It is the first time in the 83-year history of the BIS, known as the central bankers' bank, that the position of economic adviser and head of the MED has been split between two people. It is also the first time the BIS has chosen an economic adviser that is neither European or North American, illustrating the BIS' shift away from its European roots to being a truly global institution.
Borio and Shin will become members of the BIS' executive committee and contribute to the general management of the BIS, the world's oldest international financial institution that is based in Basel, Switzerland. The BIS board comprises he world’s most powerful central bank governors, such as Ben Bernanke of the Federal Reserve, Haruhiko Kuroda of the Bank of Japan, Mario Draghi of the European Central Bank and Zhou Xiaochuan of the People’s Bank of China.
Shin, a Korean national, takes up his new job as the seventh economic adviser to the BIS on May 1, 2014. In addition, he will be head of research and have primary responsibility for economic research.
Borio, currently deputy head of the MED and director of research and statistics, takes over on Nov. 18, the day Stephen Cecchetti, current BIS economic adviser and head of MED, leaves after a planned five-year term that has witnessed sweeping changes to central banking.
In response to the global financial crises that began in 2007, central banks in advanced economies slashed interest rates to record lows and unleashed massive monetary stimulus through asset purchases, known as quantitative easing (QE).
The main challenge facing central banks in coming years will be the unwinding of quantitative easing. With the U.S. Federal Reserve likely to begin reducing its asset purchases in the near term, the prospect of an exit from QE has already caused deep ripples in global financial markets and especially emerging market economies as capital starts to shift away from them and back to advanced economies.
Another theme that will mark the work of Shin and Borio is coming years will be how central banks incorporate the pursuit of financial stability into the monetary framework.
Under Cecchetti, the BIS deepened its understanding of how the financial cycle - in contrast to the shorter and more commonly-understood business cycle – impacts economic growth and typically ends in a financial crises. Another of Cecchetti's contributions to the BIS was to strengthen the links to the global academic community, a shift that began around 2000.
Borio, who joined the BIS in 1987, is one of the world's leading authorities on monetary economics and has been instrumental in developing the understanding of financial cycles. He first became known in the early 2000s for arguing that financial imbalances can build up in a low inflation environment and it is appropriate for central banks to respond to such imbalances.
At that time, most central banks mainly saw their role as keeping inflation low and rejected the notion that they should prick any asset bubbles.
But together with BIS Economic Adviser Bill White, Borio continued to explore how an environment of low inflation, financial liberalisation and innovation allowed financial imbalances to grow and set the stage for a crises. This research formed the basis for BIS' repeated warnings of the forces that eventually led to the global financial crises.
Shin is currently the Hughes-Rogers Professor of Economics at Princeton University and his research has focused on financial institutions, risk and financial stability issues. Prior to moving to Princeton in 2006, was professor of finance at the London School of Economics and holds a doctorate in economics from Oxford University.
In its statement, the BIS said Shin "comes with an outstanding publication record and his academic research and policy interests are well aligned with the mission of the BIS and central banks."
While on leave from Princeton in 2010, Shin served as senior adviser to the Korean president on international economy. He was also an adviser to the Bank of England from 2000 to 2005, a resident scholar at the International Monetary Fund in 2005 and academic visitor to the BIS in 2001, 2002 and 2003.
"Based on their exemplary career and research record, together Mr. Borio and Mr. Shin will further enchance the output of the Monetary and Economic Department in the area of research and policy advice," the BIS quoted General Manager Jaime Caruana as saying.
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Following is last week's story by Central Bank News to provide further context and perspective to the announcement of a new economic adviser:
BIS
set to name new economic adviser next week
The Bank for International Settlements (BIS), known
as the central bankers’ bank, will get a new public face next week when it
announces a new chief economic adviser, a unique job that combines the art of
diplomacy with the rigorous discipline of a scientist.
It will be the seventh economic adviser to Swiss-based
BIS, the world’s oldest international financial institution, and the candidate
will succeed the straight-talking Stephen Cecchetti, who once compared the
financial sector to cancer because it can grow so large that it suffocates and
eventually devours its national host.
