How a secretive central bankers’ club responds to crises

Central banks have come to the fore in recent years by printing money to keep economies afloat. Keystone / Lm Otero

Every other month, the world’s most influential central bank governors gather in Basel to swap notes, reinforce personal ties and untangle the technical details of keeping money flowing around the world.

This content was published on December 21, 2021 - 09:00

Since the financial crisis of 2007-2008, central banks have emerged from dull obscurity to print trillions in multiple currencies. The pandemic has only increased their resolve to buy up vast tranches of government debt and to maintain rock-bottom interest rates, even in the face of inflation.

The mysterious private club of central bankers, which says it promotes “global monetary and financial stability through international cooperation”, has operated behind closed doors since it was formed in 1930. There are no public records of debates or conversations.

The legal status of BISExternal link allows it to operate as an independent fiefdom in Switzerland – the Swiss authorities are not allowed to enter its doors without permission while its staff enjoy legal immunity and tax-free earnings.  

"Opaque and elitist"

Given the heightened importance of central banks in the last decade, some people think this should change.

“BIS is an opaque, elitist and anti-democratic institution, out of step with the twenty-first century,” says journalist and author Adam Lebor in his book, Tower of Basel, published in 2013. “It is shaping the regulatory future of global finance and calls for good governance, yet its own affairs are firmly hidden behind a thicket of legal immunities and protections.”

So why the need for secrecy? “Central bank governors can go there and talk freely, complaining about their ministers of finance and politicians, with no concern that this will leak to the public,” said former BIS staffer Stefan Gerlach, who is now chief economist at EFG Bank in Zurich.

“People think that it’s a super-secretive organisation that steers the global financial sector, but it’s more of a conference centre with a bank attached, hosting informal and confidential meetings of central bankers and regulators,” Gerlach added. “It provides meeting rooms, staff to write research papers and manages the assets of central banks – but it has no real personality.”

While BIS has no power or inclination to set binding rules, central bankers and regulators meet up to agree on financial stability policies and then go home to persuade their national governments to enforce them. The BIS Tower hosts other bodies, such as the Basel Committee on Banking Supervision and the Financial Stability Board, which thrash out measures to make the financial system more resilient to shocks.

Such deliberations led to the “Basel III” regulations in the aftermath of the 2008 financial crisis. These rules require commercial banks to set aside more funds to cover risky investments.

Saving the economy

“Our work helped prevent the Covid-19 pandemic from translating into another financial crisis,” BIS General Manager Augustin Carstens recently said at a rare press briefing at the organisation's headquarters called BIS Tower.

The money printed by central banks has been used to keep the financial system afloat during times of distress and to bail out creaking national economies, from Greece and Italy to the United States. Low interest rates have blunted the impact of debts that companies must still manage despite losing income during lockdowns.

While each central bank sets monetary policy according to the needs of their individual countries, coordination is also vital to keep money flowing around the world – particularly during a crisis. Central banks act as lenders of the last resort when commercial banks lose faith in one another.

As most international finance is conducted in US dollars, the US Federal Reserve needs to swap dollars for the currencies of other central banks (including Switzerland’s) to prevent financial flows from seizing up.

Meeting up on a regular basis in Basel helps this coordination process.

“It is better to have a cooperative approach than confrontation,” said Carstens.

The scale of the money printing experiment has some people worried. Can it be safely reversed when economic conditions improve? Could it result in uncontrollable inflation? A recent spike in prices has brought these questions to the fore.

Manageable risks

“In the face of Covid-19, which was unexpected and dramatic, it would have been socially and politically unacceptable for central banks to say: ‘Given the risk that this might not work well, we will not do anything’,” said Carstens.

“We needed to respond, but that does not mean we are blind or careless. It hasn’t been easy – and it might be more difficult in future – but the risks that have been taken are manageable.”

Such arguments fail to convince everyone, including critics of the Swiss National Bank (SNB). Switzerland’s central bank has faced a steady stream of pressure since it adopted (and later abandoned) a euro peg to the Swiss franc and then vowed to print unlimited sums of money and introduce negative interest rates.

The sudden decision to decouple the franc from the euro in 2015 caused pandemonium after catching markets by surprise. The move gave fresh impetus to political critics who wanted the central bank to be called to account for its policies. 

But efforts to force the SNB to change its monetary policy, add more gold to its balance sheet and to take over the role of printing commercial bank money have failed, even at referendums.

Swiss "success story"

In the meantime, BIS serenely carries on with its work, untouched by local disputes aimed at individual central banks. It has gradually opened up membership to incorporate 63 central banks and operates with more than 600 staff and two regional offices, in Hong Kong and Mexico.

BIS manages the assets of central banks, earning it the unofficial title of “the bank for central bankers”. Through these activities it made around $1.7 billion (CHF1.6 billion) in profits last year from this activity.

It has also built up a formidable reputation for detailed research into the world of finance and is setting up a series of innovation hubs around the world to keep abreast of the latest financial innovations, not least cryptocurrencies and green finance.

“It’s remarkable that BIS remains anchored in Basel and has not moved to London or New York,” said Gerlach. “It’s a Swiss success story in the same way as the British started coming to Swiss hotels for winter vacations 150 years ago.”

The Bank for International Settlements

BIS was set up in Basel in 1930 to ensure that Germany paid financial compensation (reparations) to the victors of World War I.

That mission was only partially completed as reparations were later abandoned, with Germany lurching into economic chaos.

This somewhat ill-fated start to life – combined with evidence that BIS had been pliable to German demands during World War II – led to the United States calling for BIS to disband in 1944.

BIS survived as a largely European-focused entity until the mid-1990s, when the central banks of other countries, including emerging economies, started playing a more active role.

BIS is comprised of various committees: The Basel Committee on Banking Supervision, the Committee on Payments and Market Infrastructures, the Committee on the Global Financial System, the Markets Committee, the Central Bank Governance Group and the Irving Fisher Committee on Central Bank Statistics.

The Financial Stability Board, the International Association of Deposit Insurers and the International Association of Insurance Supervisors are independent of BIS but have secretariats at BIS Tower.

End of insertion
In compliance with the JTI standards

In compliance with the JTI standards

More: SWI certified by the Journalism Trust Initiative

Change your password

Do you really want to delete your profile?

Your subscription could not be saved. Please try again.
Almost finished... We need to confirm your email address. To complete the subscription process, please click the link in the email we just sent you.

Discover our weekly must-reads for free!

Sign up to get our top stories straight into your mailbox.

The SBC Privacy Policy provides additional information on how your data is processed.