The secret power

For a financial institution that likes to keep a decidedly low profile, the Bank for International Settlements has been garnering a lot of publicity recently. Jaime Caruana, the BIS’s General Manager, has warned that central banks should prepare for a bumpy ride as they scale back on quantative easing–the proliferation of cheap money  that has helped spark asset-price bubbles.

But what exactly is the BIS and why should anyone care what it says?

The bank is a central pillar of the global financial system. It hosts the Basel Committee on Banking Supervision, supervising commercial banks’ capital requirements. It is also home to the Financial Stability Board, which coordinates national financial authorities and regulatory bodies. Yet most people have never heard of the bank.

It is the world’s oldest, most influential and secretive global financial institution. It was founded in Basel in 1930, by Montagu Norman, the governor of the Bank of England, and Hjalmar Schacht, the president of the German Reichsbank, ostensibly to manage German reparations payments for the First World War.

The real reason it was founded was to give central bankers a place to meet and discuss monetary policy, out of the reach of politicians and away from the prying eyes of journalists, a function it still carries out today.

The BIS hosts the secretive gatherings of governors of central banks, known as the Global Economy Meetings. Every other month sixty of the world’s most powerful central bankers gather in Basel to discuss their responses to the global financial crisis. They include Ben Bernanke, the chairman of the US Federal Reserve; Sir Mervyn King, the outgoing governor of the Bank of England–soon to be replaced by Mark Carney; Mario Draghi of the European Central Bank; and Zhao Xiaochuan of the Bank of China. The countries represented at the Global Economy Meetings account for around four-fifths of the world’s Gross Domestic Product. Yet we know nothing of what is discussed there.

It has around 140 customers, mainly central banks, but last year made a tax-free profit of around £900m. Protected by international treaty, this immensely profitable body is legally inviolable. Even in times of war, its assets can never be seized. The bank is the world’s thirtieth-largest holder of gold reserves, with 119 metric tons, more than Qatar, Brazil or Canada.

During the Second World War it was the key channel for secret contacts between the Allies and the Axis powers, despite having an American, Thomas McKittrick, as president.

Many will be intrigued to learn of the bank’s dark history. It helped keep Nazi Germany in business, accepting looted Nazi gold, and carrying out foreign exchange deals for the Reichsbank.

The bank’s wartime directors included Hermann Schmitz, the CEO of IG Farben, the giant conglomerate that ran its own concentration camp at Auschwitz and whose subsidiary manufactured Zyklon B, the gas used to exterminate the Jews. After 1945, five BIS directors were tried for war crimes. But backed by its powerful allies in banking and governments in Europe and the United States, the BIS easily brushed off attempts to close it down.

After 1945 its experience in transnational finance made it the natural choice for the preparatory work in planning the single European currency.

Alexander Lamfalussy, the bank’s general manager from 1985 to 1993, set up the European Monetary Institute, which was based at the BIS until it moved to Frankfurt and became the European Central Bank.

At a time when global citizens are demanding transparency and accountability from both politicians and bankers, the BIS’s elitist approach seems ever-more outmoded. Even with its carapace of legal immunities, the Tower of Basel could soon prove more vulnerable than it seems.