The choice of economic adviser is significant because it
provides an insight into how central banking will evolve in coming decades as
it faces the twin challenge of exiting from years of ultra-easy monetary policy
and integrating financial stability into its operational framework.
From managing Germany’s war reparations to helping
extinguish international financial crises and give birth to Europe’s single
currency, the BIS has evolved into a truly global institution, at the core of
international efforts to design and implement many of the policies that make up
a new international financial architecture.
The common thread that binds all BIS advisers is a deep
personal commitment to public policy. Not only were all its past advisers
marked by the policy issues of their time, they put their own mark on public
policy.
From its founding in 1930, the BIS was always at the
heart of international finance with the history of central banking and monetary
policy witnessed and documented by its Monetary and Economic Department (MED),
headed by the economic adviser.
Like a calm voice of reason amidst the cacophony of financial
markets, the MED publishes topical working papers, quarterly reviews of
international financial developments and the prestigious BIS annual report. The
MED’s work is based on data collected from central banks worldwide about
the global financial system.
The MED also supports the various committees that meet
at the BIS, from the world's central bank governors to the Basel Committee For
Banking Supervision (BCBS), which sets global standards for banking regulation.
The more secretive part of the BIS is its banking
department, which manages the assets and foreign currency reserves for central
banks. Through its linked trading rooms in Basel and Hong Kong, BIS traders buy
and sell foreign exchange, gold and securities on behalf of some 140 central banks
and international institutions, the reason the BIS is known as the central
banks’ bank.
One of the distinguishing features of the BIS is the
banking operations, which gives the adviser and his staff of economists a
first-hand knowledge of how financial markets are behaving real-time and how a
bank operates day-to-day.
Like the BIS, the role of its economic adviser is
unique.
Owned by 60 central banks, BIS has no national
constituency, nor is it an international institution like the International
Monetary Fund (IMF) that is responsible to member governments. The BIS resides
at the intersection of economics and politics.
This autonomy gives the BIS economic adviser a certain
freedom to carry out independent research that forms the basis for the “BIS
view” of international economic affairs, a view that is most clearly expressed
in the annual reports in late June.
The BIS annual reports gained new respect and clout
after repeatedly warning of the financial imbalances that triggered the Global
Financial Crises in 2007. More recently, the BIS annual reports have
highlighted the dangers to central banks’ credibility and independence from the
intense pressure on them to keep interest rates low and solve problems that are
outside the realm of central banking.
Looking back at past BIS economic advisers, it soon
becomes clear that they possessed skill sets that only few can claim:
An accomplished economist that is at ease in the
rarefied air of central bank governors and commands their respect; a diplomat
that policy makers trust for confidential advice; a visionary administrator
that can inspire and manage a staff of top monetary economists from central
banks worldwide and finally an intellectual with the guts and confidence to stand
up for his beliefs and defend the BIS view.
This view represents much more than just the adviser’s
opinion. It is an institutional view, developed in close cooperation with the
BIS management team, currently headed by General Manager and former Bank of
Spain Governor Jaime Caruana.
Among the most influential general mangers in recent
years was Andrew Crockett, who led the BIS from January 1994 to March 2003.
Crockett transformed the BIS into a global institution from a euro-centric body
and nurtured the BIS view by allowing its adviser and economists to become more
provocative in public statements and their work.
BIS management has to walk a fine line in
espousing its views given that its owners are central banks and the board of
directors includes the world’s most powerful central bank governors, such as
Ben Bernanke of the Federal Reserve, Haruhiko Kuroda of the Bank of Japan,
Mario Draghi of the European Central Bank and Zhou Xiaochuan of the People’s
Bank of China.
The economic adviser relies on the support of the
manager. During the 1990s, for example, Crockett provided the necessary
political cover for views by staff or the economic adviser that were critical
of the supervisory community or the monetary policies pursued by some central
banks.
There have been seven advisers in the history of the BIS,
each staying in their job for an average of 13 years so Cecchetti’s five-year,
one-term stint is slightly unusual. However, he only planned to stay for one
term so his decision to return to the United States did not come as a
surprise.
The only other adviser to remain in the position as
adviser for less than a decade was Alexandre Lamfalussy but that was only
because he went on to become BIS general manager.
