Basel Agreements

The Basel Agreements are a set of documents issued by the Basel Committee on Banking Supervision (BCBS) defining methods to calculate capital levels banks should be required to maintain given the risks they accept on the assets they record within their balance sheets. The first agreement was signed in 1988, amended in 1995, rewritten in 2004, and is currently in its third version, known as Basel III.

These agreements were a response to two concerns that emerged in the 1970s. On the one hand, there was increasing discomfort among regulators, government authorities and conservative academic economists with what was seen as a growing problem of moral hazard created by the existence of safety nets for the banking sector. It was believed that safety nets created an environment where banks were stimulated to seek riskier assets because eventual losses would be borne by the authorities rather than by banks themselves. The second concern related to the increasing internationalization of banking activity, which made it difficult for national regulators to monitor properly the risks to which banks under their jurisdiction were exposed.

Bretton Woods regime

Bretton Woods is a location, period of history, beginning of an era in the twentieth century, birth of an international organization, but, most of all, an international mon- etary system to regulate trade, peg currencies to one standard, and maintain a regime of fixed exchange-rate parity.

In July 1944 at Bretton Woods, New Hampshire, 44 nations under official British and American leadership set up economic measures for post-war reconstruction. The US dollar - pegged to gold - was approved as the new monetary standard. Two new insti-tutions were also established with specific tasks: the Stabilization Fund (International Monetary Fund, IMF), a "special organization" (Horsefield, 1969, p. 39), to be a watchdog facilitating and promoting trade through monetary stabilization, and the International Bank for Reconstruction and Development (World Bank), with the role of providing member nations with "necessary capital not otherwise available except possibly on too costly terms" (ibid.).

Bank money

Bank money is a liability issued by banks and is sometimes also referred to as credit-money. According to Keynes (1930 [1971], p. 5) bank money "is simply an acknowledgment of private debt, expressed in the money of account, which is used by passing from one hand to another, alternatively with money proper, to settle a transaction".

Chartalists such as Wray (1998) distinguish between state money and bank money. In this view, state money is exogenously created by the state in the form of central bank and treasury liabilities. Bank money is a multiple of state money, recorded on the liabilities side of commercial banks' balance sheets. Chartalists assume that the treasury and the central bank can be considered as one entity from an economic point of view (Wray, 2003, p. 87). Gnos and Rochon (2002, p. 48) disagree, pointing out that "if the Fed is the treasury's bank, then the Fed becomes a central bank vis-à-vis the treasury as well as vis-à-vis private banks, the latter role consisting in converting monies into one another and thus allowing banks to meet their reciprocal liabilities". Additionally, chartalists believe "the [US] government can buy anything that is for sale for dollars merely by issuing dollars" (Wray, 1998, p. ix). But neither central banks nor treasury departments can finally purchase anything by incurring a debt. Instead, every final pur- chase of the treasury or the central bank must be financed with income sooner or later. It is therefore more realistic to suggest that all modern money is (central or commercial) bank money.

Bank of Italy

The Bank of Italy is the central bank of the Italian Republic, instituted in 1893. The origins and the evolution of the Italian monetary system are, in several respects, pecu- liar. After national unification in 1861, Italy adopted a single currency, the Italian lira. Nevertheless, banknote circulation was fragmented owing to the persistence of strong regional interests (Polsi, 1993): a provision of 1874 recognized six banks of issue, all of which were already performing this function in the pre-unification states.

The resumption of convertibility in 1883 and the building boom triggered by the new national capital, Rome, kindled a large credit expansion, which inflated a real-estate bubble. Most major banks were engaged in generous credit to the building sector, favored by the regulatory vacuum in which they operated (see Fratianni and Spinelli, 1997). The burst of the bubble resulted in a banking crisis, which erupted into a true political and judicial scandal in 1892, when the unsustainable position of Italian banks of issue, and evidence of serious irregularities committed by one of them, the Roman Bank, became public. The scandal highlighted the need to put a limit on banknote issues and to foster the transition towards a single bank of issue (De Cecco, 1990). The Bank of Italy was then instituted by the Banking Law of 10 August 1893 through the merger of three existing banks of issue: the National Bank of the Italian Kingdom, the Tuscan National Bank, and the Tuscan Credit Bank.

