Onq and Jim's discussion of BIS

[Jim2007]

I understand that banks used derivatives amongst other means to fudge compliance with the previous limit for fractional reserves set by the BIS.
The requirement to comply with this ratio set by the BIS appears to have contributed, if not directly caused, the current world financial crisis.
I understand that Banks and Insurance companies use actuaries to advise them of potential risks and set rates of interest on loans etc.

Well this is a new one on me, just who is claiming that the BIS caused the crisis? Please provides some references.

On an international basis UBS AG was one of the worst hit having to write off $50b of it's own capital and as a consequence raise new capital of about $45b+ and Swiss government support of about $6b to survive (at this point the government support has been repaid at a profit to the government). UBS have produced a very detailed report on how it all went wrong and it makes very good reading for anyone trying to understand what went wrong with the banks. [broken link removed].

In summary it would appear that three factors caused UBS and by extension other banks to act as they did:
- An over reliance on maths models to assess risk, rather than applying common sense
- Senior management bonuses driven by short term profitability goals rather than long term outcomes
- Abolition of the Glass-Steagall Act in the US and similar legislation in Europe, which freed the banks to use their capital to finance much high risk activities than before, including mortgage securities

To date this is the first time I've ever heard the BIS being blamed, so I'm very interested in seeing the references...

Jim.

 

[Complainer]

What is BIS?

 

[onq]

The Bank for International Settlements, it operates - with no mandate - as the Central Bankers Bank, so far as I have been able to determine.

http://en.wikipedia.org/wiki/Bank_for_International_Settlements

Its potential for worsening the international credit crunch for calling for higher interest rates is second to none.

http://www.guardian.co.uk/business/2011/jun/26/international-banking-regulator-rates

Certainly not everyone sees the BIS as a benign influence.

http://bullionbullscanada.com/index.php?option=com_kunena&Itemid=122&func=view&catid=17&id=9807

And its historical origin and role in Europe exposes the real reason why Germany didn't invade Switzerland.

http://www.bilderberg.org/bis.htm

The veil of relative secrecy surrounding the BIS' mandate and the threat to the world economy that this centralised and unmonitored power represents - if misused - is being eroded.

ONQ.

 

[onq]

Well this is a new one on me, just who is claiming that the BIS caused the crisis? Please provides some references.

On an international basis UBS AG was one of the worst hit having to write off $50b of it's own capital and as a consequence raise new capital of about $45b+ and Swiss government support of about $6b to survive (at this point the government support has been repaid at a profit to the government). UBS have produced a very detailed report on how it all went wrong and it makes very good reading for anyone trying to understand what went wrong with the banks. [broken link removed].

In summary it would appear that three factors caused UBS and by extension other banks to act as they did:
- An over reliance on maths models to assess risk, rather than applying common sense
- Senior management bonuses driven by short term profitability goals rather than long term outcomes
- Abolition of the Glass-Steagall Act in the US and similar legislation in Europe, which freed the banks to use their capital to finance much high risk activities than before, including mortgage securities

To date this is the first time I've ever heard the BIS being blamed, so I'm very interested in seeing the references...

Jim.

What's your connection to the BIS Jim?

ONQ

 

[Jim2007]

What's your connection to the BIS Jim?

ONQ

I have no connection what so ever to the BIS... apart from the fact that I used to walk past it's head quarters in Basle on my way to work for 4 years.

On the other hand, over the years, I have, as the author of various banking software applications, been involved in several discussions about implementing it's requirements known as Basle II and now Basle III, so I am more aware than most of it's importance in the banking community. And as I have already said I have yet so see any credible argument to suggest that the crises was caused by the BIS.

And while it is true that Basle III, will require banks to meet a higher T1 ratio, which will result in them being less profitable, they will at least be less risky from a depositors point of view.

With respect to your references, the wikipedia article is very good of course, but the rest sound more like your typical conspiracy theory than anything else to me.

Jim.

 

[Jim2007]

The Bank for International Settlements, it operates - with no mandate - as the Central Bankers Bank, so far as I have been able to determine.

http://en.wikipedia.org/wiki/Bank_for_International_Settlements

Its potential for worsening the international credit crunch for calling for higher interest rates is second to none.

http://www.guardian.co.uk/business/2011/jun/26/international-banking-regulator-rates

Certainly not everyone sees the BIS as a benign influence.

http://bullionbullscanada.com/index.php?option=com_kunena&Itemid=122&func=view&catid=17&id=9807

And its historical origin and role in Europe exposes the real reason why Germany didn't invade Switzerland.

http://www.bilderberg.org/bis.htm

The veil of relative secrecy surrounding the BIS' mandate and the threat to the world economy that this centralised and unmonitored power represents - if misused - is being eroded.

ONQ.

Seriously, you consider this to be reliable research??? The Wikipedia article is as expected well done, but the rest... well lets just say I hear Black helicopters in the distance.

Jim.

 

[Jim2007]

I understand that banks used derivatives amongst other means to fudge compliance with the previous limit for fractional reserves set by the BIS.