Following is a brief profile of economic advisers to the
BIS:
Per Jacobsson: September 1931-October 1956
Swedish-born Per Jacobsson joined the newly-established
BIS in 1931, becoming the first head of its monetary and economic department.
Among his responsibilities was writing the BIS’ annual report, which quickly
gained worldwide reputation.
In 1956 Jacobsson left the BIS to become managing
director of the International Monetary Fund in Washington D.C. and remained in
that role until his death in 1963.
Jacobsson set the standard for BIS economist, not only
for his analysis and work in monetary economics but also for his international
standing and trusted friendship with bankers, government officials and
political leaders worldwide.
Jacobsson’s appointment to the IMF came as such a
surprise to the BIS that there were no plans in place to replace him and it
took four years to fill the vacancy.
Milton Gilbert: November 1960-December 1975
American Milton Gilbert took over as economic adviser at
a time of rapidly expanding international trade and economic growth within the
Bretton Woods system with the U.S. dollar the main reserve currency and thus
the dominant instrument in international liquidity.
Gilbert came to Basel from the OECC, the Paris-based
organization that was set up in 1948 to help administer the Marshall Plan. The
OECC became the OECD in 1961. Gilbert had been director of economics and
statistics at the OECC and began his career at the U.S. Commerce department and
attended the Bretton Woods conference as a junior member of the U.S.
delegation.
As an American with deep knowledge of Europe and
international monetary affairs, Gilbert became known for pointing to growing
U.S. budget deficits as the primary reason for the breakdown of the Bretton
Woods system and called for a revaluation of the official gold price to save
it.
Alexandre Lamfalussy: January 1976-April 1985
Hungarian-born Alexandre Lamfalussy took over the mantle
from Gilbert in 1976 and added the responsibility of assistant BIS general
manager in 1981. In 1985 Lamfalussy became BIS general manager and left the
position of economic adviser.
Prior to joining the BIS, Lamfalussy had a career as an
academic and then as a commercial banker with Banque de Bruxelles, one of the
predecessors of the ING Group. He joined the Belgian bank as an economist
and rose to the position of chairman of the executive board, gaining valuable
insight into financial markets.
Lamfalussy remained at the BIS as general manager until
1993 when he moved to Frankfurt and became founding president of the European
Monetary Institute, the forerunner of the European Central Bank (ECB).
During his time as general manager, Lamfalussy was a
member of the Delors Committee, which met at the BIS in Basel and was pivotal
in European monetary integration and the preparation of the Maastricht
Treaty.
Lamfalussy became synonymous with European monetary and
financial integration and when he left EMI, Wim Duisenberg described Lamfalussy
as a person that combined the cautious nature of a central banker with a firm
belief in European monetary integration.
But the BIS was also closely involved in the Latin
American debt crises of the early 1980s and part of Lamfalussy’s legacy was his
understanding of financial fragility. He became the main architect of the BIS
approach to financial stability, which focuses on the financial system as a
whole, including the risk of failures of banks and other institutions that have
a systemic dimension.
Horst Bockelmann: May 1985 - April 1995
Before joining the BIS in May 1985, Bockelmann, a
German, spent most of his working life with the Deutsche Bundesbank in
Frankfurt. His main work at the Bundesbank was in research and statistics and
at one point he was in charge of monetary analysis and became known for this
work on monetary targeting. From 1972 to 1978 he was deputy head of the
Research Department and then from 1979 to 1985 he was head of the Bundesbank’s
Statistics Department.
Reflecting his past at the Bundesbank, Bockelmann’s
writing style was clear, concise and logical, a precedent that later BIS
economic advisers have followed.
In the mid-1960s, Bockelmann was seconded from the
Bundesbank and served in developing countries, providing technical assistance.
In 1965 he became the first governor of Guyana’s new central bank, which issued
its first notes that replaced the Eastern Caribbean currency.
During his time at the BIS, Bockelmann often argued for
worldwide coordination of economic policies, taking issue with such luminaries
as Martin Feldstein and Stanley Fischer that believed each government should
deal with their own problems.