Bank of Canada

The Bank of Canada has received many accolades in recent years because of its handling of the financial crisis, especially owing to the popularity of its governor at the time, Mark Carney, who was also appointed chairman of the G20's Financial Stability Board in 2011 and then, in 2013, he became Governor of the Bank of England. As far as central banking internationally is concerned, the Bank of Canada exerts much more prominence among central banks than it would otherwise do when measured simply by the size and importance of the macroeconomy that the Bank oversees through its activities. The Bank of Canada has acquired high credibility also because it has managed a solid and sophisticated banking system, which did not face the same difficulties that plagued the US banking sector during the financial crisis that erupted in 2008.

Much like the US Federal Reserve (Fed), this central bank was founded following major financial crises on the North American continent during the early decades of the twentieth century, namely after the crisis of 1907 for the US Fed and the Great Crash of 1929 for the Bank of Canada (see Lavoie and Seccareccia, 2013). In stark contrast to the Fed, which established a "decentralized" central banking system in 1913 with 12 separate reserve districts, the institutional structure of the Bank of Canada was modelled on the more centralized organization of the Bank of England, with this structure being adapted to the Canadian context following its founding in 1934, for instance in terms of its regional and linguistic representation on its board of directors and governing council. Hence, while first a private institution, the Bank of Canada was quickly nationalized by the federal government within a few years of its creation in 1938 (see Plumptre, 1940; Bank of Canada, 2014).

Banque de France

The Banque de France (BdF) was established in 1800, under the aegis of bankers and Napoleon Bonaparte, who was then First Consul of France. At that time, a few promi- nent bankers were advocating the creation of a private bank of issue, independent of political powers, in order to face up to a state of deflation and lack of cash in the French economy. Bonaparte, who was striving to consolidate public finances and restore mon- etary stability in the aftermath of the French Revolution, agreed to provide public funds to the BdF: he regarded the BdF as a tool for fulfilling his objectives. In 1803, he passed a law in order to provide it with an official charter, which notably endowed it with the exclusive right to issue banknotes in Paris for a period of 15 years. Shortly thereafter, the BdF experienced a bank run owing to the issuance of large amounts of banknotes to finance public spending that eroded public confidence in banknotes. In response, in 1806, Napoleon decided to monitor a reform designed to allow him to exert better control over the BdF's activities. This reform, which was complemented in 1808 with an impe- rial decree providing for the "basic statutes" of the BdF and for the creation of discount offices in main French cities, promoted a relatively balanced power relationship between the State and private shareholders, which was to run until 1936. During that period, the BdF's right to issue banknotes was extended and the network of its discount offices expanded. To deal with the financial crisis that arose from the 1848 Revolution and later from the Franco-Prussian war (1870) and the First World War (1914), the BdF's notes became fiat money for some time. They became fiat money for good in 1936. Legal tender was first experimented with in the 1848-50 and 1870-75 periods, before being definitively enforced in 1875.

Bank of England

The Bank of England (BoE) was founded in 1694 as the government's banker and debt manager. There have been a number of key moments in the BoE's history. In 1781 the renewal of its charter was described as "the public exchequer". The 1844 Bank Charter Act gave the BoE the sole monetary authority in the United Kingdom and tied its note issue to the BoE's gold reserves. Later in the nineteenth century the BoE took on the role of lender of last resort. In 1946 the BoE was nationalized and remained the HM Treasury's adviser, agent, and debt manager. Operational independence was granted to the BoE in May 1997, whereby it undertook the responsibility of monetary policy while public debt management was transferred to HM Treasury and its regulatory functions were passed to the then newly established Financial Services Authority (FSA). The Financial Services Act of 2012 created new regulatory reforms for the BoE whereby an independent prudential regulator was established, the Financial Policy Committee (FPC), as a subsidiary of the Bank. The Prudential Regulatory Authority (PRA) was also created and is responsible for the prudential regulation and supervision of banks, building societies, insurers, and major investment firms. The reforms came into effect on 1 April 2013, with the FSA becoming the two separate regulatory authorities just mentioned.