Where is the reference for this statement? I know that Credit Suisse have made a proposal to use for Basle III, but I'm not aware of their use in the past???

Jim.

 

[onq]

Jim,

I realise only too well that you can live beside something and not know whats going on.

Here is a past thread on AAM started by me in which I posted the text of an e-mail to the BIS asking them for clarification of their role.

http://www.askaboutmoney.com/showthread.php?t=119469
11-08-2009, 03:23 PM

In relation to the black helicopters, all you have to do is follow the money and see who is benefiting from the pressures on the system right now.

Are the large corporations and the banks being targeted by taxation to relieve the debt undertaken without any mandate from their electorates by supposedly sovereign governments? No.

Are small businesses getting the liquidity they were promised as a result of taking on board this insupportable debt? No.

Here is a link to a story about what is starting to happen in the United States right now as individual states start to help themselves after realizing that the government has only helped the larger conglomerate banks.

http://www.opednews.com/articles/How-the-Bailout-Killed-Loc-by-Ellen-Brown-110702-255.html

I am not interested in conspiracy theory.

I am trained to look at the facts, however unpalatable they may be, and make professional decisions, regardless of any preconceptions I may have.

One thing I've learned over time is that people who choose to rebut facts by attacking the messenger as opposed to countering the arguments, are engaging in a political exchange, not a debate.

If you know about the BASLE accords then you know what I know.

What you seem to be missing is an appreciation of the effects of these accords given the banking situation in place at the time.

Either the likely effects were known about or they were not.

Given the contacts in the BIS they could not have been unaware of the degree of governance of the local banks, the central banks and the money markets.

Yet they pressed ahead with implementing the accords.

Is none of this making sense to you Jim?

ONQ.

 

[onq]

I have no connection what so ever to the BIS... apart from the fact that I used to walk past it's head quarters in Basle on my way to work for 4 years.

On the other hand, over the years, I have, as the author of various banking software applications, been involved in several discussions about implementing it's requirements known as Basle II and now Basle III, so I am more aware than most of it's importance in the banking community. And as I have already said I have yet so see any credible argument to suggest that the crises was caused by the BIS.

And while it is true that Basle III, will require banks to meet a higher T1 ratio, which will result in them being less profitable, they will at least be less risky from a depositors point of view.

With respect to your references, the wikipedia article is very good of course, but the rest sound more like your typical conspiracy theory than anything else to me.

Jim.

Is business week a sufficiently credible source?

http://www.businessweek.com/magazine/content/08_17/b4081083043159.htm

And since Wiki seems to be an acceptable source I'll include this general comment.

http://en.wikipedia.org/wiki/Basel_II

If these geniuses are allowed raise interest rates after their hamfisted handling of the banking crisis it will ruin the world economy.
IMO this is a deliberately set up plan by the smartest money men in the room to beggar the middle classes and create wealth for themselves.
If that happens, and it is entirely foreseeable to a layperson like me and entirely unbelievable to suggest this wasn't planned, then the Swiss may have more surprises coming.

ONQ

 

[onq]

Where is the reference for this statement? I know that Credit Suisse have made a proposal to use for Basle III, but I'm not aware of their use in the past???

Jim.

I'll use the same business week reference I included in another post.

http://www.businessweek.com/magazine/content/08_17/b4081083043159.htm

I wasn't specifically referring to Irish banks, but I'm sure they played a similar game.

I agree with your other comment - Irish Banks went from lending money prudently to selling money unwisely to shoveling money negligently at people.
I say "negligently" because they are supposed to be the professionals who were supposed to operate at a higher level and have a duty of care to the public.
The current mess where the public, via a disgraced previous government, have taken on private bank debt is the result of them not having discharged their duty of care.

My other thread starter on the repudiation of Odious Debt is relevant.

ONQ.

 

[Jim2007]

I'll use the same business week reference I included in another post.

http://www.businessweek.com/magazine/content/08_17/b4081083043159.htm

I wasn't specifically referring to Irish banks, but I'm sure they played a similar game.

Well first of all this article does not support your claim that CoCos where being used....

And secondly it disingenuously argues that because the banks have failed to follow the T1 guidelines set out in Basle II, it is now the BIS's fault that there is a problem!!!

Had they indeed followed the guidelines they would have had a been in better situation to survive the fall out - For example UBS had a T1 rate of about 14/16% when it took the hit of $50b and as a result it was able to cover about $45b itself before needing an extra $6b from the Swiss government - in comparison look at what happened to US/UK/Irish banks, with their very low T1 rates...

Jim.

 

[Jim2007]

If these geniuses are allowed raise interest rates after their hamfisted handling of the banking crisis it will ruin the world economy.
IMO this is a deliberately set up plan by the smartest money men in the room to beggar the middle classes and create wealth for themselves.
If that happens, and it is entirely foreseeable to a layperson like me and entirely unbelievable to suggest this wasn't planned, then the Swiss may have more surprises coming.
ONQ

First of all decision making within the BIS is in fact the decisions of it's 60 members, some very powerful ones such as the Fed, the ECB and the Bank Of England and to suggest that these bodies would accept being pushed around by the staff of BIS is just not credible. And Secondly, it is the Fed, the ECB and the Bank of England that are the main drivers when it comes to setting interest rates and who in fact have the authority to do so.

