The Bank for Central Bankers (BIS) admits its doubts about whether they do know what they are doing

25th June 2012 by Shaun Richards

Yesterday whilst much attention was focused on England versus Italy in the Euro 2012 football tournament there was some support for one of my themes. Before I move on good luck to Italy as they move to the semi-finals.And as a counterpoint to some of the gloom in England I would like to point out that if you include the cricket and the rugby our record over the weekend was a much more respectable 1-1-1. Returning to the economics the Bank for International Settlements stood full square behind my argument that central banks are over stretching themselves and in effect are acting above their pay-grade. This is quite an irony when you consider that it is a by central bankers body!

What is the Bank for International Settlements?

Let me answer that with its own explanation.

The mission of the Bank for International Settlements (BIS) is to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks.

This role is often represented as being the banker to the world’s central banks of which some 60 are formal members. If you are in any doubt as to its potential influence then take a look at the constitution of its board of directors. It has amongst its members the Chairman of the US Federal Reserve, the Head of the European Central Bank, the Governor of the Bank of England as well as the Governor of the Bank of Japan. Actually I could go on but I think that I have made the point about its membership.

What does it do?

The BIS is in many respects a shadowy organisation in the background of financial affairs. It is easy to get paranoid about such bodies but I think a little care is needed as in my opinion it would be much better if the worlds central banks moved from the foreground to the background of world financial affairs!

It is involved in foreign exchange intervention although again often in the shadows. Perhaps the most open of its manoeuverings in this area is the way that it is often the conduit for intervention by the Swiss National Bank. Of course this is an area where it has been kept busy and indeed right now with the Swiss Franc to Euro exchange rate being at 1.2007 versus a cap of 1.20 if it were the Starship Enterprise then it would be at a minimum of yellow alert right now. And we see that it has been busy.

However, in May 2012, the SNB’s foreign exchange reserve holdings surged by more than 25% over the previous month as pressure on the minimum Swiss franc per euro exchange rate heightened

The BIS has also been involved with the construction of the Basel rules for bank capital and liquidty requirements. As we are in the middle of a banking crisis it is clear that this part of its role has been much nearer to a disaster than a triumph.

What does the BIS think about central banks right now?

First we get a statement of the obvious telling us that many of the worlds central banks have extraordinarily accomodative (expansionary) policies.

 the stance of monetary policy is accommodative globally

But very quickly we get a warning.

But there are limits to what monetary policy can do.

And added to it is an implicit criticism of the role of those in charge of the Euro amongst others.

It can provide liquidity, but it cannot solve underlying solvency problems.

It is nice of the BIS to agree with my point that central banks are operating beyond their paygrade.

The growing gap between what central banks are expected to deliver and what they can actually deliver could in the longer term undermine their credibility and operational autonomy.

And then they choose to hit harder by coming solidly behing my theme that some of the central bank action has the danger that it may make things worse rather than better.

Prolonged and aggressive monetary accommodation has side effects that may delay the return to a self-sustaining recovery and may create risks for financial and price stability globally

In essence if we allow for the coded nature of the language they are agreeing with my argument that central banks have become like drug-dealers continually supplying more doses of monetary expansion to clients who become more like junkies with each further dose. So that in addition to the danger of the world economy in effect being on a “high” in response to this there is of course the hangover or “low” to come. But the highs get ever shorter.And even worse the low is always kicked like a can into the future meaning that it will be deeper and longer when we are finally allowed to catch up with it. Or as the BIS put it later in their report.

A vicious circle can develop

How much of the drug have we received?

Added to the way that interest-rates have been cut we have seen this.

Total assets held by central banks have more than doubled over the past four years and stood at approximately $18 trillion at the end of 2011

As many of you have replied in the comments section these numbers are now so large it is very difficult to have a clear concept of what they mean. And let me apologise for yet another number larger than the ones that have gone before! Another type of inflation which shows no signs of abating.

And we see a concentration of this in what we have become used to calling the advanced economies.

In the advanced economies central bank assets rose to about 25% of GDP

However there is already collateral damage: remember the “currency wars”?

This subject is almost entirely ignored by the mainstream media but a consequence of the monetary easing has been this.

These extraordinarily accommodative monetary conditions are being transmitted to emerging market economies in the form of undesirable exchange rate and capital flow volatility.

