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Workshop on Central Banks

World Economic Forum

January-February, 1998

Davos, Switzerland

Andrew Crockett - General Manager- Bank for International Settlements

James H. Cross, Deputy Governor , South African Reserve Bank, South Africa

Peter Munk, Chairman and CEO Barrick Gold Corporation, Canada

Jen-Claude Trichet, Governor of the Bank of France

Moderated by Robert D. Hormats - Vice Chair-Goldman Sachs International

I walked in late as a result of speaking to my friend Raul

Andrew Crockett- BIS

How do you prove the stability of the system and at the same time without undermining the incentives. Believe that one of to harness as far as possible the self-regulating property of the market--those who own, manage, and run financial institutions have the greatest interest in running them prudently and being around for the foreseeable future. What we need to do is strengthen through our regulatory mechanisms incentives that already exist in the private sector to operate more efficiently in operation.

In order for institutions to respond appropriately and not to over lend, not to over leverage, not to get themselves into vulnerable positions, they need a combination of adequate information and appropriate incentives and one of the things we have learn form Asia is that we have to work on both those fronts. We have to make sure that the necessary information is available so that those lending cross-border into the financial corporate systems of emerging markets can better understand the risks to which they are exposed. At the same time, of course, this is even trickier we have to that the bad lending decisions are appropriately penalized. That means simply financing crisis by bailing out crisis is thought in the long run to be an inadequate response. In the long run, the adequate response must involve the private sector who are involved in the lending decisions and who bear a part of the lending responsibility of responding to those decisions and if necessary, paying a part of the price.

Even though I say information and incentives is a part, regulation plays a part also. Bob has referenced to the capital adequacy ratios. Those have over the last 8 years been enormously important in strengthening the financial basis of banks. Bear in mind, they have only applied in the G-10 countries as an important obligation and only to international banks so what we need to do is devise a system of regulation --that has a much more general applicability outside of the G-10 and add to it institutions which have both domestic and international responsibilities. That is the so-called core principles for regulating banks that where put forth in Hong Kong at the annual meeting of the IMF last year and put forth next year. How do we have them taken up by the supervisory authorities of all the countries of the world [IOSCO].

Supervision is not a static thing. Banking instruments and systems are constantly changing through time and we must make sure that the capital as held by banks is appropriately related to the risks that banks run. We have a somewhat crude of risk rates which distinguishes amongst four for five different categories. Most sophisticated financial institutions have moved off in their calculation of their own international risk calculation. I think we have to harness the sophisticated risk measurement which is undertaken in financial institutions that the capital adequacy is only one part. Systems and controls is another part and much has to be done there.

Banks have to both have --Finally the infrastructure of the financial system is another important part that we have to pay attention . We must make sure that when one bank gets into financial difficulties that the innocent bystander banks those who are exposed to that bank either legally through contract or through clearing and settlements are adequately protected. Most importantly we want to draw attention to accounting. Our experience is that banks fail because loans that are classified in their portfolio as good are bad loans. There is almost no bank that hasn't on the eve of its failure, complied with the 8% capital ratio. That tells you something about the accounting--I'm not blaming the accounting professionals, it is one we are going to have to tackle if we are to strengthen the underlying stability of banks.

Comment by Hormats: Number of points we can come back to - emerging economies into the system. The G-10. A large number of emerging countries have joined the BIS and therefore there is really ample scope for the BIS to expand their regulation and......As you say, Americans are just beginning to wake up that there is going to be a Euro and that one is going to be created in the not too distant future. For the American's in the audience who have led a rather sheltered environment, there is an opportunity to develop a greater sense of the Euro, particularly with what the meaning will be with a bi- or tri-polar currency system for the world economy. There are several questions which come from this. (1) is it likely to increase/decrease volatility in currency markets and (2) if this does occur, are there rule changes in the global financial; system which will be needed to be made which will accommodate a system where we do have a powerful and important financial currency which will be the Euro and US dollar, and depending on what happens in Japan, the yen which plays a greater role in global reserves and finance.

Jean-Claude Trichet - Central Bank of France

The mood has changed. It is necessary to push the button. We are creating a currency which will have qualities of the be currencies in Europe because everything has been built on that basis. The convergence of the Euro is convergence of the best currencies. We are all targeting the best performance. We will have a new single currency....which will have the legacy of the Deutsche mark, the French Franc--which have provide over time. That implies in my opinion, that the change in the European currency and the yen. My personal thing is that provided we continue to share the same values as far as strategies are concerned on a transitional basis, namely that partician view of the U.S.....It is also a case of Europe--that has crystallized.... Need a balanced budget not where you are in the red. This is where shared values come into play with a global monetary system. The currency should be a good store of value. That is very important. continued that we share the same values.

There are those who say the G-7 has not done a good job. I disagree.

Hormats: Number of points- particularly the role of the Euro and the need for Americans to realize that we need to invest in software capabilities of inventing in the Euro.

I will ask James Cross/Peter Monk - How they see the role of gold in the international monetary system.

