BIS plays favorites in Asia

By James T. Areddy

HONG KONG (Dow Jones): The Bank for International Settlements (BIS)' latest expansion suggests it has definite views about which Asia-Pacific economies matter and which don't.

The Basel-based BIS earlier this month offered membership to central banks of Thailand, Malaysia and Indonesia, but passed on New Zealand, Taiwan and the Philippines.

The newly invited Asian countries have more commercial debt to foreign banks than, for instance, New Zealand and they were at the crux of the financial crisis that started in Thailand in 1997.

But it's still hard for New Zealand's central banker to fathom how BIS drew the line.

Don Brash, Reserve Bank of New Zealand governor, told Dow Jones Newswires the BIS rebuffed his hopes of joining, indicating its aim is to correlate membership with systemic importance to global finance.

"It may well be that those countries which have been invited to take up shareholdings are indeed more systematically important than New Zealand," he said. "I have more difficulty seeing the logic in omitting New Zealand when so many other quite small countries are already shareholders."

A BIS spokesman in Basel said, without much elaboration, "They (prospective members) should make a significant contribution to the financial system."

Candidates must also have an internationally important financial market or economy, he said, adding invitations to join are at the discretion of the 17-member board of directors.

Most Asia-Pacific countries have been clamoring for a bigger role in the BIS, particularly because its work on changes to the international financial architecture was prompted by Asia's crisis.

Along with the three Asian banks, the European Central Bank and the Central Bank of Argentina were invited to join under the expansion announced Nov. 8. The invitations would bring BIS membership to 50 central banks.

In a terse statement, the BIS said the five invitees "have been increasingly involved in central bank cooperation at the BIS in recent years and already make a substantial contribution to the bank's activities."

Philippine Central Bank Deputy Governor Amando Tetangco acknowledged the Philippines and New Zealand will be the only members of the 11-member Executives' Meeting of East Asia and Pacific Central Banks not in BIS.

But he said the Philippines sees other ways to get its voice heard and he isn't too worried about being passed over.

"We've never discussed membership with the BIS," Tetangco told Dow Jones. "It's something that I see as a possibility down the road. But it's just a fact that up until now, we haven't done it."

BIS tracks economies based on how much cross-border lending they've received from international banks. By this measure, New Zealand is surely small, but so are some BIS members.

International banks had claims on New Zealand amounting to about US$9.4 billion at the end of June, just less than their exposure to the Czech Republic and a little more than to Israel, both BIS members.

Claims on the BIS' Baltic members, Estonia, Latvia and Lithuania, together are a third of those against New Zealand.

International bank claims on the Philippines were around $16.5 billion at the end of June, below $18.6 billion for Malaysia, which got in during the last expansion.

But the Philippines, with its freely traded currency, could be considered a more integral part of the global financial system than Malaysia, which fixed its currency rate last year and applied restrictions to trading.

Meanwhile, international bank claims against Taiwan were $19.5 billion in June, surpassing Malaysia, but well below new BIS entrants Indonesia, at $43.8 billion, and Thailand, at $34.7 billion.

With China already a BIS member and Taiwan's complex international status, the country may face unique obstacles to membership.

As a club for central bankers, the BIS has always been a prestigious organization, with member central bankers rubbing shoulders at informal retreats almost every month at the BIS headquarters in Switzerland.

In the wake of the emerging markets' crisis, the BIS has become more than a monitoring station. The Group of Seven major industrialized nations has handed it a leading role in studying how to restructure the global financial system.

The BIS is also putting finishing touches on a radically new and highly controversial way to grade bank strength that analysts expect will strongly impact cross-border lending in emerging markets.