Indeed and this was what led Brazil’s Finance Minister to coin the phrase “currency wars”. But there is more.

In the major emerging market economies, central bank assets stood at roughly 40% of GDP at the end of 2011, reflecting the large accumulation of foreign exchange reserves over the past decade, in particular in emerging Asia.

So in attempting to deal with imbalances have central banks contributed to the creation of another one? Or are they implicit fans of West Ham football club’s theme song?

I’m forever blowing bubbles, Pretty bubbles in the air.

So we see that a concentration of assets in the central banks of the advanced economies has contributed to an even larger accumulation in the emerging economies.

The BIS is more worried than it is willing to fully admit

Here it is only one word but a word which has considerable implications. You see not so long ago the word probably would be missing from the sentence below. If you read it without it you get an entirely different emphasis and meaning and that is my point.

 Decisive action by central banks during the global financial crisis was probably crucial in preventing a repeat of the experiences of the Great Depression

The cause of the switch is in essence the banking sector. The BIS is (correctly) worried that the policies pursued may have delayed necessary reforms.

low interest rates reduce the opportunity cost of carrying non-performing loans and may lead banks to overestimate repayment capacity. All this could perpetuate weak balance sheets and lead to a misallocation of credit

Yes and as to bank reform we see that the BIS are worried by what the Eagles sang thus.

You’re afraid it’s all been wasted time

Comment

In a way the most daming citicism of the world’s central banks comes in this sentence here.

the high degree of uncertainty about the level and growth rate of potential output

As we are seeeing a confession here that the extraordinary moves have been taken in effect “blind” as to their result. And whilst individual central banks claim their independence is unaffected as a group they suddenly seem much less sure.

The very meaning of instrument independence therefore becomes unclear when central banks engage in large-scale balance sheet policy measures

Let me help them out, it means you are no longer independent. In some ways mere discussion of the subject implies that independence has been lost.

It is interesting that the BIS is confessing here that the intellectual argument about central bank intervention has been lost. However I counsel caution about expecting a change of policy. If we look at its board members we have recently seen Governor King vote for an extra £50 billion of Quantitative Easing and Chairman Bernanke of the US Federal Reserve vote for a US $267 billion extension to Operation Twist! No doubt the Swiss National Bank will also continue its Euro accumulation campaign.

So there you have it central bankers are in a state of uncertainty and doubt but are likely to do the following.

Carry on Regardless

Royal Bank of Scotland

It is not my intention to scaremonger here so let me remind everyone that RBS is backed by the UK taxpayer. But as the “glitch” goes on and on and reaches nearly a week isn’t it good that we appointed a new board who really understood banking and could get to grips with the bank? Oh….

Imagine the problems right now if RBS was based in Athens or Madrid.

 

 

 

26 thoughts on “The Bank for Central Bankers (BIS) admits its doubts about whether they do know what they are doing”

  1. James says:

    $18 trillion held by central banks? what on earth does this mean for the reality of human life? Isn’t that about $2500 for every human alive? Does it ever have to be reversed?
    Help!

    1. The_forbin_project says:

       not too bad – 63Trillions is the worlds GDP

      but I suspect theres more debt  than that to be  “phatomized ” !

      Forbin

      1. Anonymous says:

        Hi Forbin

        You would win the prize for the largest number mentioned on this blog so far but as I am replying to you I think that 64 billion had been mentioned before. So I was wrong today to say 18 billion was the max and we have had even more inflation than I thought!

  2. Rods says:

    Hi Shaun,

    I read the BIS comments over the weekend, but thanks to your excellent blog you have put them into context and made it much more digestible and understandable. Thank you for this.

    According to a comment by an ex-RBS employee, I read as part of a DT article on the RBS situation. They alleged the problem was due to IT outsourcing to India and a major upgrade that went wrong. The said the Indian company has not got the 20 years+ experience of the UK workforce they have replaced. Apparently about 1000 RBS technical staff were made redundant last year and the work outsourced as part of a cost cutting exercise.

    Maybe it has been a false economy?

