Lifting the veil on the central bankers' bank

BIS general manager Andrew Crockett says the institution's role is to promote cooperation between central banks. BIS

One of Basel's outstanding landmarks, the impressive tower of the Bank for International Settlements (BIS), houses a very mysterious organisation.

This content was published on April 1, 2003 - 07:51

The BIS's outgoing general manager, Andrew Crockett, gave swissinfo's Robert Brookes an insight into the oldest international financial institution, established in 1930.

Crockett stepped down on Monday after being in the post since 1994.

A former staff member of the International Monetary Fund and a former executive director of the Bank of England, Crockett is to be succeeded as BIS general manager by Canada's Malcolm Knight.

The BIS is generally known as the central bank of central bankers and acts as a forum for international monetary and financial cooperation.

It provides a range of banking services aimed at helping central banks manage their foreign exchange and gold reserves.

It also acts as a banker to, and manages funds for, international financial institutions.

But it doesn't accept deposits or provide financial services to private individuals or companies. And it is not allowed to make advances to governments or open current accounts in their name.

About 130 central banks and international financial institutions place deposits with the BIS. The total of currency deposits with the BIS amounted to $154 billion at the end of March 2002, representing 7.6 per cent of world foreign exchange reserves.

swissinfo: Andrew Crockett, to what extent would you agree that to the layman the BIS seems to be a bit of a mystery - an organisation that's difficult to put a handle on?

Andrew Crockett: That's certainly true. Most people, it's fair to say, have never heard of the BIS. It doesn't get into the headlines in the same way that the International Monetary Fund does.

Its job is to promote cooperation amongst central banks and that is very often behind the scenes kind of cooperation. That's probably why you never hear very much of it. It doesn't make dramatic decisions itself but it facilitates central banks in making their decisions.

swissinfo: The BIS is often referred to as the central bank of central banks. What is its role?

A.C.: What the BIS does is host meetings and host committees, many of which are very influential in charting the policies of central banks in their management of the national and international financial system.

The BIS is fundamentally there to serve them, so you could say in one sense that we react to their requests to provide facilities for cooperation. Of course you can also see its role as helping to set the agenda, and if we do our job well we should be spotting the issues and the problems that are going to be important in a few months or a year's time.

We should be encouraging the central banks to think about and analyse such issues, and we should focus on their international dimensions. Naturally national policy makers think about how things affect their countries and they don't always think about the international dimension.

swissinfo: How much power does the general manager wield?

A.C.: Not really very much. The function of the bank is to serve central banks, so if the general manager started trying to do things that were not wanted by the member central banks, he would pretty soon be told to change his ways.

swissinfo: As the BIS helmsman, in what direction have you been steering the organisation?

A.C.: Helmsman is a good term now that we in Switzerland are the sailing champions of ocean yachting.

I think one of the changes that has occurred during the time that I've been general manager, and it's not solely due to me, has been to globalise the institution.

This was predominantly an organisation that was made up of European central banks and it played a very useful and important role since its foundation, in particular in the 1970s and 1980s as European monetary integration was proceeding.

But what we now realise is that many of the emerging market countries are becoming financially and economically more important. We have to find a way - and it's not easy - to preserve the club atmosphere of the BIS, and the openness and frankness that characterise the cooperation that takes place.

At the same time, we need to recognise that there are very many important countries outside Europe, the United States and Japan - countries like China, India, Brazil and Mexico - which are already playing a bigger role on the world stage and will continue to do so. Their central banks share many of the concerns and we have to find ways of integrating them.

The second change is that central banks have become more and more conscious of their responsibility of preserving financial stability, as well as managing monetary policy - changing interest rates to try and keep inflation under control.

Financial stability is making sure that in an uncertain and troublesome world you don't find that the financial system lapses into a crisis because of weaknesses in particular institutions or market functions, so central banks have become more and more interested in that. That's another challenge.

swissinfo: This is perhaps a difficult question for you to be objective about but forget modesty for the time being; what do you think have been your achievements as general manager?

A.C.: I prefer to see it in terms of the milestones that the organisation has passed while I've been here. I hope I've played some role in them but undoubtedly many people have played a part.

One of them is to create a role for the BIS as a forum for central bank cooperation throughout the world and not predominantly among the G10 big industrialised countries or the European countries.

We've opened an office in Hong Kong which acts as a focus for the cooperative work among the Asian central banks. We've just opened one in Mexico City for the Americas. All of that I think has been very important.

We've also pushed forward, I believe, the analysis of what causes financial instability. We've had a lot of instability over the past ten to 15 years in the world economy. You remember the crises in Mexico, East Asia and Long Term Capital Management, the American hedge fund that failed.

People don't realise it now but LTCM almost created a crisis in the New York financial markets. We have put in place procedures that enable us to deal more effectively with those problems.

It doesn't mean to say there won't be crises in the future - I'm sure there will - but I think it's another achievement that the international community of central banks, to an important extent working through the BIS, has recognised those issues and put in place mechanisms for dealing with them.