Jim.

 

[Jim2007]

What a load of Bull !

Well whatever else I thing potential borrowers should pay attention to this comment within the article and borrow accordingly:

"It is considered that a normal worker will be able to pay back 2.5 times his income over the course of his working life. In the case of a couple, who would typically buy a house, the limit was 2.5 times plus one times spouse’s salary. This meant with an often sizeable deposit, a couple could afford to buy a house with the help of a mortgage."

Jim.

 

[onq]

First of all decision making within the BIS is in fact the decisions of it's 60 members, some very powerful ones such as the Fed, the ECB and the Bank Of England and to suggest that these bodies would accept being pushed around by the staff of BIS is just not credible. And Secondly, it is the Fed, the ECB and the Bank of England that are the main drivers when it comes to setting interest rates and who in fact have the authority to do so.

Jim.

Are you suggesting that, far from setting policy, the BIS is merely a figurehead organization for the three largest groupings of banking interests in the world?

ONQ.

 

[onq]

Where is the reference for this statement? I know that Credit Suisse have made a proposal to use for Basle III, but I'm not aware of their use in the past???

Jim.

I hadn't known about CoCos before your post.

Now that I do I can go hunting for more information as to their use.

Thanks.

ONQ.

 

[onq]

Nice simple article. Shouldn't be criticised for keeping it simple.

Banks lent up to 8 times income on house purchases.

They could only do this through massively increasing the credit supply. They could only do this by holding lower cash reserves and through an increasing loans to deposits ratio.

The regulator could have limited these vital actions in any number of ways.

Simple as that. Yes you can delve deeper into why it happened (opening up of the market to foreign banks, ECB funding, etc) but that's not necessary to understanding what happened and how it should have been stopped.

Some people obviously don't like the simplicity, but you can't argue the facts.

You're going on assumptions, not facts.

The banks didn't need to adversely affect their cash reserves in absolute terms - they could have borrowed the money they lent locally on the international credit market.

ONQ.

 

[Purple]

It appears that it is precisely this lack of competence that is supposedly guiding the BIS and the people Jim tells me it fronts for - the ECB, the FED and the IMF.
Or so they would have us believe.

ONQ.

What do you think the real story is?

 

[onq]

There is no mystery to this, Purple.

The official assessment is that all this [repeated boom and bust cycles] happens through human error and greed in a free market system.
This is based on certain assumptions about the free market system which aren't well supported in my opinion.

An unregulated free market is the unmonitored playground of corrupt corporations seeking to accumulate wealth.
To support this thesis, just follow the money and see who gains and who loses in the medium term.
The results tell the real story.

ONQ.

 

[Purple]

There is no mystery to this, Purple.

The official assessment is that all this [repeated boom and bust cycles] happens through human error and greed in a free market system.
This is based on certain assumptions about the free market system which aren't well supported in my opinion.

An unregulated free market is the unmonitored playground of corrupt corporations seeking to accumulate wealth.
To support this thesis, just follow the money and see who gains and who loses in the medium term.
The results tell the real story.

ONQ.

So you are of the opinion that the international financial crisis was manufactured by international global capitalists.
If that is the case it was a complex and high risk strategy which would have required decades of planning as well as considerable and coordinated political control of the governments of major countries in order to influence policy. Who are these people, what events did they influence and how did they manufacture the suitable outcomes?

 

[millieforbes]

Are you suggesting that, far from setting policy, the BIS is merely a figurehead organization for the three largest groupings of banking interests in the world?

ONQ.

I always understood that, at a high level, BIS was responsible for policy setting but not implementation; for example drafting the Basel II accord, presiding over the negotiations and publishing the final policy but individual regulators in individual countries were responsible for implementing and policing the policy. The effectiveness of the implementation of the policy is, of course, determined by the competence of the organisations implementing the policy, including in our case the Financial Regulator.

Looking at the Irish regulator, you have a small organisation trying to effectively police all the banks, including all the hundreds of small subsidiaries of international banks operating out of the IFSC - as well as the AIBs and Bank of Irelands, and covering all types of regulation varying from consumer credit acts to the Basel II accord.

At the heart of sophisticated approaches to Basel II credit risk requirements (credit risk making up most of the capital requirements for Irish banks) are models designed to predict the likely losses on loans. This is where the equivalent of the actuaries come in - though in the case of banks they are typically statisticians rather than actuaries. The statisticians build these models which convert the banks loans into Risk Weighted Assets. BIS dictates that banks hold 8% of these RWAs as capital but the local regulators are responsible for ensuring the RWAs have been robustly calculated. The banks wanted to lend more money so it was in their interest to push down the estimation of RWAs. The regulators reviewed this. In the FR the team responsible for these reviews was probably no more than 10 people, and these highly specialist model reviews were not their only work.

IMO where the BIS failed here was in failing to check that the local regulators who were responsible for implementing their policies were actually competent in so doing.