In September 1992 the UK was forced out of the European Exchange Rate Mechanism. In October 1992 an inflation targeting regime was introduced. In May 1997 that regime was changed to a new one, which was more in line with the policy implications of what has come to be known as the New Consensus Macroeconomics (see, for example, Arestis, 2007). I explain the two regimes in what follows, before I turn to more recent devel- opments as a result of the August 2007 subprime crisis and the Great Recession that followed.

Bank of Japan

By virtue of the National Bank Act of 1872 (amended in 1876), the Japanese government allowed national banks to issue their own banknotes. The Bank of Japan, established as the central bank in 1882 by the Bank of Japan Act, started issuing its own banknotes in 1885, which were convertible to silver (and later to gold) by the Convertible Bank Note Regulations (1884), at which point national banks lost their ability to issue their own banknotes, although their banknotes continued to be used until 1899. The Bank of Japan was originally under the direction of the Ministry of Finance and therefore had little role in the regulation and supervision of the financial system. In 1897, Japan joined the gold standard, but in the end broke away in 1931. Japan gradually moved to a managed currency system, and in 1941 the specie reserve system was abolished. In 1942, the Bank of Japan Act was revised, but the Bank was still under the Ministry of Finance. The Bank of Japan Act was drastically amended in June 1997 and was enforced in April 1998 (see Schiffer, 1962; Tamaki, 1995; Cargill et al., 1997; Tsutsui, 1999).

Bernanke, Ben Shalom

According to Harris (2008, p. 203), Ben Shalom Bernanke (1953-) "seems to have system- atically trained himself to become a top central banker". That training and experience has been quite different than his predecessor as Chairman of the Board of Governors of the US Federal Reserve and of the Federal Open Market Committee (FOMC), Alan Greenspan. The majority of Bernanke's career has been as an academic within prestig- ious US institutions. Following a degree in economics at Harvard (1975) and a PhD at the Massachusetts Institute of Technology (1979), Bernanke initially worked as an Associate Professor at Stanford (1979-83), before holding a variety of Assistant and then Full pro- fessorial positions at Princeton (1983-2002), where he remained a member of the faculty until 2005. He served as editor of the American Economic Review between 2001 and 2004. Bernanke's principal academic work has focused on the role of monetary policy. He has published widely on the causes and consequences of the Great Depression (see Bernanke, 2000). Whilst not unequivocally supportive of all aspects of Friedman and Schwartz's (1963) work, he conforms to the position that the Fed adhered to the gold standard in a way that reduced liquidity and that it allowed an escalating set of bank failures (was "liq- uidationist"). Following Friedman and Schwartz (1963), Bernanke argues that a central bank can cause and accentuate aspects of the business cycle and that it has a key role in shaping that cycle. Concomitantly, Bernanke's interests extend to the Japanese response to deflationary pressures in the 1990s, and more generally the role and scope of central banks, particularly inflation targeting (see Bernanke et al., 1999).

Biddle, Nicholas

Nicholas Biddle (1786-1844) was the third and most famous president of the Second Bank of the United States (SBUS). He was an active president of the Bank, perhaps anticipating certain central-banking functions (Hammond, 1991). Biddle famously opposed the US President Andrew Jackson during his "war" against the SBUS.

The SBUS was created in 1816, the First Bank of the United States having lost its charter in 1811. The fiscal requirements of the US federal government during the War of 1812, the bank runs of 1814, and wartime inflation conspired to change the mind of US Congress (Walters, 1945). The SBUS was to be private, though 20 per cent of its capital was supplied by the US federal government in the form of bonds. In addition, the SBUS would maintain a special relationship with the US federal government, as the US President would appoint five members of its 25-person board, while the bank would act as the government's fiscal agent. The SBUS was subscribed with roughly 35 million US dollars, and was, by Biddle's tenure, the largest corporation in the nation (Hammond, 1991).

Burns, Arthur Frank

Born in 1904 in what is now Ukraine, the son of poor immigrants, speaking no English as a child, Arthur Frank Burns graduated from Columbia University with both Bachelor and Master degrees in 1925. He taught at Rutgers University from 1927 to 1944, earned his PhD (Columbia University) in 1933, and became an internationally respected scholar, a director of the US National Bureau of Economic Research (NBER), Chairman of the Council of Economic Advisers (CEA) of the US President, Chairman of the Board of Governors of the US Federal Reserve (Fed), and US Ambassador to West Germany. He died in 1987 from complications following heart surgery.

