The Bank for International Settlement (BIS) is essentially a central bankers' bank, clearing payments between countries. It was specifically designed to assist central banks in the management of their foreign exchange and gold reserves, and acts as banker and fund manager for international financial institutions.
Funds deposited with the BIS are placed mainly in investments at top-quality commercial banks and in short-term government securities, but it also carries out a range of foreign exchange and gold operations, they say.
Further information is given at bis.org
"At 31 March 2001 the Balance Sheet stood at 76,054 million gold francs, a record for the end of a financial year and a 1.6% increase over the total of 74,836 million registered 12 months previously. In fact, the size of the Balance Sheet would have been larger still (by some 3.2 billion gold francs) were it not for the negative impact of the overall appreciation of the US dollar between the beginning and the end of the financial year."
Unlike many of the world's central banks, "The Bank’s assets in gold rose slightly from 3,506 million gold francs to 3,521 million over the same period, reflecting an increase in gold deposits received." [FY end 31 March 2001]
According to Profile of the BIS - Organisation and governance in the BIS 71st Annual Report (1 April 2000 - 31 March 2001),
"The BIS employs the gold franc as a unit of account for balance sheet purposes. The gold franc has a gold weight of just over 0.29 grams of fine gold, which is identical to the gold parity of the Swiss franc from the foundation of the BIS in 1930 until September 1936, when the Swiss franc's gold parity was suspended. Assets and liabilities in US dollars are converted into gold francs at the fixed rate of US$ 208 per ounce of fine gold (equivalent to 1 gold franc = US$ 1.94). All other items in currencies are converted into gold francs on the basis of their market rates against the US dollar."
It enjoys the following immunity:
"The Bank, its property and assets, and also the deposits of other funds entrusted to it, on the territory of, or dependent on the administration of, the Parties shall be immune from any disabilities and from any restrictive measures such as censorship, requisition, seizure or confiscation, in time of peace or war, reprisals, prohibition or restriction of export of gold or currency and other similar interferences, restrictions or prohibitions."
(See bis.org
In 1999, the BIS had this to say about "Highly Leveraged Institutions" - in other words, the type of outfit, for instance LTCM, that makes use of financial instruments such as derivatives.
BIS DELIVERS ITS VERDICT ON LTCM (reported by the Global Association of Risk Professionals)
"The Bank for International Settlements (BIS) has delivered its verdict on the near-collapse of Long-Term Capital Management (LTCM) and it’s implications for bank’s dealings with other such highly leveraged institutions (HLIs). The LTCM incident highlights "deficiencies in banking institutions’ risk management with respect to some HLIs", says the report. Under certain market conditions, HLIs activities can pose risks "not only to direct counterparties, but to the financial system as a whole", it adds.
Banks generally did not appear to possess effective policies and guidelines for managing exposures to some HLIs in a manner consistent with their overall credit standards", says the report. The lack of financial information on HLIs has led to a reliance on " non-systematic and largely qualitative assessments of risks", based on "reputation and perceived risk management capabilities of the HLI concerned", it adds. " These shortcomings appear to have compromised the accuracy and rigour of subsequent stages of the credit process, inlcuding the setting of limits and the collateral and margining arrangements", says the report.
To remedy these deficiencies, the BIS recommends that banks beef up their due diligence procedures when offering credit to HLIs. Banks should also stress tests their HLI exposures on a more regular and consistent basis, as well as improving their methodologies for estimating potential future exposure. Supervisors should work with banks to formulate and implement "sound practices" for assessing and monitoring counterparty relationships with HLIs, the report adds.
The BIS stops short of recommending direct regulation of HLIs- the formulation of such a direct approach "would clearly extend beyond the competency of bank supervisors and require a political initiative", it says. Instead, the report urges supervisors to "ensure that the proper incentives, procedures and standards are in place to encourage prudent management of these exposures by banking institutions".
According to an interview with David W. Tice, of David W. Tice & Associates, Inc., in April 2000,
"The Bank for International Settlements recently estimated that derivatives around the world amount to $100 trillion... I disagree completely with Mr. Greenspan’s comments about risk. Derivatives can reduce the risk for individual players, but at the same time they increase systemic risk. Don’t miss this point: Derivatives have actually increased system-wide risk...
People who are not willing to bear a risk can transfer it to somebody else, but they can’t really mitigate or reduce system risk. In fact, if derivatives seduce some people to perform more recklessly because they think they have insurance, then they actually increased systemic risk..."
According to Dennis Birch's Resource Stock Digest, Feb. 1998:
"A definite coolness exists between the BIS and the United States. This goes back to the Bretton Woods Conference in 1944, held to set up the machinery for resuming world business after WWII. Even though this conference established the gold-backed US dollar as the only reserve currency, the US did everything it could to torpedo the BIS and give sole power to the US sponsored IMF"
The BIS is cited in Howe v. Bank for International Settlements, et al., U.S. District Court for the District of Massachusetts, Civil Action No. 00-CV-12485-RCL, which concerns the allegation of a conspiracy to manipulate the price of gold:
Howe v. Bank for International Settlements
The Gold Anti-Trust Action Committee (GATA) is seeking compensation for an alleged price-fixing scheme it says involves J.P. Morgan & Co. Inc., Chase Manhattan Corp., Citigroup Inc., Goldman Sachs Group Inc., and Deutsche Bank AG. GATA's suit alleged that the five Wall Street firms conspired with the U.S. Federal Reserve Board, the Federal Reserve Bank of New York, the U.S. Treasury Department and the Bank of International Settlements to depress the price of gold between 1994 and 2000.
