
“Markets are increasingly global and central banks are not,” said Willem Buiter, 57, a former member of the Bank of England’s Monetary Policy Committee. “So there’s a huge vacuum to be filled.”
The agenda for this year’s annual meeting may already have been set by a BIS report. Last month, the bank argued that hedge funds should “enhance sound practice” methods for improving risk management and preventing potential shocks to the international financial system.
Growing concern about the extent of investors’ risk-taking comes as a global cash glut swamps the ability of central bankers to set policy. New Zealand central bank governor Alan Bollard said in March that “cheap international money” has stymied his efforts to curb a housing boom, a sentiment echoed by Bank of England governor Mervyn King.
Buiter, now a professor at the London School of Economics, says liquidity and new financial instruments are pouring across borders so quickly that BIS’s ability to analyse financial markets is struggling to keep up.
“The problem is that you will inevitably end up fighting the last war,” said Buiter. “The global reality is they have to agree on everything, so things become very, very slow.”
BIS’s advocates nevertheless point to its power as a magnet that brings together the world’s most powerful central bankers and their officials.
“The BIS has more influence than you might think,” said Ernst Welteke, 64, who headed the Bundesbank between 1999 and 2004.
BIS’s meetings, which usually take place every two months, give central bankers a chance to meet face to face. Policymakers typically arrive on Sunday evenings and governors from the Group of 10 nations dine together. Reserve Bank of India governor Y.V. Reddy is also attending the meetings.
The next morning, the likes of Trichet, Bernanke, King and China’s Zhou Xiaochuan can be seen having breakfast in the restaurant of the Basel Hilton before they stroll across the street to BIS’s 20-storeyed building, which was designed by Swiss architect Mario Botta.
There, policymakers share ideas and experience on everything from the state of the global economy to derivatives to currency management until late into the evening. “Governors find these discussions uniquely valuable,” said Knight. “They have the chance to really hear others’ news.”
Central bankers also get time to relax. At last year’s annual gathering, policymakers crammed into the bar of the Basel Hilton to watch the World Cup soccer match between the Netherlands and Portugal, smoke cigars and exchange banter.
“There’s a wonderful camaraderie among central bankers that means they really get to know each other very well,” said Meyer, who sometimes represented Alan Greenspan during his time at the Fed between 1996 and 2002. Travelling to Basel “was unbelievable fun.”