Bullionist debates

The bullionist controversy took place during the Napoleonic Wars, in particular after the policy measures of 1797 according to which Great Britain abandoned the gold stand- ard and thereby the convertibility of banknotes to gold. The commitments of Great Britain to its allies and the remittances of gold bullion to foreign countries dangerously depleted (from 10 million to 1.5 million British pounds) the Bank of England's (BoE) gold reserves. The rising military expenditures of the British government coupled with rumours of an imminent French invasion triggered a run on the banking system and led the BoE to the suspension of the gold standard and payments in metal. The prohibitions of payments in gold increased the price of the specie from its mint parity of £3/17s/10½d per ounce to £5/10s in 1813. The British pound depreciated with respect to foreign cur- rencies and the domestic price level increased. Hence, the purchasing power losses of the pound (domestically and internationally) became the focal point of the debate (Viner, 1937 [1965]).

Bubble Act

The so-called "Bubble Act" was a durable, if inconsistently enforced, feature of British law from its passage on 9 June 1720 to its repeal on 29 June 1825. To modern eyes, the central clauses of the Act are those that prohibited the establishment of joint-stock cor- porations issuing transferable stock unless a charter had been secured from the Crown. The Act has often been interpreted as the British Parliament's attempt to broadly con- strain speculative manias of the type that developed around the South Sea Bubble of 1720. Beyond the formal penalties prescribed for use against unincorporated firms, it has commonly been argued that the Act exercised a "symbolic force" that delayed the evolu- tion of corporate organization in Britain (McQueen, 2009, p. 20).

Bubble

A bubble is when the price of financial assets increases in an irrational way after a long period of optimistic expectations and high profits. When a bubble inflates, "specula- tors invest only because the asset price is rising" (Rapp, 2009, p. vi). Asset prices grow irrationally and speculators increase their purchases until the bubble bursts; this is when stock prices start decreasing (Fisher, 1933). Referring to the dangers induced by bubbles, Keynes (1936, p. 159) maintained that "speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation". According to Galbraith (1990 [1994], p. 13), the factors contributing to the euphoria inflating a bubble are manifold: "The first is the extreme brevity of the financial memory. In consequence, financial disaster is quickly forgotten. [. . .] The second factor contributing to speculative eupho- ria and programmed collapse is the specious association of money and intelligence". In this regard, Kindleberger (1996, p. 13) noted that "[t]he word mania emphasizes the irrationality; bubble foreshadows the bursting. [. . .] [A] bubble is an upward price movement over an extended range that then implodes. An extended negative bubble is a crash".

Banking and Currency Schools

The debates between the Banking School and the Currency School are of central impor- tance in considering the role of money and banks in a capitalist system. They can be connected with the bullion controversy of the early nineteenth century, whose main protagonists were Henry Thornton and David Ricardo, and are also linked to the finan- cial revolution parallel with, and a necessary complement to, the industrial revolution in Great Britain (Cameron, 1967).

The debates focused on two central themes: (i) the criteria to adopt with respect to money emission; and (ii) the extent of the Bank of England’s power. The crises charac- terizing the first half of the nineteenth century (1825–26, 1836, 1839) largely conditioned attitudes, leading to much criticism against the Bank of England.

The Currency School was anchored in Ricardo’s theory that the quantity of money in circulation should be limited according to precise rules. Torrens (1837) and Overstone (1857) also assumed this position, adopting the quantity theory of money and the price– specie flow mechanism and underwriting a definition of money that included, besides metal-based money, banknotes issued by the Bank of England and by other banks. The task of the Bank of England was thus to control the quantity of money in circulation in order to ensure that prices remained stable.

BIS macro-prudential approach

With the global financial crisis that burst in 2008, the Bank for International Settlements (BIS) is receiving more and more attention for its analysis of financial stability issues. Typical for the BIS is a broad approach to financial stability, "marrying" its micro- and macro-prudential dimensions.

The BIS was set up in 1930 as a forum for central bank cooperation. It provided central bankers with three main services (Toniolo, 2005): research on issues relevant to interna- tional payments and prudential supervision, a venue for regular and discreet meetings, and a financial arm (particularly important in the gold market).

