The Bankers' Bankers' Bank: The Bank of International Settlements

By Suter, Keith | Contemporary Review, July 2004 | Go to article overview

The Bankers' Bankers' Bank: The Bank of International Settlements


Suter, Keith, Contemporary Review


'YOU mean to tell me that the success of the program and my re-election hinges on the Federal Reserve and a bunch of --ing bond traders?' This was the response of Bill Clinton, newly elected but not yet inaugurated as US President, when on 7 January 1993 he was briefed by his economics team on the limited financial power he would have as President. Other entities would guide his destiny.

What is significant in this quotation (from Bob Woodward's book. The Agenda: Inside the Clinton White House) is that Clinton had spent two years talking about economics but had not learnt all that much about the real world of economics. In 1991, President George Bush won the Gulf War and seemed impossible to beat in the 1992 presidential election. Clinton, then an obscure politician from an obscure state, decided to campaign for the presidency. He avoided foreign policy (where the president was strong) and instead concentrated on the economy (where the president was weak). 'It's the economy, stupid' was the campaign slogan. But despite all the speeches and campaigning, he failed to grasp the power of the US Federal Reserve and the bond traders over any president.

In 1998, with Clinton in trouble over the Monica Lewinsky affair, financial commentators were happy with the lack of presidential power. Whatever happened to the President over his Congressional problems and the threat of impeachment, the economic boom would continue. The markets had confidence in Federal Reserve Chairman Alan Greenspan and Treasury Secretary Robert Rubin. The president's fate was irrelevant.

Standing behind the US Federal Reserve (which is the US bankers' bank) is yet another bank: the Bank of International Settlements (BIS). This is the bankers' bankers' bank. This is the least known part of the global banking system.

Once a month, the world's eleven most powerful central bankers gather in the Swiss city of Basle to discuss common problems. The meetings are not open to the public and are not publicized. This is not a sinister organization aimed at global financial domination (though some extreme left-wing and right-wing American political groups have argued that it is). But in the cosy world of banking, it is part of the final line of defence when there are runs on national banking systems. It is a bit like the International Monetary Fund--but it rarely receives the IMF's publicity.

Central Banks

The BIS is the central bankers' bank. Most national banking systems now have some form of a central bank or reserve bank to co-ordinate some of their activities (such as the Bank of England in the UK). A central bank is a banker to other banks. The final daily cash settlements within the banking system and between the banks and the central authority take place through a number of accounts held by the central bank. This means that the commercial banks involved must keep sufficient funds in the accounts held with the central bank.

A central bank also supervises the national banking system to ensure that banks do not operate fraudulently and that their customers' deposits are secure. The basic concept is 'capital adequacy': the need for enough realizable assets within a bank or other financial institution to enable it to absorb losses and thus avoid the risk of insolvency. Countries used to set their own capital adequacy levels. This has changed and a system was created by the BIS: the 1988 Basle Accord.

The BIS

The BIS was created in January 1930. It is the world's oldest international financial organization. Although based in Switzerland, the BIS is an international entity and Swiss officials have no right to enter the building without permission. It has immunity from Swiss criminal and administrative jurisdiction. The BIS is owned and controlled by the central banks. According to its charter, it is 'to promote the co-operation of central banks and to provide additional facilities for international financial co-operation'. …

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