AVOIDING GLOBAL FINANCIAL REGULATION: How the Bank of England protected the Eurodollar market in its formative years, 1959-64
- 31 Mar 2016
‘Has the Euro-Dollar a future?’ a leading financial journalist of the City of London asked in 1963. According to research by Seung Woo Kim, to be presented at the Economic History Society’s 2016 annual conference in Cambridge, the Bank of England’s reply was ‘yes’ as it succeeded in negating global efforts to control the market for expatriate US dollars and introduce a regulatory system at the international level.
The new study reveals the critical role of access to information in the making or (un)making of a regulatory framework for the international financial market. It shows that the key to the Bank of England’s success was to capitalise on asymmetric information about Eurodollar transactions in the City of London.
From the mid-1950s, international bankers in the City of London (even including communist banks such as the Moscow Narodny Bank) invented an innovative practice for foreign holdings of US dollars, known as Eurodollars. With the return to convertibility in 1959, the new market grew rapidly enough to attract attention not only from prominent international bankers but also monetary authorities around the globe.
Yet due to the lack of centralised facility for Eurodollar transactions and the secrecy of banking practices to prevent the entry of potential competitors in the new business, a comprehensive understanding on the market was not feasible for any concerned actors.
Moreover, the inherent features of the Eurodollar market – the unknown end-user and double counting – hindered practitioners and central bankers from grasping the origins of funds and the size of market.
While the Bank of England firmly stood to support it despite the potential danger of ‘speculation’ in Eurodollar flows, market participants continually found problems with the Eurodollar market. For example, in 1962 Charles Hambro of the Hambros Bank considered the market would soon disappear. Hermann Abs of the Deutsche Bank called for regulations on the Eurodollar market by monetary authorities.
Within the international financial community, discussion of the implication of Eurodollars for the international money market was mainly held at the Bank for International Settlements (BIS). As the market imposed tensions on domestic monetary policy, some central bankers suggested an examination of the market as well as a coordinated regulatory framework in the bank for central bankers.
From October 1962, European central bankers and the Federal Reserve Bank of New York sought to produce statistics for the Eurodollar market as a reference for the formulation of policy recommendations. Since each central bank applied different category for its own needs, a new statistic was called for.
Accordingly, the BIS turned to the Bank of England for it was able to collect comprehensive information from London banks. Yet the Old Lady of Threadneedle Street was reluctant to cooperate in consideration of its relationships with member banks: it did not want to give impression that some banks were not acting prudently by asking for detailed transactions, which was coherent to the central bank’s policy towards the Eurodollar market.
It was also in line with its own policy to incubate the market. In 1964, the BIS published the Euro-currency market statistics, but failed to address the inherent issues of the market, merely providing an ‘estimated’ size of it.
Moreover, the British central bank actively defended the market in late 1963 when the financial squeeze of Hugo Stinnes and the failure of Ira Haupt substantiated the potential dangers of unknown end-user problem in the Eurodollar market. The British sought to dismiss it merely ‘a matter for the banker’s own judgment.’
The BIS also rejected the ‘condemnation of the Eurodollar market’ and discouraged any attempts at regulation. It successfully negated any efforts to reach a consensus among central bankers and persuaded others that ‘Euro-dollar market …were not essentially different from the problems that existed in relation to international short-term capital movements in general’ in the Group of Ten agreement.
This historical event indicates ‘how information can be a powerful tool for a policy goal by a central bank’ Kim comments. Knowledge is power.
‘Has the Euro-Dollar a future?’ – the formative years of the Eurodollar market, 1969-1964
Seung Woo Kim
University of Cambridge