Tower of Basel: The Shadowy History of the Secret Bank that Runs the World

by Adam LeBor

  Yet the second decade of the twenty-first century could yet turn out to be the most challenging, even perilous, for the bank. The bank has profited immeasurably from the rapid pace of globalization and economic development and will further do so as new members join from the developing world, all eager to profit from the BIS’s expertise and banking services. “There are many emerging market economies for whom the BIS banking operations have real value,” said King. “They would feel they would lose something without a bank for central banks.”23

  But the ongoing financial crisis has changed more than banks’ balance sheets. Citizens and activists around the world are demanding accountability and transparency from banks and financial institutions. Yet, most have never heard of the BIS, an information deficit that this book has hopefully filled. The bank’s management views the BIS’s legal inviolability, which is protected—like that of the United Nations and the European Central Bank—by international treaties, as its greatest strength and believes the BIS to be protected in perpetuity. Yet the bank’s statutes, written in 1930 for another age, of deference and obedience, may turn out to be its Achilles heel.

  The question of the Argentinian reserves raises profound questions about the BIS’s legal inviolability. The BIS’s immunities could soon be tested again. By early 2013 most observers expected Greece to renegotiate its sovereign debt, which would demand that investors holding Greek bonds would have to take a “haircut” and write off some of the value of their holdings. What would happen, then, if Greece, like Argentina, shifted its foreign reserves to the BIS to avoid angry creditors? If Greece followed Argentina, perceptions of the bank will shift. The BIS’s claims of moral probity and of acting in the “public interest” will start to appear decidedly shoddy. For now, the bank has the protection and support of the Swiss courts and the Federal Council. But even in the land of the anonymous, numbered account, public—and legal—opinion is shifting about the country’s reputation as a refuge for those seeking legal inviolability. Switzerland is under sustained pressure from the US and European authorities to ease its secrecy and guarantees of anonymity.

  As long as Argentine foreign reserves remain out of the creditors’ reach, the BIS sets a unsettling precedent: that if a BIS member country defaults, or is about to, it could ship its national reserves to Basel for safekeeping. There are the beginnings here of uncomfortable—for the BIS—parallels with the 1930s and ’40s. In March 1939 Montagu Norman, one of the bank’s founders and most powerful directors, and Johan Beyen, the BIS’s president, refused to stop an order from the National Bank of Czechoslovakia to transfer some of its gold holdings from its BIS subaccount at the Bank of England to the Reichsbank BIS subaccount. It was obvious that the transfer order, given after the Nazis had invaded Czechoslovakia, had been issued under duress. Yet Norman deliberately took the view that the interests of the BIS and the new, transnational financial system were more important than refusing, or even delaying the request. Beyen went along with this decision. The gold was credited to the Reichsbank’s account. During the Second World War years, the bank acted as a depositary for looted Nazi gold, even though Thomas McKittrick, the president, was specifically warned that the gold might be stolen. He believed that the bank had no business asking where the gold came from and was anyway protected by its statutes. But even with its powerful allies, the bank still had to fight hard to escape being closed down because of its acceptance of looted gold.

  For now, the BIS’s statutes and the support of the Swiss legal system ensure that its reserves are untouchable. But laws—and treaties founding international banks—are made in a political context and can be changed. Legal and political pressure could mount. The change in perception of the bank is already happening. Influential analysts and economists, such as Claudio Loser, cited above, are questioning the bank’s ethics, behavior, and legal inviolability. In the age of Twitter and Facebook, the BIS, once its central role and importance is known, could yet find itself at the center of a global firestorm.

  The BIS’s assets may remain untouchable, but as more activists understand the bank’s role in the global financial system, its secrecy and elitism, they will increasingly question its operations, role, and need to exist. Such a shift in global perception of the BIS, and the demands to make it more accountable, will bring pressure on politicians, which will then be passed on to the central bank governors, who are independent but still appointed by governments. The controversy over the Argentine reserves could, in turn, corrode the basis of the bank’s soft power: its regulation and supervisory frameworks. Commercial banks, might, for example, ask why they should adhere to the Basel Committee’s banking rules, when the host bank itself is arguably protecting a central bank against its creditors?

  For now, at least, the BIS can rely on its powerful friends. But if the political climate continues shifting toward transparency and accountability, the bank’s managers may find that their calls take longer to be returned and are briefer in duration. The bank needs to reform in three areas to ensure its survival: transparency, accountability, and corporate social responsibility.

  The first is the simplest. The BIS should hold a press conference after the bimonthly governors’ weekends and make it available on the Internet. The bank should publish the attendance list and the broad themes of discussion at the weekend meetings, in particular of the elite Economic Consultative Committee that meets for dinner on Sunday evenings; the Global Economy Meeting the next day, the BIS directors’ meeting that deals with the bank’s governance, and deliberations of the Markets Committee, which deals with the international financial markets.

  The BIS and the central bankers argue that such a move would inhibit discussion. King said,

  The BIS has moved quite a long way to being open about the state of its finances, its legal position, its board membership, and how it works. The membership of the BIS is well known, and from that you can infer that the governors of the member countries will come to the meetings. The themes and subjects of discussion are of value solely because they are confidential. I would contrast the BIS meetings with the G20 and the IMF where communiqués are published, which purport to be transparent and report what is said. But the expectation of publication constrains useful discussion.