    1. The_forbin_project says:

       in the computer customer support role I play for a large corporate  this is now news at all but any reason argument about supportability and re placement of skilled technical staff  goes second place to the corporate bottom line

      in supporting even RBS and others I can say their current outsourced Sys Admin are clueless  –  anything that goes wrong  they expect their suppliers technical staff like myself to their job  !   they have not paid us for that btw .

      then theirs my company outsourcing jobs like mine to the same low cost locations ….. it will all end in tears , some body got to loose real big time before anything will change – and why should it even then ?

      we have the examples of sir fred and the banks  – billions lost on the banks but  no one is brought to book 

      now if that was someone on the street   yer feet wouldnt even touch the ground!

      Forbin

      1. Anonymous says:

        Any “upgrade” that went wrong should be quickly recoverable by reverting to the pre-upgrade backup.

        A security breach a la TKMAXX would cost more than RBS saved in outsourcing.

        Interesting question as to what is wrong at RBS ….  I’m glad I don’t have an account there !

        1. Rods says:

          Hi Expat,

          From what I have read, the UK staff that are left, told management what need to be done, it was 12 hours plus later before a decision was made to do what UK technical staff suggested! Now I don’t know if this has caused a cumulative delay, whether the situation was not easily reversible, or it might be the outsourcing company can’t do the job, who knows?

          Of course it has never been know for IT staff (especially inexperienced ones) in a high stress situation to improve things worse, has it?

          Anyway do they have to really care about their customers, standard of service or whether they make a profit, with the tax payer always there as a provider of last resort. Reminds me of BL in the 1970’s and 80’s, it was always in the next 3 year plan that they were going to break even, BOE growth predictions are the same.

          1. Anonymous says:

            Hi Rods,

            It is apparent that their disaster recovery planning is badly inadequate. They are running critical infrastructure within the modern economy – which is why they get away with the “too big to fail” bailout scam.

            They need to be held to account for their failure. Unfortunately they are owned by the very government that regulates them. This creates a decisive conflict of interest for every state corporation and is a strong argument for leaving business to private enterprise.

            Best for the taxpayer to get rid of this zombie bank ASAP at any price – it’s losing money.

        2. The_forbin_project says:

           the reply that most customers had to the question of “whats your disaster recovery plan?”  – Call you!( me in support )

          in case you’re wondering yes I know of certain software updates that if applied to the products I support would preclude any going back …. scary and I have to support it …….

          Forbin

          1. Anonymous says:

            We used to have duplicate hardware, the live machine gets the upgrade and the hot standby does not. A simple failover effectively rolls back the upgrade. QED This of course assumes that you have the necessary hardware and competent staff.

            Good luck with your support work !

          2. Rods says:

            Not that dissimilar to what I do with high integrity / high volume websites I develop. All development is done locally on my local server, this then goes onto a password protected ‘live’ test website on the live server for testing and compliance and once this is signed off the live site can be updated.

          3. Anonymous says:

            I’d call that the beta or QA environment – not a hot standby.

          4. Rods says:

            I agree, just making the point that QA, upgrades and maintenance procedures need to be part of an IT development process from day one.

            None of my customers required hot swap server facilities, if they did I would  provide it, but all the severs have SLA agreements, with downtime guarantees.

    2. Anonymous says:

      Hi Rods

      I see you have triggered something of a debate on RBS and its situation.

      I will offer one thought which is that these systems simply have to work in the way say that airliners do where there are loads of back-up systems and redundancy. And by being on the ground they have an easier environment. So I see it as a prima facie fail in banking terms and a type of clear incompetence.

      Not necessarily that there was a mistake after all to err is human and the machines we build will not be perfect but the delay in getting back to normal is where I take issue with it. Let us see if there is any punishment at the top for the decisions made!

  3. JW says:

    Hi Shaun
    I am trying to think off some clever analogy between the state of the UK economy and the England football team, but its too depressing. Enough to say that until we ‘do a Germany’ and raise young English players to play with skill ( ie learn to pass) and stop glorifying buying foreign mercenaries with foreign dodgy money ( a la Man City, Chelsea), it will just be ‘more of deja vu’.
    RBS; completely incompetent management, or cover for a liquidity crisis?
    BIS; talk about ‘stating the bleeding obvious’!
    Stories circulating about how much the Chinese have been telling ‘porkies’ about the real state of their economy during ‘handover’ year, electricity consumption figures look like they are being doctored and the fall could be 10% from last year. Time for the tin hats if this is true.

