CHAPTER FIVE - REFORMING THE INTERNATIONAL MONETARY AND FINANCIAL SYSTEM:
TOWARDS STABILITY AND THE GLOBAL GOOD

4. INTEGRATING THE ROLE OF CENTRAL BANKS AND THE BANK FOR INTERNATIONAL SETTLEMENTS WITHIN A GLOBAL REGIME OF STRENGTHENED MONETARY AND FINANCIAL SUPERVISION

As the Committee has pursued its inquiry, we have also become more aware of the little-known role played by the Basle, Switzerland-based Bank for International Settlements (BIS), the "central bankers' central bank", with which over 100 central banks from around the world have deposits, and which is again assuming importance as a financial intermediary in the Mexican bailout, as it did during the Latin American liquidity and debt crisis of the 1980s. The BIS, created in 1930, was born out of the problems of settling German war reparations and dealing with chaos in the capital markets that provoked grave concern among private financiers and central banks. 65 Today the BIS primarily safeguards the interests of the latter - led by the Major "G-10" central bank governors who meet regularly under tis auspices - in smoothly-functioning currency and capital markets. While it has come to be accepted by governments (despite a decision at Bretton Woods that it be phased out), the BIS is not an intergovernmental institution. It determines its own rules largely independently of the formal Bretton Woods system of the IFIS.

What role then can be ascribed to central banks and the BIS in relation to the deficiencies of the current global monetary management regime, or to the potential for a reformed system involving the IMF? In addition to the financial intermediation role noted above, some point to the useful role of the BIS (through its Committee on Banking Supervision) in averting systemic banking crises through the de facto enforcement on banks of international prudential regulations in such areas as capital adequacy requirements, most recently in regard to banks' derivatives exposures. Stephen Gill referred to the acknowledgement by Baron Alexandre Lamfalussy, a former senior figure at the BIS and current president of the European Monetary Institute, of the need to address these systemic stability issues in a comprehensive way. [23:34] Some proponents of a market-led (as opposed to government-led) international monetary system, even believe that the BIS could become the centre for a rule-making authority on a global scale. 66

Witnesses who expressed an opinion before the Committee, however, tended to be sceptical of leaving major public policy matters affecting the world economy to be decided among central bankers. Culpeper observed ruefully from personal experience: "They don't want too much publicity." [21:16] Describing the BIS as a "very murky organization [that] has no legitimacy politically [and] is self-created", Manfred Bienefeld was strongly opposed to any suggestion of augmenting its role: "The BIS is the main source pressing for the political independence of central banks and the idea of making money independent of political entities. This is the opposite to my solution. It is the ultimate way of cutting the link between money and the social context that gives it value in the end." [18:48] (These opinions reflect the sort of debate taking place in Europe around the establishment of an EU central bank. Will it become a supranational authority unto itself that is more independent than the German Bundesbank in a national context?)

Several other witnesses nevertheless pointed to the need to address constructively the role of central banks and to integrate their actions within a better overall system of coordinated intervention and oversight by public authorities. Michael Webb, observing that within the BIS central banks have been "very reluctant to coordinate their policies with each other" (citing in particular the Bank of Japan, the Bundesbank, and the U.S. Federal Reserve), argued the case that: "there's room for improvement here that's consistent with the political interests of central banks. . . . For many of them, acting sooner would minimize the kinds of adjustments that they need." [23:11] Rodrigue Tremblay also raised the possibility of envisaging a broader international economic governance system which would bring together the roles of the IMF and the BIS:

I haven't examined the problem in depth but it is obvious that the coordination of monetary and fiscal policies, and macro-economic policies, could be done by joining a part of the International Monetary Fund with the Bank for International Settlements. There is a problem with respect to the International Monetary Fund.( . . .) As part of the consolidation of this Bank and the IMF, it may be necessary to establish new rules and a sort of financial security council, giving these countries a casting vote in relation to other member countries as is the practice in the UN Security Council. [23:48]

This is probably quite different from the proposal of the Commission on Global Governance for a UN "Economic Security Council", an idea endorsed by several witnesses. Nonetheless, it raises the critical issue of how to integrate all of the parts and central players within the system in order to improve both its governance and its performance in the interests of monetary stability and policies that better serve the global common good.

Accordingly, the Committee recommends that Canada seek an agreement at Halifax to examine the role which should be played by central banks and the Bank for International Settlements in the strengthening - especially at the G-7 level - of coordinated macro-economic cooperation and surveillance, including in particular the issue of what connection should exist between the IMF and the BIS.