Peter Monk - Barrick Gold

From a producer country stand point. Let's just have a look at some activities in the market over the last 8 years. Consider whether we as a producer country can afford from a central banking perspective to ignore gold. If we can't afford to ignore it and we can't. What are we going to do? We have $5.5B in are we going to develop gold into the monetary system if we feel that is what we need to do?

What we want to do is to involve ourselves in the international debate on how gold has been mobilized over the years by central banks. If we look at a few figures. Central Banks are holding 30-34,000T of gold. The ECB are holding 14,000 tons of gold and the issue is that gold has come to the market in the form of lending and the demand has come from mining companies who started new projects and needed financing. It has come from the jewelry industry and those processes. the mobilization of gold as far as we can see.

An informal survey: the deposit market has grown from 1300 tons in 1990

to 3.5 to 4,000 tons in 1994. In 1995, it has grown quite sharply to round from

2,000 tones to 3,500 tons.

I think as a central bank we would from a producing country call for international based practices to be applied to gold transactions. It is everybody given to transact with gold what they want to transact. Lending of gold--that gold linked be singled out by a central banks balance sheet to a separate category, not simply in the vault. The BIS has done that successfully. This will give the market a clear assessment of how much gold has been linked , how much has been sold and which will be reproduced in the future and will be the market a degree of certainly saying "well the market is reasonably oversold or is not oversold..." We have accurate, up to the minute figures on the futures market activity and one can assess the futures markets is or is not oversold and if you want to have a look you can do that. We don't have the same certainty when it comes to how much gold is being lent into the market. In terms of selling programs. It is not the effect that central banks are wanting to dispose of gold it is the fact that there could be a lot of rumormungoring around these activities because there is no clear intention...we think we should be selling and will be selling x amount over x time. The Canadians announced this in 1969 and continued to do this over 4-5 years, They disposed of 438 Tons of gold and the market successfully knew exactly where it was coming from. In fact this year, it went unnoticed. Because of the price level they would not be doing anything for the next 14 months.

Now what is changed is not the fact that selling have been increasing so much but that uncertainty seems to be creeping into the system. It is not the central banks or the governments of the countries which are commission research and the central banks are too, but it does require if you are going to declare an intention of looking at an asset like that, it does require a certain amount of intention and declared intention. I would like to liken it to government stock--you have auctions, you announce it, and complete openness and transparency. If the Central banks had a declared auction program, a long term program, the market would absorb gold and how you orchestrate that is a question for the bank and discussion. It is a suggestion to try and take an opinion who is suffering from a decrease in the price due to lack of transparency. If central banks are going to change....lending in the market, it should be done slowly.....

Peter, would you like to comment on this set of issues - transparency is increasingly important--from how national governments deal with their own statistics and the price of gold.

Peter Monk - Barrick Gold

Let me start off saying in contrast to distinguished fellow panelist, I am just a producer--you are all high level government officials, you represent the wheel of the nations, I am here to protect my shareholders.

I do not believe that I or the people I represent or the gold producers have any desire or right to tell central bankers, whose job it is and who have done a brilliant job so far, what kind of reserves they should have. I am not here to advocate gold even though I could spend an hour doing so.

I'm here to tell you that I do not believe that it is in the interest of owners of hundreds of billions of dollars of reserves which the European Central Banks do hold in terms of gold, it cannot be in their interest, divorced as they may be from the dirt of the reality of commerciality in contract to us, to see the benign neglect to having no one speak on behalf of this currency a reduction of constant erosion of value or making it worse, transferring billions of dollars worth of value from taxpayer ownership , after it is taxpayer money which you people are guarding, the New York speculators. Because what you are doing in the interim period while you are waiting for the bureaucratic administrative detail to finalize the formation of the proper sportsmen for the new European Central Bank, the people who own 13,000 tons of this product--while you are waiting for the spokesman, the media, the speculators and the ......

Gentlemen, please understand, while you are the guardians of billions of dollars worth of public funds, today the explosion of global markets and finance today is such that George Soros, I don't mean him--- and his ilk today control billions if not trillions of dollars and if they notice if the feel sense, any weakness in coffee beans, Asian ringits, they go for the jugular. In going for the jugular, when they go for the jugular, they mobilize billions, trillions and what happened last year was not the fundamental supply and demand distorting the market value--we did not see the erosion of 1/3 of the gold price because supply has increased and demand has dried up, in fact the opposite has happened. Supply today is some 25% less than demand yet the prices have collapsed by 1/3. Now gentlemen, what we need to do is establish that the market should prevail in terms of market supply and demand and that requires for you people, you the owners of the largest stock to speak. We do not want to include or be included in the decision as to whether you decide to buy, sell or hold, but please speak. If you want to sell, then let us get together. Nobody can do a better job of monetizing your holdings than us. Us the producers because we are not bankers, the World Gold Council, I on behalf of my little company, we have a shortage of some $4B dollars. We are short 11 million ounces. We could sit down and monetize your reserves if that is what your desire is. I would like to suggest to you that European banks ---would be interested in new currency, the most important task you have is credibility.

