Claudio Borio, a man humorously self-described as “very secretive”, is without doubt one of the most important people you’ve never heard of. Italian by birth, he grew up in Argentina before a gap year in the UK fortuitously turned into a 9-year stint at the University of Oxford: all the way from PPE undergraduate to research fellow, picking up a PhD in Economics along the way. Preferring policy to academia, in 1985 he became an economist for the OECD. Borio eventually joined the Bank for International Settlements (BIS), relocating to Basel Switzerland, in 1987. He has since risen through the ranks of various departments, finally acceding to his current position as Head of the Monetary and Economic Department in 2013. He is also the author of a range of books on monetary policy, banking and finance. On November 12th Claudio Borio was kind enough to join the Room for Discussion team via Zoom to explain what exactly the BIS is, its role during the coronavirus pandemic and their policy and technological plans for the future.
The Bank for International Settlements was established in 1930 (making it the oldest international financial institution in the world), partly to facilitate German war repayments and partly to serve as a “central bankers club” to coordinate and strategise in a liberalising world. Borio is keen to emphasise that the BIS itself is not a “Central Bank” per se, but rather a bank that provides banking services to central banks. Having “hibernated” during WW2 and risked closure following Bretton Woods, the institution adapted to the “dollarized” world and flourished by shifting its focus towards financial stability. Since the 1990’s, the bank’s scope has expanded well beyond Europe, and today its proverbial coffers count in excess of 400 billion dollars in deposits. The economics department, which Borio oversees, supports central bank committees and hosts regular meetings of senior level management to exchange views and share global perspectives. The BIS also produces and disseminates statistics and conducts independent research and policy analysis to provide its own insights for these meetings. The newest departmental addition is a technology division, dubbed the “innovation hub”, tasked with developing prototypes and providing technological solutions.
Moving on to the implications of the pandemic, Borio casts his mind back to the founding principles of central banks. Monetary policy was never initially within their purview, mostly tasked with acting as lenders-of-last-resort (especially under the “Gold Standard”). Since, their foremost tool has been their ability to set interest rates. Yet even before the pandemic, as interest rates were already near-zero, their “room for manoeuvre” was severely limited. As a consequence, as the coronavirus swept the world and crippled its markets, central banks also became “buyers-of-last-resort” to prevent asset markets from collapsing. This entails buying large quantities of government and private securities, without necessarily increasing deposits, financed by issuing new money. Borio warns however that “there is no free lunch”, and that in the long-term central banks can’t just buy up the whole economy. Nonetheless, these current “emergency measures”, including lending to the private sector at very low rates, will undoubtedly gradually become commonplace.
During the Great Recession, without central bank intervention the financial system would have surely collapsed, taking the tangible economy down with it. The same is true now. COVID-19 has and will continue to have a huge impact on the real economy. Thanks to regulations imposed after 2008, trust in banks increased and today they are widely leaned on by supervisors and revered as part of the solution. Nevertheless, problems are accruing for the long-term: with low interest rates and inflation seemingly refusing to take-off, how do we return from the brink in future? Borio sees this as the principle challenge we face: rebuilding this “room for manoeuvre”. At some point, banks will need to rebuild capital, and fiscal authorities will have to consolidate to ensure that leverage does not swell to dangerous levels. Sovereign crises can all-too-easily incur banking crises and economic crises in turn. Banks and the rest of the economy rely on the government to be saved, but who exactly is there to save governments if they themselves fail?
Much speculation has been conjured up surrounding what the economic recovery will look like. Until the unwelcome shoring up of the 2nd wave, Borio himself fully expected a “Nike swoosh”: with the way back much more gradual than the way down. However, now that subsequent waves are emerging, there’s no hiding from the fact that the weaker the economy becomes each time, the harder and slower the recovery will be. We are currently moving from the “liquidity phase” to the “solvency phase”, where businesses unsalvageable by short-term injections of cash will fold and a widespread reallocation of resources will leave standing only those destined to survive in the “non-physical” future. There is little central banks can do to help in this phase. This adjustment will no doubt be far longer and more painful than initially expected.
One booming sector at least, is that of digital currency. Specifically, things are looking up for proponents of Central Bank Digital Currencies (CBDCs). Such central bank-issued cryptocurrencies would serve two purposes: facilitating payments between financial institutions (with exceptional efficiency) and replacing cash for general retail purposes. Essentially, each unit would represent a digital claim on the central bank, much like physical cash has done in the past (at least since the 20th century). An attractive idea “on paper”, in a survey of central banks around the world only 10% declared they were actually likely to implement some form of CBDC in the near future, citing multiple common concerns: an instantly withdrawable currency could increase the risk and severity of banks runs, consumers would be exposed to the perils of negative interest rates (although holding cash has long assured a negative yield due to inflation), cyber-security breaches could do untold damage in the blink of an eye, and the older, less technically proficient generation could find themselves victims of financial exclusion. Nonetheless, if well structured and implemented, such a currency could also foster financial inclusion, for example by allowing people to make payments and transfers based on their ID numbers. In any case, for there to be any hope of a CBDC becoming universal, central banks would need it to adhere to certain principles, such as that of complementing rather than substituting the current system, catalysing not stifling competition, and remaining consistent with their stability goals.
The private market is already offering such currencies, but Borio insists that such players will never be able to achieve the same level of safety as that of a claim on a central bank. Private competition is cherished as it has spurred on central banks to continuously improve their infrastructure: people want safety and convenience, and each can be incrementally achieved by updating the current systems. Cross-boarder payments remain more of a hassle than they should be, and are thus a primary focus for the banking world.
What the future will look like depends first and foremost on customer preferences. Money has always been evolving, from physical commodities such as gems, to deposits, to cash claims on banks. Our money is a reflection of the consumer preferences of the day and the technological solutions available. Bitcoin, among others, has shown that crypto-currencies are feasible, so it’s just a matter of whether we want to make the leap.
If you would like to learn more from Claudio Borio and his insights, you can find the link to his interview with Room for Discussion here, or go even deeper into the annual report of the BIS.