It was Bockelmann’s misfortune to be economic adviser at
the same time that Lamfalussy was general manager. Despite his new position,
Lamfalussy was effectively still chief economist and the public face of the
BIS, never afraid to make strong statements.
William White: May 1995-June 2008
Canadian William R. White joined the BIS in June 1994 as
manager of the MED and took over as economic adviser and head of the MED a year
later.
White’s career began as an economist with the Bank of
England in 1969 which he left in 1972 to join the Bank of Canada. He spent 22
years with the Canadian central bank, initially as an economist, and then
rising to the position of deputy governor from 1988 to 1994 where he was
responsible for international developments, including foreign exchange
intervention and reserve management.
After his retirement from the BIS, White deepened his
involvement in public policy, helping advise German Chancellor Angela Merkel on
G20 issues from 2008-2012 and is currently serving on the Federal Reserve Bank
of Dallas’ board for globalization and monetary policy and is chairman of the
Economic Development and Review Committee at the OECD, which makes policy
recommendations to member countries.
Under White and General Manager Crockett, BIS started to
take on a much more public and independent role, taking issue with its natural constituency
of banking supervisors and central bank governors.
BIS economists began to question the prevailing
wisdom that inflation targeting by central banks would lead to financial
stability and showed that low inflation can in fact mask the build-up of
financial imbalances.
The consequence of that insight was that White found
himself in the delicate situation of publicly arguing that central banks should
take asset bubbles into consideration when setting policy, a view known as
‘leaning against the wind’.
This was in direct contrast with the position championed
by the revered Federal Reserve Chairman Alan Greenspan, who argued that asset
bubbles were hard to identify and therefore central banks should just focus on
cleaning up any economic damage caused by the bursting of bubbles.
In his final annual report before leaving Basel in 2008,
White presciently wrote that the global downturn would be deeper and more
protracted than the consensus view expects and “the effectiveness of a lowering
of policy rates might be significantly reduced in the aftermath of a
credit-induced spending boom.”
And White is not resting on his laurels. In August 2012
he wrote the paper, “Ultra Easy Monetary Policy and the Law of Unintended
Consequences,” pointing out the dangers from the current low interest rates by
central banks in advanced economies – helping lay the groundwork for the
Federal Reserve’s decision to wind down five years of massive asset purchases,
known as quantitative easing.
Stephen Cecchetti: July 2008-?
Stephen G. Cecchetti, citizen of both the United States
and Italy, came to the BIS from Brandeis University and Ohio State University
following a two-year stint at the Federal Reserve Bank of New York as director
of research and associate economist at the Federal Open Market Committee. As
many other prominent central bankers, Cecchetti also studied at the
Massachusetts Institute of Technology.
Even before he joined the BIS, Cecchetti was thinking
along the same lines as BIS economists who were exploring the consequences of
financial liberalization and globalization for monetary policy.
In 2000, Cecchetti co-authored “Asset Prices and Central
Bank Policy” with John Lipsky, Sushil Wadhwani and Hans Genberg, raising the
issue of how central banks should view changes in equity, housing and foreign
exchange markets.
The paper’s conclusion was that central banks can
improve their performance by adjusting policy to changes in asset prices along
with inflation forecasts and the output gap. Answering critics, who argued that
asset bubbles are difficult to spot, the authors admitted that it may be
difficult to spot misalignments but that is no reason to ignore them.
And in November 2007, as the global financial crises was
starting to unfold, he called for derivatives to be traded on exchanges with
clearing houses imposing margins based on the security’s daily gains and
losses, much like capital in a bank acts as a buffer against losses.
Illustrating how such ideas can develop into public
policy, Group of 20 leaders agreed at their Pittsburgh summit in September 2009
that all standardised over-the-counter derivative contracts should be traded on
exchanges by the end of 2012 – a goal that is getting closer but still not
fulfilled.
Under Cecchetti, the BIS has deepened its understanding
of how the financial cycle - in contrast to the shorter and more
commonly-understood business cycle – impacts economic growth and typically ends
with crises. Dynamic economic models that integrate the financial system,
something that was ignored in the past, are now being refined and tested.
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