Big unease at the Tower of Basel: once a European fortress, the BIS is about to experience a Canadian takeover. Is this an emerging Anglo-Saxon Trojan horse? TIE's Klaus Engelen goes behind the scenes. (Institutions).
On April 1 of this year, Malcolm D. Knight (58), senior deputy governor of the Bank of Canada since 1999, will succeed Andrew Crockett as managing director of the BIS, an institution that acts as "Bank of Central Banks." And on July 1, Jaime Caruana, governor of the Bank of Spain, will take over the chair of the Basel Committee on Banking Supervision from McDonough, who negotiated the new global risk-based accord for bank capital (Basel II) and who will retire as president of the New York Federal Reserve in the middle of this year.
Another Canadian, Nick LePan, superintendent of financial institutions, will serve in the newly established position of vice chairman of the Committee on Banking Supervision. And Roger W. Ferguson, Jr., the Fed's vice chairman, has taken over as chairman of the Committee on the Global Financial System (CGFS). Since the bank's high-caliber team of economists is headed by William White, another Canadian, three key positions at the bank will be in Canadian hands.
At first glance these leadership changes at the center of the world of central banking in Basel have been accomplished without much visible collateral damage. Central bankers--in contrast to finance ministers and finance officials--are known to work under a veil of secrecy. In particular, when choosing one of their peers for a major international position, they try hard to keep any discord among themselves from the public eye.
FINANCE OFFICIALS WITH A BIG STAKE
This time around things didn't go that smoothly if one looks a bit behind the veil. As the central bank governors of the major industrial countries were working to replace the two outstanding financial leaders, their internal squabbling and their jostling for the new positions leaked out. The reasons were obvious. Who gets the top-management post at the BIS is an issue that goes beyond the world of central banking, because Crockett also has been chairing the Financial Stability Forum (FSF), today's important platform for central bankers, financial market supervisors and finance officials.
The major task of the FSF is to improve international financial stability through timely information exchange and better co-operation in financial supervision and surveillance. Formed in April 1999 with the blessing of G7 finance ministers and following the recommendations of Hans Tietmeyer, the former president of the Deutsche Bundesbank, the FSF has done a lot to bring together, on a regular basis, national authorities responsible for financial stability in significant international financial centers, sector-specific international groupings of regulators and supervisors and committees of central bank experts. With a small secretariat at the BIS in Basel, the FSF is setting the agenda to cope with financial market shocks or fragilities of the international financial system. Assessing the damage of the September 11 attacks on the insurance sector and looking into the implications of corporate scandals such as Enron and World-Com were high on the Forum's agenda.
Last year, when Crockett signaled that he would like to step down from his position by the end of March, 2003, the G7 deputy finance minister sounded a warning to the Gl0 central bank governors that are calling the shots at the "Tower of Basel": that the chairmanship of the Financial Stability Forum was given to Crockett "ad personam" and that, therefore, the G7 ministers would like to preserve the option to come up with a high-caliber finance official to chair the Forum.
A EUROPEAN JOB FOR A CANADIAN?
Some European finance officials, supervisors, and regulators didn't like what they saw happening at Basel's central bank tower. And they didn't mince their words. Some accuse key European central bankers of having committed a major strategic blunder in a financial world of escalating transatlantic rivalry and tensions. "By choosing a non-European IMF veteran to run the BIS and possibly the FSF, the governors may have undermined Europe's position," laments a high finance official from a smaller EU member country. He asks: "Didn't they think of the likelihood that a new BIS managing director would be asked to chair the FSF that sets the global agenda for financial crisis prevention?" And he warns: "If this is the way key European central bank governors act to protect European interests, they should not be surprised that finance ministers and governments are pushing them back from the European decision-making process."
Even some European central bankers have second thoughts. "The 17-member board of the BIS should never have opted for such a selection charade," laments a higher up at the Bundesbank. Such complaints are not made publicly but on an off-record basis. High BIS officials take a different view when they argue: By choosing a highly qualified non-European to succeed Crockett, the governors of the Group of Ten demonstrated their independence from national governments and strategic regional considerations. By opting for a Canadian central banker who has been working at the IMF for most of his professional career, they would like to make sure "that the BIS will stay connected with Washington as the center of gravity in the global financial system for years to come."
As things stand, the headhunters from the BIS board have some explaining to do. In their view they did the best they could.