  The whole point of the BIS conversations is that they are private and are confidential. There has to be a role for private conversations for them to be useful. You cannot have every conversation between central bank governors being minuted and reported. Then there are no useful conversations, simply people making public statements at each other.

  We don’t do deals at Basel. It is too strong to say that this is coordination or harmonization as responsibility, for policy making remains with national central bank committees. The BIS meetings do make us much better informed about why people have done various things and maybe what they intend to do in the future.24

  It is true that central bankers do need to be able to speak freely to one another. But there is no need to put a camera in the room and post the video on YouTube or even release a transcript. But the bank should publish minutes: the broad themes of discussion, the lines of debate, and the overall conclusions of the meetings. All the central bankers and officials present at the governors’ meetings are public servants, charged with managing national reserves, which are public money. The central bankers are accountable to the citizens who pay their salaries and pensions. It is no longer acceptable for them to gather in a secretive cabal and refuse to release even minimal details of their meetings. The US Federal Reserve is a useful model here. Before each meeting of the Federal Open Markets Committee, the bank releases edited minutes of the previous meeting. The Federal Reserve’s website already carries detailed information about which bank officials are attending the BIS weekends and their hour by hour itinerary while in Basel. Neither the Federal Reserve nor the dollar nor even the BIS have collapsed as a result.

  Central bankers argue that the comparison is not valid as the BIS is not a decision-ma
king body. King said, “We publish minutes at the Bank of England because we take a formal decision that we have been mandated to take by the UK government. There are no formal decisions like that taken at the BIS. If the BIS was taking interest rate decisions, it would be right to have that degree of transparency. We don’t generate decisions at the BIS. We have informal discussions, then we go home and we take our decisions.”25

  Secondly, the BIS should be stripped of its legal inviolability. The BIS is a bizarre hybrid—an extremely profitable commercial banking operation protected by international treaty. Its founding statutes are certainly out of step with the modern age. The statutes provide unnecessary levels of legal protection for a bank dealing in public funds, and they warp the psychology of the BIS. They fuel the peculiar arrogance of much of its senior management. The bank claims to have a mission of public service, yet is structured in such a way that the public is kept as distant as possible, behind the bank’s wall of legal immunities. Such a change would demand an Extraordinary General Meeting (EGM). There is a precedent here. In recent years, EGMs were called to change the bank’s unit of account from the gold franc to the Special Drawing Right, to forcibly buy back the shares held in private hands, and to distribute the shares held by the former Yugoslavia to its successor states. Voting is decided at EGMs by member central banks. If the governors and officials of the member central banks were mandated by their national governments to vote for the change and modernization, the bank would have to accede to the changes.

  Thirdly, such an EGM could also mandate the bank to spend some of its profits on corporate social responsibility and philanthropy. The bank has for decades reaped rich rewards of its stewardship of public funds. In the financial year 2011–2012 the BIS made tax-free profits of almost $100 million each month. It is time to return some of those profits to a wider society, beyond the annual dividends paid to the central bank shareholders. The bank refused to answer questions from the author on how much it spends on charity and philanthropic projects. The words “philanthropy” and “charity” do not appear in the 2011–2012 annual report. Lisa Weekes, the bank’s head of press, said that as most of the bank’s staff live in or near Basel, the BIS provides “modest financial support for selected initiatives or institutions within the Basel region . . . with a social or cultural purpose.”26 The bank also makes ad hoc donations in response to major natural disasters, such as for the typhoon victims in the Philippines in December 2012, but refuses to say how much.

  This is feeble. It is time for the BIS’s much-vaunted globalism to extend to its social conscience. The bank should set up a charitable foundation—George Soros’s Open Society Institute could be one model—to support global training, education, internship, and development programs for young business people and bankers. One day’s worth of annual profit—$3.2 million—would be enough to kick-start such a program, which with the BIS’s imprimatur would soon attract corporate sponsorship. The bank’s staff could be encouraged to contribute, in lieu of the income tax they are spared. The foundation should be given a block of shares to ensure that civil society has a vote at the bank’s annual general meeting. A group of real people at the meeting, outside the charmed circle of the central bankers and their officials, would provide a useful and refreshing reminder that the central bankers’ policies and decisions, and those of the BIS, have consequences in the outside world.