    1. Anonymous says:

      Hi JW

      We in essence surrendered the midfield as we could have man marked Pirlo even if we were incapable of being creative ourselves. I wish I knew what happened to us after the first 20/25 minutes!

      On the subject of China the next month or two will be fascinating. They have let themselves get behind the times on interest-rate cuts just like we did in the West. And we wait to see the consequences of this. For us it was fatal in credit crunch terms as we got sucked into it.

      Added to the electricity consumption issue has been the fact that the demand for bank loans isnt what it was and that commodities are being stockpiled rather than used…..

  4. Eltaurus36 says:

    After watching the England v Italy match last night it occurred to me that the team mirrored in their performance much of that of the current  ‘elite’ of the nation. Several players underperformed,most were guileless and the management had no plan B to redress the problems. And it is a national characteristic to acclaim and reward failure (Bankers). 
    Contrast that with the performance of the German team. Does their success on the field mirror the ‘Wirtschaftswunder’ success of their nation off it?Someone will now draw a comparison with the supreme Spanish football team and their nation’s current difficulties off it. There I’ve shot down my own anology.

    1. Anonymous says:

      Hi Eltaurus

      There are 2 bailout nations in the last four and one likely to ask for a bailout before it is over. On such a basis you could argue that for anti-‘Wirtschaftswunder’…

      On a lighter note there have been various spoof notices supposedly from the ECB congratulating the 3 teams it has sponsored for reaching the semi-finals. A bit harsh on Italy right now but give it time..

  5. The_forbin_project says:

    and as a side note that Spain is asking 100billion bailout

    from the country that needed  no bailouts….

    just the thin edge of wedge I fear

    de ja vue  – this story must be old  , er , wait , I think Shaun went over this weeks ago…..

    forbin

  6. Anonymous says:

    Hi Shaun
    I have been watching another obscure body but aptly and augustly named “The European Systemic Risk Board”, set up in December 2010 to guard us against systemic risk to great fanfare and much cost. I notice on 21 June they issued a press release announcing ( in reference to the crisis)… ” Addressing these challenges requires measures to tackle vulnerabilities
    at their source that lie beyond the remit of the ESRB and European
    System of Financial Supervision.”…another talking shop bites the dust, then! I have admired, though, their contribution to the wealth of economic acronyms….

    1. James says:

      Great to hear of this clearly useful body. I am reminded of the Monty Python film Life of Brian, where they have various groups called things like The committee for the Liberation of palestine, which hates the Palestine Liberation committee, which hates the Liberation of Palestine committee etc etc.
      Perhaps Shaun could have a new subsection of his financial lexicon devoted to useless bodies and their acronyms?

      1. Anonymous says:

         Hi James, ABS,CMBS,BEAFF,SLS,MPC,QE,QE2,QE3,OMOs,OSFs,ILTROs,DWF,ECTR,SLS,USDROs,EBA,ESRB,ESFS,EFSF,ESM,BIS,BIS(other),LTRO,ELAs,SMP,ECB,ESCB,NCBs,FSA,FPC,MROs,FTOs,FESs,RTs,FESs,CBPPs,TFEU,ECOFIN,EDPs,M1,2,3,4,4ex,EMU,ECU,SGP,MFIs,TARGET,TARGET2,REPOs,FSB,SRRs,MMLG,FXJSC,SLRC….
        thought I would kick it off!

        1. Rods says:

          Which simplifies to UNIVERSAL FAILURE!

        2. Anonymous says:

          Put like that it looks rather intimidating doesnt it?

      2. Anonymous says:

        Hi James

        There was a sci-fi film made with Roy Thinnes who was in the original The Invaders series where there was another Earth where everything was reversed. In that he flew on a European rocket and everything was Euro this and that. Eurosec etc. and so on.

        So back in the 1970s they were able to predict that Europe would be fairly hopeless with names and acronyms! Quite impressive in a way and rather prescient.

    2. Anonymous says:

      Hi Shire

      In one way they were unusual in that at least they realised that they were on the “Road to Nowhere”. In these times that qualifies as great insight for our “elite”.

      Yes I know elite should be in the lexicon too!

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