http://www.publications.parliament.uk/pa/ld200102/ldselect/ldeconaf/143/1112705.htmExamination of Witness (Questions 420 - 429)
TUESDAY 27 NOVEMBER 2001
MR ANDREW CROCKETT
Lord Cuckney
420. Who owns the BIS?
A. Although it is an international organisation established by international treaty it is in the form of a company limited by shares. The shares are owned by national central banks. There are now something like 50 shareholding central banks. The founder member central banks, of which the Bank of England is one, have the largest amount of shares, each has about nine per cent of the shares. There were six founder member central banks, and other central banks have smaller amounts. The BIS pays dividends like a company would pay dividends to the owners and it retains the rest of its profits to augment the capital base.
421. When you say "we" bought out the private shareholders, it was the central banks?
A. I should say it was the BIS. I did not put up any of the money myself but the BIS as an organisation and therefore its shareholders.
422. Could I ask, it goes on a bit to the question I might ask later, about your definition of soft laws, you talk about hard and soft; the BIS is engaged entirely in the area of soft laws, is it not?
A. Yes.
Chairman: Pardon?
Lord Cuckney: I just wondered whether the BIS engaged entirely in soft laws but not in legally binding hard laws.
Chairman
423. The question was partly more general about the relative benefits of hard and soft commercial regulation. Are you saying that you are a believer in the soft approach?
A. It is not a soft approach but it is not formalised law. I think I am a believer in it in certain areas. As I said in my written submission, the financial sector changes so quickly that it is particularly hard to enforce something that does not run with the grain of market forces because if you try to do that the markets quickly find ways around it. Soft law is really a search for best practice which is perhaps where the market would guide you anyway if it was given time enough. Such rules are often adopted on a voluntary basis by a number of significant market players, and then taken up by others as a result of peer pressure and market forces. This is not law but that is the way that standards tend to get adopted in technological areas. Microsoft developed something and eventually everyone has to use the Microsoft way of doing it. It is not a law that you have to do it but the standard is adopted anyway. This is slightly different but if the main jurisdictions, the US and the main European countries, adopt certain rules for bank regulation it becomes very hard for others to say, "We believe in a different approach." They can try it but their banks are not going to have much international scope for expansion.
424. But the essence of your answer, if I have got it right, is that, national or international, a domestic regulator has got a statutory basis to what he or she does, he says you cannot do that and that means you cannot do it, you are not allowed to find a way around it, you would be breaking the law. I take it that the point about an international regulator is there simply is not a possibility of having an international regulator saying you could not do that because it would not carry any weight. Is that a fair summary?
A. That is right. It is soft law at the international level. The national regulators get together internationally to agree this is what they are going do, which they then enforce in whatever way they choose. It need not be hard laws—
Lord Cuckney
425. They could easily break your arm!
A. He is supposed to do it with his eyebrows.
Lord Barnett: Is not soft law no law?
Baroness Hogg: This applies to a lot of international institutions. It is the membership of the club sanction. "If you do not obey our rules you cannot be a member of this club."
Baroness O'Cathain: A code of conduct.
Baroness Hogg
426. That would apply to the IMF.
A. The IMF is much harder law. It does not always work. The IMF had a law that you were not allowed to change your exchange rate without getting international approval.
427. That is club-based law.
A. It was ineffective law because if the market blew you off the peg you—
428. Would you in the same way say "If you do not abide by certain types of behaviour you cannot have deposits with us", or whatever?
A. First of all, I should say that the structure of the BIS is very opaque. The banking regulations are not actually set by the BIS, they are set by the group of ten. It so happens that the group of ten countries are the central banks that are represented on the BIS board but they do not do it in the name of the BIS. They meet at the BIS, the secretariat is there, but they do it in their collective name. We sometimes talk about this as the "Basel process". In other words, it is not the BIS as an institution, it is people who choose to meet there and have these formal meetings of discussion or setting rules. In the case of banking regulation what has been agreed is that the 12 countries that are on the Basel Committee agree on a consensus basis (everybody has to agree) a set of rules to be applied to internationally active banks, and having agreed that amongst themselves, they all implicitly agree to adopt the necessary domestic regulations or enforcement to implement the rules. That does not carry any direct implication for banks that are not international or for countries not in that group of 12, but because these are reckoned to be the best standards there are, there is quite a lot of pressure on other countries to have standards that are as good or better. There are very few counter-examples, although there are one or two. New Zealand, for example, has said, in effect "We do not accept this. We think that banks should be entirely transparent and the market will regulate them so we are not going to impose other rules". This is broadly speaking what they say, and directors have to take responsibility for their banks, and if any director is found not to have exercised due diligence he can go to jail for however long, and in fact they put people in jail. This is their approach—transparency and penalties for lack of responsibility from directors.
Chairman: To go back very briefly to Lady Hogg's point, if the big players say that they are going to do something about money laundering, and that is the rules of the club, if a particular country says, "No, we are not interested", surely they would not be in the club?
Baroness O'Cathain: You would boot them out.
Chairman
429. You would find a way of dealing with them whether it is hard or soft. I mentioned hard because it is the in thing today because somebody has decided something has got to be. But it is not freedom of choice. Once they have made up their mind that that is the game they are playing, then that is the game they play. That is why Lady Hogg was quite right in emphasising the club aspect.
A. That is right. This would not be an issue amongst the ten that are there, but it is for the others that are not. We are in fact having meetings on money laundering tomorrow and the next day on "know your customer" and we are having them between onshore supervisors. and offshore supervisors. The offshore supervisors, who have been listed in the publication which another part of the Basel process, the Financial Stability Forum, prepared, were initially entirely indignant, "You can't do this to us. We are sovereign jurisdictions. We will do what we like." They have gradually realised—and this is your point—that as far as they are concerned they have got more interest in collaborating than they have in being defiant and so they are coming around to that and maybe that is not really soft law. That might be "Godfather" law.
Chairman: I am not sure we care about the terminology as long as we understand the concept. May I bring this to a close and thank you very much. We have kept you beyond what we should have done but that is indicative of how interesting we have found all of this session. Thank you very much for the time you have taken with us. I reiterate that if there is more you would like to tell us, we are certainly still open to hear more and also, any ideas that we ought to develop. Just to again emphasise we are an enormous distance from coming to any conclusions. We are very much at the early "asking the questions without knowing the answers" stage. Thank you very much.
BIS motherlode found 