This never attracts attention because obviously you don't notice a crisis that doesn't happen. You only notice the crisis that does happen. But I feel that we've probably avoided a few risks that might not have been avoided in other circumstances.

swissinfo: You chair the Financial Stability Forum set up in 1999? How important is that body and what does it do?

A.C.: I think it's a body that can build on its success to date and become even more important in the future.

If you think about it, these days it's not governments that control what happens in financial markets. It's the financial markets themselves and if they function well, things seem fine. Businesses and households can get the funds that they need for investment and for mortgages. Savers can get the returns that they want without being subject to losses or uncertainties.

If the financial system doesn't work well, we know what kinds of things can emerge. The Financial Stability Forum was set up by governments and it recognises that it's now not only a question of ministries of finance and central banks doing their job of ensuring stable growth of the economy.

The regulators, those who oversee banks, those who oversee insurance companies, the market regulators, the accountants, all play crucial roles in the effective functioning of the financial system and each depends on the other...

We in the Forum have tried to pull together all those actors - you might call it the directory for the world financial system - so they can share information, can discuss potential vulnerabilities with each other and hope to head off at least some of the financial problems that might otherwise come.

swissinfo: How has the worldwide economic situation dictated what you have had to do at the BIS?

A.C.: I think we have had to react to developments that might not have been forecast ten or 20 years ago. Ten or 20 years ago, if you'd said the world will have low inflation, independent central banks, full central bank credibility, the first question you would have been asked is: "Have you been smoking a banned substance?"

In fact, we have all of that now but we have not solved all the issues. In some countries, far from inflation being the problem that we thought was perennial, we have deflation so the BIS and the groups that work within it have had to analyse the problems created by deflation and how you respond to it.

We've also found that certain institutions that had built their contracts on the expectation of high inflation and high interest rates are now facing difficulties. Insurance companies, for example, that used to guarantee their policyholders certain rates of return now cannot pay those, so that's an issue too.

There have been plenty of questions that come up as a result of developments. We had September 11, which put a sudden operational strain on the system. Central banks had to cooperate to make liquidity available. That's the kind of problem that you have to react to.

swissinfo: Looking forward, what future role do you see the BIS performing?

A.C.: My successor and the staff here have to be nimble in spotting the role that an institution like ours can play but I'm convinced it's there because financial markets now shape economic destinies in a much greater way than they did before.

Among the most powerful players in financial markets and influences in financial markets are central bank policies and central bank attitudes. Moreover, markets are integrated globally so what's done in one corner of the world has a direct or indirect effect in other corners of the world.

In my view, that means that central banks have to be aware of what they are doing and have to take advantage of sharing with each other best practice, objectives and means of dealing with things. So I think there will always be a demand for central banks to get together.

We see that reflected in the fact that the central banks come here every two months, most of them represented at governor level. They bring their staffs.

In between their meetings, central bank advisers, the chief economists, the economic model builders, the legal advisers and the administrative people meet.

I believe what they take away from that are more effective institutions better able to serve the needs of their financial systems and economies and therefore better able to promote economic well-being, growth and all of the social and political advantages that come with a strong economy.

swissinfo: Is Basel the ideal place for the BIS headquarters, rather than say London or New York?

A.C.: Maybe I'm biased because I've been here for ten years but I actually think it is true that if the organisation were being created today, I doubt it would come to Basel.

The people who participate in our meetings are quite accustomed to going to meetings in Paris, London, New York, Tokyo and so on.

What I think we can offer them is that when they come to a meeting here there's a degree of calmness and quiet. There are hotels nearby so that they can walk across the street to us. They can be very informal.

You can sometimes see Alan Greenspan (chairman of the US Federal Reserve Board) crossing the street with nobody paying any attention to him. I don't suppose that would happen in New York.

We've found too that the travel connections are so far pretty convenient. I don't hear any complaints and I don't hear from the participants any suggestion that they would be happier if we located ourselves in a big noisy city.

It might be more exciting after the meetings are over but in fact most of our governors are so exhausted they like to go to bed anyway, so they quite appreciate that they aren't tempted by the bright lights of the big city.

Your future career hangs in the balance, so to speak. Your name is on the list to take over as chairman of Britain's Financial Services Authority, arguably the world's most powerful financial regulator. How much would that job appeal to you?

I've said to many people that I don't think it's appropriate for me to make any plans until I've left here. I read the newspapers and people are speculating but there is absolutely no truth in any of the rumours. My future plans are a secret even from me at this stage.

swissinfo interview: Robert Brookes

Key facts

The BIS in Basel is the world's oldest international financial institution, dating back to 1930.
It is often referred to as the central bank of central bankers.
The outgoing general manager of the BIS, Briton Andrew Crockett, is handing over to Malcolm Knight of Canada.
From April 1, the Special Drawing Right (SDR) will replace the gold franc as the Bank's unit of account.
The SDR is an international unit of account defined by the IMF and is based on a basket of major currencies.
The gold franc has served as the unit of the account for the BIS since its establishment in 1930.

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