Whether you decide to hold or sell, it is in our common interest to maintain stability and stability can only be maintained by someone being transparent and speaking. If you do not speak, all those lilttle...who guides the media and who don't have an Asian Crisis so they jump on someone else, will highlight the gold crisis because they will say Mr. George or Tietmeyer of the Bundesbank--and soon you will have the little George Soroses in Brooklyn shorting gold.

All you have to do is sell 1 million ounces, collect $400M if you have a line of credit and buy U.S. Treasury and you have a positive spread of 3.5% because all we have to pay you is 1.5% and we collect form the U.S. Treasury 4.5%. Now surely it is not in the interest for you to lie in silence. Do not be overcome the reluctance of betting together and saying the ECB have said they are going to sell 1/3, or sell nothing or reduce it to nothing....whether you sell, buy or hold, so we can sit down and do a deal with you. It must be in our common interest to keep the price up and to keep a stable market. And that is all I as a supplier can ask you to do. I ask you to help us and help yourself.

Q. how do you see the ECB working to enure transparency?

A. I would say for speaking for all institutions, that it is not our intention. The third highest level of gold is France, the second is the Bundesbank and the U.S. is the first.

Gold is 28% of central bank aggregate reserves. About $330 oz is break even.

The role of the Bis to address hew guidelines. In the US, where they try to get IMF through...need to reassure that powers to be to understand the connection to gold. Importance of gold as reserve asset.

It became apparent several years ago that what we needed was something that would apply to all banks and help us in procedures, ongoing manager and closure procedures. It would apply to small banks and large banks, domestic/international banks, and not with just how much principal you should hold but what the liabilities and capital and assets are. 15 or so emerging market countries along with the supervisors of the G-10 to draw up a set of core basic principles. There are 25 of them and they cover a wide range. They re not specific and therefore a considerable amount of work has to be done to bring them into operating procedures. Ex. one of the principles refers to the necessity of stronger and appropriate accounting standards. What those accounting standards are and how measure the value of assets will be very difficult. Even now in the G-10 there is variance as to how you classify assets. Those people who tell me that their banks are at 8.1% capital adequacy worry me. What we always say is look at controls, volatility and risks and make sure you are adequate capital.

Q. Is there any level of core reserves for the South American banks.

A. The key is gold. ECB

The role of ECB and global stability, if we look at Asia, we see problems of local banking systems but what responsibility to ECB or French banks do they feel toward the excesses of lending and the withdrawal of liquidity and what can banks do prevent this?

The participation of the eCB is the global economy is central and the participation of US commercial banks and U.S. investment in general and your participation is very, very big. Whether it was the commercial banks or the global investors...other institutions, non-bank institutions which had some type of behavior...the world is very complex.

We have a very good deal of international cooperation with regard to Asia, as an example, Korea- which is in the making has been quite rapid in participating in this global cooperation to give the best response possible.

Q. Thatcher demonstrated that you can sell to the people what they already owned. In the Disposal of state assets -- she explained and the bankers and financial institutions embraced the idea of selling to the people what the people already owned. To sell to the people what they already owned the price is low and you got all the pieces in place as far as gold is concerned. To sell to other people what belongs to other people they own and when Central Bankers decide as it is their right to sell to other people what belongs to their people, they do not make it attractive, for their own people to buy, they do not involve the major financial institutions in the disposal of this gold. They do it quietly, surreptitiously, and they cause as much as uncertainty in the market as is possible to do. Now I cant understand why the central bankers settle their business in that manner and I don't understand why it is that the bank does not want to sell its gold.

A. It is up to each individual bank. It would be nice to see some certainty and announcements but it isn't the way anyone wants to do something. The French central banker--it is not our intention to sell gold.

Q. Several years ago the IMF said gold gave their balance sheet strength. Do you think central banks still take that view?

A. It is a difficult questions to answer since we have had quite a few more central banks in the last 10 years dispose of gold that we have seen today. If you look at Central Bank holdings over the years...

JV Question:

I have a comment. There is an old adage that says, "He who owns the gold makes the rules." My real question is about transparency. Is not transparency dependent on a very basic core human principle of truth and honesty. There are many examples of personal greed in the whole of the global system because of humanness. How are you Mr. Crockett, going to guard the modus operandi of transparency when it is so very basic to life?

Mr. Crockett:

Maybe I am inclined to treat that as a rhetorical question (laughter). Let me say that all markets operate on the basis of transparency and it is in the interest of those who operate to be as transparent. The market is a price determination mechanism. If people are untransparent, what happens is the market shrinks and goes elsewhere to where there is transparency. That is why we have rules like the Securities and Exchange Commission. So I don't think transparency is actually running in the opposite direction. The instincts of those who want to organize the efficient and effective market is actually very basic to the operation of markets and we find even where there is not regulation, outside of regulation comes along ways in which people make themselves more transparent. There is market transparency-- so I don't think we are running against the tide I think we are running with the tide.