The BIS macro-prudential approach to financial stability had its origin in the late 1970s, when central bankers worried about the strong growth of external debt in develop- ing countries. In this context, the BIS, and especially Alexandre Lamfalussy, its economic advisor, emphasized that a borrowers' market had been developing, mainly because of loose US monetary policies. So, a distinguishing characteristic of the BIS approach is to place debt problems in a broader macroeconomic framework, paying particular attention to the interaction of global imbalances and debt dynamics. The BIS macro-prudential approach referred further to prudential policies that promote the safety and soundness of the broad financial system - and not of individual financial institutions alone.

Bank capital and the new credit multiplier

The ongoing debate on the money supply process (the relationship between bank loans and bank deposits) has recently been enriched by introducing the importance of equity capital (see Lavoie, 2003; Karagiannis et al., 2011, 2012). The importance of bank equity for book (loans) expansion and consequently for financial stability was first identified by the Basel Committee in 1988, then by Basel II agreements (2006) and more recently by the Basel III (2011) capital requirements framework.

The reason for studying the linkages between bank equity and bank lending lies mainly in its possible importance as an alternative monetary policy vehicle. This issue emerged as a by-product of the liberalization process of the banking industry around the world, which induced a lending boom-bust cycle and had to be restricted for financial stability reasons (Goodhart et al., 2004), as well as adding to banks' insolvency risks. Consequently, the Basel Committee issued a number of directives for G10 banks (Basel Committee on Banking Supervision, 1998) that had two supplementary aims: first, to specify the different categories of collateral attached to different bank loans, actually calculating the "net" exposure; and, second, to attribute the appropriate weight to these (collaterally adjusted) exposures.

These directives aimed at reinforcing the Capital Adequacy Ratios (CARs) imposed on the banking sector. However, some years later, the Basel Committee was compelled to issue revised directives (see Basel Committee on Banking Supervision, 2006) in order to describe bank exposures in more detail; these directives were further revised more recently (see Basel Committee on Banking Supervision, 2011).

Bank Act of 1844

The Bank Act of 1844 followed the 1819 return to the gold standard: that is, convertibil- ity of banknotes into gold, which had been suspended since 1797; the 1819 Act stipulated a conversion rate of £3/17s/10½d (3 pounds, 17 shillings and 10½ pence) per ounce of gold.

Barings Bank

The history and evolution of Barings Bank provides a convenient thumbnail sketch of the rise and fall of a modern financial institution. Originally founded on the first day of 1763 by the two Baring brothers, John and Francis, the company began as a London mer- chant house, the John and Francis Baring Company, engaged in the surging textile trade. Over the next decades, the Baring Company grew from a trading house to an institution that earned profit by arranging finance for other companies' trading, activities that today are known as merchant banking. It was quite a natural evolution for the Barings to move from financing private institutions to financing government activities.

Despite having been commissioned by the British government to help finance their army during the American Revolution, and then against the French, in 1803 Barings also aided the United States in the purchase of Louisiana, thus helping to finance Napoleon in his war against Britain. At this point in time the Bank was demonstrating signs of growing into a modern capitalist institution, one more loyal to its own profitability than its country of origin.

Bagehot rule

In Lombard Street (1873), Walter Bagehot argued that, in a banking crisis, central banks should lend early and without limits to solvent firms against good collateral, albeit at a high rate of interest. Known as the Bagehot rule, this principle has been invoked when- ever there has been a serious banking crisis as the basis for the central bank's lender-of- last-resort policy.

Bagehot, influential as editor of The Economist magazine, developed his policy rule in response to the banking panics of 1847, 1857 and 1866. He argued that the Bank of England reacted late and with great reluctance in these crises. For instance, during the 1866 crisis, the Bank provided liquidity support only after the collapse of Overend, Gurney Company Bank contributed to a great banking panic. Bagehot approved of the Bank of England intervention, but suggested it would be better if the Bank officially acknowledged its role as lender of last resort, as only it could save the financial system in a crisis: "The only safe plan for the Bank is the brave plan, to lend in a panic on every kind of current security, or every sort on which money is ordinarily and usually lent" (Bagehot, 1873, p. 90). The Bank of England therefore had a responsibility to support the liquidity of the banking system based on its role as issuer of money and manager of the country's reserves.