The charts at goldensextant.com clearly show that by far the largest player in gold and interest rate derivatives is J P Morgan / Chase.
See also:
The JPM Derivatives Monster by Adam Hamilton, CPA, MCSE
If this Derivatives Monster should topple, would an LTCM style bail-out be possible? Or would this "too big to fail" entity, formed from the merger of J P Morgan and Chase, require a bail-out partner of greater standing?
On Friday, August 21, 1998, the formerly prestigious hedge fund, Long-Term Capital Management (LTCM), virtually collapsed, but by the end of September it was rescued from the brink of liquidation by a consortium of 14 commercial and investment banks. Investors lost over 90% of their capital. LTCM had entered into enormous positions in exchange-traded and OTC derivatives. But prices moved against it, and it teetered on the edge of default until the Federal Reserve Bank of New York encouraged its major creditors and counterparties, who were some of the largest U.S. and European banks and investment banks to provide LTCM with a line of credit worth $3.6 billion to prevent its collapse and the possible systemic risk to the US and even the global financial system.
Alan Greenspan said of the LTCM problem that it "could have potentially impaired the economies of many nations, including our own".
Alan Greenspan knows well the enormous risk of a cascading series of cross-defaults to the financial system, exemplified by "Herstatt Risk". Bankhaus Herstatt was a small German bank highly active in foreign exchange dealings, and it was a string of losses in these dealings that caused its demise in June 1974. It left $620m of unsettled forex trades, where counterparties had paid up but had not received the exchange currency- the time difference between settlements in different countries contributed to the settlement risk in this case. The bank had already been closed down by the time that the payment of currency owed was due.
Herstatt's default set up a terrifying domino effect of payment defaults throughout the international banking community- of the kind that they never want to see again, at all costs.
Another example that gives bankers nightmares is the Franklin National Bank, which failed in October 1974, apparently due to poor credit control. A bank with over $3bn of assets, yet it was not "too big to fail".
The problems in Herstatt and Franklin had led to the setting up of the Basle Committee on Banking Supervision, the Secretariat for which is provided by the BIS, with its international oversight of banks' capital adequacy standards. It also led to international efforts to make improvements in the timing and synchronisation of settlements between international time zones.
"It was the judgment of officials at the Federal Reserve Bank of New York, who were monitoring the situation on an ongoing basis, that the act of unwinding LTCM's portfolio in a forced liquidation would not only have a significant distorting impact on market prices but also in the process could produce large losses, or worse, for a number of creditors and counterparties, and for other market participants who were not directly involved with LTCM. In that environment, it was the FRBNY's judgment that it was to the advantage of all parties--including the creditors and other market participants--to engender if at all possible an orderly resolution rather than let the firm go into disorderly fire-sale liquidation following a set of cascading cross defaults." - Alan Greenspan, October 1, 1998
In the 1920s, money flowed into various European countries- such as Austria. With such a flow of easy money, banks, such as Austria's Credit-Anstalt bank, were tempted to lend too freely without the controls that would have been applied in more austere times.
Austria ran up a large import-export deficit, importing more than it exported and financing the difference by borrowing from other countries.
From 1930, Austrian and foreign depositors took money out of the Credit-Anstalt bank on worries over the soundness of the bank's loans, leading ultimately to the bank's failure in Spring, 1931. This was the first domino in an expanding series of financial problems that exacerbated the economic misery of the 1930s.
Price deflation had raised the value of debts (the opposite of inflation, which allows debts to fade away of their own accord). Germany had been paying formal reparations, financed by short-term borrowing.
The Bank of England bailed out the Austrians with 4.5 million pounds Sterling. This did not impress the French and others, who sold the pound, leading to a suspension of gold parity on 21st September, 1932.
"The failure of some banks is highly contagious to other banks and businesses that deal with them"
- Alan Greenspan, Sep 23, 1998
The Golden Sextant described how the BIS decided to freeze-out its private shareholders at an Extraordinary General Meeting scheduled for January 8, 2001 (see following link):
goldensextant.com
One theory as to the reasons behind this, is that perhaps the BIS wants to suppress disclosures of derivatives positions- as it would remove the public interest functions associated with its being a joint-stock company.
"... the Basle-based central bankers' bank, has announced plans to spend $700m to buy back the 13.73 per cent of its shares which remain in private hands. Andrew Crockett, BIS general manager, on Monday said: "We want to make it clear that BIS is representing international central bank holders and is acting in the interest of the public shareholder."
"He said the move would "ease the underlying inconsistency of being a joint-stock company with public interest functions. Playing a global role in promoting financial stability is not wholly consistent with shareholder value."
- Andrew Crockett, BIS general manager
Financial Times, September 11, 2000
If the BIS is somehow getting involved in the derivatives business in a big way- instead of just reporting the off-balance sheet positions of member banks- we may speculate, perhaps, as a derivatives participant of last resort, performing its role as a contributor to global financial stability-
we have to ask:-
Is the BIS too big to fail?
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