  Central bankers counter that the BIS already gives something back to society through its numerous seminars and meetings, and by hosting the Financial Stability Institute, which was set up by the BIS and the Basel Committee on Banking Supervision in 1999 to work with financial sector supervisors. King said,

  They do a lot of good work in providing opportunities for smaller members of the BIS to come and learn. There is an informal workshop about governance and the challenges of running a central bank, and smaller members of the BIS have found this of immense value. They belong to a club where they have a chance to quiz their central bank colleagues. At home there was no one to ask for advice. That kind of exchange is invaluable. That is the BIS using the resources of bigger countries to put something back into emerging markets and developing countries.27

  There are small but encouraging signs that some central bankers understand that with great financial power comes social responsibility. In October 2012, Andrew Haldane, executive director for financial stability at the Bank of England, gave a speech on “Socially Useful Banking” at a meeting hosted by Occupy Economics, the London branch of the social protest movement.28 The Occupy movement, he said, had helped trigger the first stages of a “reformation of finance.” Policymakers were listening to criticism and were acting to close the “fault lines” in the global financial system. “Occupy has been successful in its efforts to popularize the problems of the global financial system for one very simple reason: they are right.” Over the years, there had been a “great sucking sound” as “people and monies” were drawn into banking, especially investment banking, draining human and financial resources from the rest of the economy. Even the BIS agrees. Haldane quoted recent research by the bank, which found that when the financial sector reaches a certain level it impedes growth because the financial sector competes with other parts of the economy for scarce resources. “More finance is definitely not always better,” wrote Stephen Cecchetti and Enisse Kharroubi.29

  WHAT THEN DOES the future hold for the BIS? Over the decades, from the Schacht-Norman era, through the Second World War and the birth of the euro, to the present-day jamboree of regulatory committees, the bank has demonstrated an extraordinary ability to make itself essential to the times, repeatedly jettisoning its historical baggage and re-inventing itself to preserve its central place at the heart of the global financial system.

  Keenly aware of the growing global hostility toward bankers, the BIS now emphasizes its status as an international organization and its contribution to the common good. This is certainly an effective recruiting tool. “The quality of the people working at the BIS is very high,” said King. “It helps, when recruiting really good individuals, to say this is an international institution for which you work, not just a think tank. People like to feel they are working in public service.”30

  But the bank’s latest evolution, into a socially responsible institution, may prove the most difficult. Secrecy, opacity, and unaccountability—like gold—are embedded in the bank’s DNA. The bank will find it difficult to adjust to the new demands, outlined by Andrew Haldane, that financial institutions be accountable and socially responsible. Yet to survive, it will have to. In an age when information flows as fast as capital, when citizens demand ever more transparency and accountability from the institutions that have power over their lives, when even Wall Street can be occupied for weeks, the Tower of Basel is no longer inviolable.

  Unlike its biblical predecessor, the Tower of Basel reaches only eighteen stories above the city skyline. But the fate of the biblical tower-builders should give the bankers pause. For when God saw their work, he confounded their speech and introduced a multitude of tongues. The builders could no longer understand one another. The construction work stopped, they were dispersed, and their tower vanished into history.

  Acknowledgments

  This book was born out of a conversation in New York with Clive Priddle, the publisher of PublicAffairs. Clive has been the best editor a writer could hope for: encouraging, insightful, and deeply knowledgeable. My brilliant agent, Elizabeth Sheinkman, of William Morris Endeavor, was an enthusiastic advocate of this project, and Jo Rodgers was always there to help. Numerous friends and colleagues provided encouragement, advice, and ideas, especially Roger Boyes, Justin Leighton, Erik D’Amato, and Nicholas Kabcenell. In New York, Peter Green, Bob Green and Babette Audant were warm and welcoming hosts, while Matt and Emmanuelle Welch in Washington, DC, provided a home from home. In Budapest, I am especially grateful to Flora Hevesi, who diligently transcribed many hours of interviews and never once complained about technical
and banking terms. Many thanks to Lori Hobkirk for her production, organization, and editing expertise, to Daisy Bauer for her elegant design, and to Beth Fraser for her diligent copyediting.

  Tower of Basel is a book about networks, connections, and the exercise of covert power. Mapping those links is always easier when insiders and former insiders are ready to share their expertise and knowledge. I spoke to numerous sources with firsthand knowledge of the Bank for International Settlements, the world of central banking and related themes. Some prefer to remain anonymous; they know who they are and I am very grateful for their insight. Others did agree to speak on the record. My thanks to Dan Alamariu, Peter Akos Bod, Dean Baker, Geoffrey Bell, Rudi Bogni, Stephen Cecchetti, William de Gelsey, Charles de Vaulx, Adam Gilbert, Richard Hall, Frigyes Hárshegyi, Andrew Hilton, Zsigmond Járai, Karen Johnson, Sir Mervyn King, Malcolm Knight, William McDonough, Laurence Meyer, Ron Paul, Rupert Pennant-Rea, Nathan Sheets, Paul Volcker, and Peregrine Worsthorne. William White was especially informative and helpful. Thanks also to Sarah Ashley at the Bank of London press office, Gillian Tett, Ralph Atkins, David Dederick, Paul Elston, Barbara Wyllie, Steve Bloomfield at Monocle, Jonathan Brandt, John Hubbel Weiss, Peter Grose, John Lloyd, Greg Ip, Peter Rona, William Clothier at Brody House in Budapest, Paulina Bren, Zoltan Markus, Mark Milstein at Northfoto, Alex Kuli, and the folks at the Federal Reserve Press Office. Ryan Avent read the manuscript and shared his insight into the world of central banks while John Shattuck kindly gave me access to the Central European University’s library in Budapest. Lee Goddard built me a fine website at www.adamlebor.com.