HEADHUNTERS HAVE TO MAKE GOOD
On September 10 of last year, the Governors of the BIS Board formed a "committee to assist in seeking a replacement for departing General Manager Andrew Crockett" under the chair of Arnout H.E.M. Wellink, president of De Nederlandsche Bank. According to informed sources, the "finding committee" had to work through a list of almost fifty applicants to get to three final highly qualified contenders: Apart from Knight, also Jaime Caruana, Spain's central bank governor, and Urban Baeckstroem, Sweden's former central bank governor (who had served as chairman of the BIS Board) were competing for Crockett's position.
Apart from Wellink as the finding committee's chairman, also Jean-Claude Trichet, Bank of France governor and designated president of the European Central Bank, and Jean-Pierre Roth, the Swiss central bank governor, did the crucial interviews with the three final contenders. In the eyes of some European central bankers and finance officials, they have committed what amounts to "high treason" by not choosing one of their two European colleagues. For Spain and Sweden the rejection of their candidates came close to a national humiliation. In other European capitals, there was anger at the final interviewers "for surrendering the institution with a distinct European character even more to Anglo-Saxon domination."
Confronted with such complaints, Dutch governor Wellink responded through his spokesman B.J. van der Zaag: "The profile stated that the best candidate should be selected, irrespective of nationality." And he continued, "Having considered three shortlisted candidates, the search commission and the board decided unanimously on Mr. Knight." Roth, the Swiss central bank governor, defended the rejection of the two European candidates as a "decision of the BIS board," meaning that the G10 governors put thumbs down against their colleague from Spain. As co-author of the recent study on Enron by the Group of Thirty, Caruana has shown his mettle.
COLLATERAL DAMAGE FOR A BUNDESBANKER
When the BIS Board of Governors, on January 13, appointed Malcom D. Knight as the bank's new general manager, this was bad news to the Bundesbank's Vice-Governor Jurgen Stark, long-term sherpa to former German Chancellor Helmut Kohl. As a former German deputy finance minister with some international standing, Stark had a good chance to succeed McDonough as chairman of the Basel Committee on Banking Supervision. All this changed when Europe's strongest contender for Crockett's job, Caruana, was turned down by his colleagues. To soften the blow to Spain, the key members of the finding committee--with Wellink and Trichet up front--led a drive to give McDonough's position to Caruana. Nobody was surprised when the G10 central bank governors, on March 10, announced that Caruana will succeed McDonough as chairman of the Basel Committee for Banking Supervision.
Professional BIS watchers such as Karel Lannoo, who heads the Brussels CEPS Research Institute, express a certain uneasiness about what is going in Basel. "Europe shouldn't lose what the BIS has been providing until now, namely independent, high-quality economic and monetary analysis from a European angle." In his view, the BIS experts have a reputation of delivering "a second opinion" in a world of analysis that is very much dominated by what the IMF and the Anglo-Saxon experts think. This uneasiness has been spreading among the staff of the world's oldest multilateral institution.
There are questions from staffers whether some BIS governors were looking for a proven cost and staff cutter. But there also is concern that with an IMF veteran from Canada in charge it would be easier for the Americans to keep sensitive topics--like government-sponsored enterprises such as Fannie Mae and Freddie Mac or the concentration of derivative risks--from the BIS research agenda.
DARWINIAN SURVIVAL INSTINCTS
Some observers of the BIS see the choice of someone who is wired into the Washington-IMF establishment as an asset. Says Robert Pringle, publisher of the magazine Central Banking, "The BIS has always shown a remarkable ability to adjust to changing circumstances and has in the past narrowly survived potential threats to its existence. It is now showing an admirable degree of Darwinian survival instinct. The appointment of Malcom Knight is another stage in the evolutionary struggle."
All this explains why there won't be a welcome mat for Malcolm Knight, the 24-year IMF veteran, who--in his short stint at the Bank of Canada--made a name for himself in one area only: by reducing staff and cutting costs. Even more so than his British predecessor, Knight spent most of his professional career at the IMF. He joined the Fund in 1975 as an economist after teaching economics at the University of Toronto and the London School of Economics (LSE). In his later years he was deputy director of the Middle East department and the Monetary and Exchange Affairs Department. He left the Fund in 1999 as deputy head of the "European I Department." While at the IMF he was an adjunct professor at John Hopkins University School of Advanced International Studies and at the Virginia Polytechnic Institute and State University. He has published widely in the areas of macroeconomics, international finance, and banking.
