Regulation’s vampire squid
“The shadowy history of the secret bank that runs the world”, the subtitle of Adam LeBor’s new book, may sound sensationalist. But “Tower of Basel” is an absorbing and thorough examination of one of the world’s most important yet opaque institutions: the Bank for International Settlements (BIS).
The book’s publication is timely: revelations of Big Brother-style snooping by the U.S. government and the increasing influence of central bankers are troubling examples of what appears to be a power grab by the ruling elite. “Tower of Basel” shows how concentrated and opaque that control is in finance.
The BIS is often considered geek-central. It is the home of the immensely complicated Basel III rules for bank capital. Its reputation among financial types was enhanced by its regular warnings about excess leverage – starting well before the 2008 crisis. The BIS was chosen as the natural host for the Financial Stability Board, the group of global leaders that has coordinated the response to the crisis.
LeBor devotes little time to these issues, however. His concern is the bank’s lack of transparency and accountability. Despite being taxpayer-funded, the BIS is a club that operates with no democratic oversight. The bank is solidly profitable: it made $1.2 billion in tax-free profit in its last calendar year from the fees and commission it charges central banks for short-term liquidity and credit, gold swaps and other investments. That much, at least, is in the public domain.
But the BIS only makes ad hoc donations in the event of natural catastrophes: it has no set programme of philanthropy, according to LeBor. It also preciously guards the content of the discussions held at its offices.
The BIS’s history, described vividly by LeBor, suggests that opacity is troubling. The bank was founded in 1930 as a vehicle to funnel German reparations under the Young Plan after World War One. But it quickly adapted to become instrumental in keeping finance flowing during World War Two. Subsequently it oversaw the breakdown of the gold standard at Bretton Woods and the birth of the euro and the European Central Bank.
The BIS, then, has been a master of reinvention. But, as LeBor explains, it’s hard to dissolve an institution founded under international treaty with fixed statutes. Senior managers at the bank enjoy privileges akin to diplomats: their papers are inviolable and their actions at the bank are immune for life under Swiss law.
What’s more, this cosy club has a mixed moral record. Belgian and Czech gold stolen by the Nazis during World War Two found its way to vaults in the Reichsbank via the BIS. The bank was also alleged to have protected looted Nigerian money following the death of dictator Sani Abacha in 1998. In the 1930s, rumours abounded that BIS officials were using their informational advantages to speculate against the Swiss franc.
One of LeBor’s most telling anecdotes relates to the bank’s origins. Montagu Norman, then Bank of England governor, asked Walter Layton, editor of the Economist, to draw up the BIS’s constitution. Layton concluded that it couldn’t be done.