Knight moves to a top of the oldest multilateral financial institution, whose history dates back to 1930. The BIS was established to handle war reparation of besieged Germany under the Versailles Treaty. He has to fill the big shoes of Andrew Crockett, who in almost a decade transformed the BIS from a "bank club" for the major central bank governors into a global "bank of central banks." Coming from the Bank of England to Basel in January 1994, Crockett reacted promptly to the formation of the European Central Bank and the introduction of the euro as a common currency. He set the institution on a new course to become a global service center for central banks and a global platform for setting standards. For this purpose, he invited central banks from emerging markets as shareholders and substantially broadened the field of BIS's activities. Now central banks from fifty countries are shareholders of an institution with a balance sheet of close to $200 billion that operates with a highly qualified staff of over five hundred who come from almost fifty different countries. The G7 finance ministers recognized the outstanding role of the BIS in reforming and strengthening the international financial architecture by asking Crockett to head the newly formed Financial Stability Forum (FSF) with a small secretariat at the BIS. More than other international financial institutions, the BIS, under Crockett, understood the need to establish a dialogue with the private sector, in particular, with the leading international banks. By getting the distinguished former governor of the central bank of the Czech Republic, Josef Tosovsky, as director of the Financial Stability Institute, Crockett was able to strengthen the BIS role as a global training center for central bankers, financial supervisors, and regulators. By pushing the development and implementation of standards and codes in the area of banking supervision, Crockett has given the BIS a competitive edge over other international organizations, including the mighty Bretton Woods institutions.
CIRCLING THE MINE FIELDS
Before moving into his office at Basel's BIS Tower, Knight said the right things and circled the mine fields. Talking to the local Baseler Zeitung, he emphasized that he would continue his predecessor's policy of broadening the role of BIS in emerging economies. And he argues that institutions with such a high standing as the BIS can make a major contribution to restoring investor confidence in financial markets by providing reliable information. Of course, he would do his best to work together with the IMF.
He outlined three priorities: First, to expand the BIS role in serving central banks around the world and to remain an active player in global markets; second, to maintain the high standards of economic analysis that the BIS has developed over the years; and third, to strengthen its role as a platform for important international committees where central bankers, financial supervisors, and regulators work together to improve financial stability.
As an IMF veteran with diplomatic skills in financial diplomacy, he left open the question of whether he would add more regional BIS offices to the ones in Hong Kong and Mexico City. And he didn't dare to venture into the hottest question of all: Whether he expects to follow into Crockett's steps and become chairman of the influential FSF.
On this issue, all bets are off. When the G7 finance ministers and central bank governors met in Paris at the end of February, there was no consensus on who should chair the FSF when Crockett steps down. "There are some reservations from some quarters," was the message that leaked out from the Paris meeting. This confirms that some finance ministries, supervisors and even central bankers--in particular in Europe--are not happy with the leadership changes at the BIS.
History: General Managers of the Bank for International Settlements The French (the major beneficiaries of Germany's reparation payments of World War I) dominated the old BIS. Name Home Country Time Pierre Quesnay France 1930-37 Roger Auboin France 1938-58 Guillaume Guindey France 1958-63 Gabriel Ferras France 1963-70 Rene Larre France 1971-81 Gunther Schleiminger Germany 1981-85 Alexandre Lamfalussy Belgium 1985-94 Andrew D. Crockett United Kingdom 1994-2003 Malcolm D. Knight Canada
The Big-Time Players
On July 1, Jaime Caruana governor of the Bank of Spain, will take over the chair of the Basel Committee on Banking Supervision from William McDonough who negotiated the new global risk-based accord for bank capital (Basel 11) and who will retire as president of the New York Federal Reserve in the middle of this year.
Since the bank's high-caliber team of economists is headed by William White, another Canadian, three key positions at the bank will be in Canadian hands.
Malcolm Knight, in his short stint at the Bank of Canada, made a name for himself in one area only: by reducing staff and cutting costs. Knight spent most of his professional career at the IMF.
G7 finance ministers recognized the role of the BIS in reforming and strengthening the international financial architecture by asking Andrew Crockett to head the newly formed Financial Stability Forum. The BIS, under Crocken, understood the need to establish a dialogue with the private sector.
Klaus C. Engelen is the international correspondent for Handelsblatt in Dusseldorf, Germany, and a TIE contributing editor.
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|Author:||Engelen, Klaus C.|
|Publication:||The International Economy|
|Date:||Mar 22, 2003|
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