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By Emily Marriott
The Bank for International Settlements (BIS) is the oldest of all the international financial organizations. The BIS coordinates the activities of national banking regulatory and supervisory bodies to oversee and regulate banking challenges on a global level. This FAQ provides an overview of the BIS by examining its history, its basic structure, the work of its committees, the services it provides to central banks, and its current role in the international financial community.
I. History of the BIS
The BIS was formed in 1930 under the Young Plan, which was the plan for settling German reparation debts following World War I. The Young Plan directed the BIS to administer the payments imposed on Germany. Central banks of six nations—Belgium, France, Germany, Italy, Japan, and the United States—funded the BIS and selected Basel, Switzerland as its location. The countries chose Switzerland because of its neutrality and minimal exposure to undue influence from nations with significant economic power. The city of Basel was chosen because of its excellent railway connections in all directions, particularly important since most international travel was by train. The BIS remains headquarterd in Basel, and maintains representative offices in Asia and the Americas.
When the central banks established the BIS, it had three original functions. The first function, as dictated under the Young Plan, was to collect, administer, and distribute the annuities payable as reparations after World War I. The second function was to act as a trustee for the Dawes and Young Loans, which were international loans issued to finance Germanyís reparations. The third function was to promote central bank cooperation in general. When the reparations issue concluded, the BIS was able to devote all of its time to this third function as its focus shifted to ensuring cooperation among central banks and other agencies in order to foster monetary and financial stability.
II. Basic Structure of the BIS
A. Decision-Making Bodies of the BIS
The BIS is governed by three decision-making bodies. The first decision-making body consists of representatives, or Governors, of the fifty-five member central banks. The Governors hold general meetings every two months to vote on key banking regulatory and governance issues. The second governing body of the BIS is its Board of Directors. The Board determines the strategic and policy direction of the bank. Board members include Governors of the central banks of Belgium, France, Germany, Italy, and the United Kingdom, as well as the Chairman of the Board of Governors of the U.S. Federal Reserve System. The BIS Governors may elect additional, but not more than nine, Board members from other member central banks. The Board elects a Chairman and Vice Chairman and meets at least six times a year. The third decision-making body of the BIS is the Bank Management. The Bank Management carries out the policies determined by the Board and oversees the bankís day-to-day activities. The Management consists of a General Manager, who acts as the bankís chief executive officer, department heads, other senior officials, and Chief Representatives from the two representative offices.
B. Committees Under the BIS
The BIS governs several committees, most of which were formed by the Group of Ten, or G-10. (The G-10 is actually a group of eleven industrialized nations—Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States—that meet once a year to consult and cooperate on economic, monetary, and financial matters.) Under the guidance of the BIS, these committees conduct analysis and provide policy recommendations to support central banks and other agencies. This section describes the four main committees under the BIS and how they work to further the BISí overarching goals of ensuring international financial cooperation and stability.
1. Basel Committee on Banking Supervision (BCBS)
Responding to the 1974 failure of two internationally active banks—Herstatt Bank in Germany and Franklin National Bank in New York!=—central bank governors of the G-10 established the BCBS in 1975. The BCBS, governed by the BIS, consists of senior representatives of bank supervisory authorities and central banks from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom, and the United States. The main duty of the BCBS is to regulate capital adequacy of internationally active banks and improve the quality of global banking supervision.
The BCBS formulated and published twenty-five Core Principles for Effective Banking Supervision (Core Principles) in 1997. These principles were outlined under the topics of Licensing and Structure, Prudential Regulations and Requirements, Methods of Ongoing Bank Supervision, and Cross-Border Banking. The main impetus for issuing these proposals was to ensure that all countries were implementing banking supervision techniques used by developed countries. Due to an increase in cross-border financial transactions, the BCBS realized a need to revise its Core Principles. Therefore, the BCBS published revised Core Principles in October 2006, which gave more focus on cross-boarder issues and sound risk management and corporate governance practices.
In addition to the Core Principles, the BCBS has also focused on creating capital adequacy guidelines for internationally active banks. The amount a bank holds as ìcapitalî is calculated by subtracting the bankís liabilities from its assets. The term ìcapital adequacyî refers to the level of capital banks must hold in regards to riskiness and liquidity of some of its assets. The BCBS published its first set of capital adequacy guidelines, known as Basel I, in 1998. Basel I was developed to calculate the capital adequacy of internationally active banks in relation to credit risk (the risk debtors will not fulfill their obligations repay their loans). However, Basel I had its disadvantages. One major complaint about Basel I was that it failed to sufficiently measure risks, since the scheme only took into account credit risks and failed to consider other risks, such as operational risks (risks associated with inadequate or failed internal processes, people, or systems). Therefore, with input from significant players in the international financial community, the BCBS revised its framework and published Basel II in June 2006. The goal in enacting Basel II was to establish an international banking framework to further a sound, stable international banking system by making sure that banks enjoy consistent capital adequacy regulation, calculated to measure all associated risks. The BCBS also enacted Basel II to ensure that minimum capital requirements would not create inequality among internationally active banks. Basel II is currently in various implementation stages in several countries around the world. In a newsletter published in May 2007, the BCBS reported that a ìsignificant numberî of countries have implemented the Basel II Framework and several other nations have established the proper infrastructure and are preparing for implementation in 2008 and 2009.
2. Committee on the Global Financial System (CGFS)
The CGFS was established in 1971 as the Euro-currency Standing Committee. The committeeís original mandate was to monitor international banking markets. However, due to an increase in off-shore banking activities, the G-10 Governors changed its name and revised its mandate in 1999. Now, the CGFS is charged with identifying and assessing potential sources of stress in global financial markets. The committee also works to further the understanding of the structural underpinnings of financial markets by publishing many papers on a variety of topics, such as monetary policy. Additionally, the committee works to improve the functionality and stability of financial markets. The CGFS hosts quarterly discussions with its member nations and publishes numerous reports on important issues.
3. Committee on Payment and Settlement Systems (CPSS)
The CPSS was created in 1990 as a forum for the central banks of G-10 nations to monitor and analyze developments in payment systems and coordinate central banksí oversight functions with regards to payment systems. In essence, the role of the CPSS is to promote sound and efficient payment and settlement systems. The CPSS conducts detailed studies on payment and settlement systems and publishes reports on its findings to help member countries develop the most efficient payments systems. The CPSS has developed important standards, codes, and best practices for the banking industry by its publications of Core Principles for Systematically Important Payments Systems, Recommendations for Securities Settlement Systems, and Recommendations for Central Counterparties.
4. Markets Committee
The Markets Committee was established in 1962 as the Committee on Gold and Foreign Exchange with the creation of the Gold Pool—an effort to stabilize the price of gold. When the Gold Pool collapsed in 1968, members continued to meet and the Markets Committee developed as a result of those meetings. Over the last few decades, the committee has become a forum for discussions about recent developments foreign exchange and other financial markets, possible future trends, and implications current events have on the financial markets. The Markets Committee meets during the bimonthly meetings of the BIS member central banks.
III. Current Role of the BIS
With background on the structure of the BIS, you can better understand how the BIS functions today. Its functions have greatly evolved since its early days of managing Germanyís reparation payments. In its current operations, the BIS focuses on two main goals: (1) to foster international monetary and financial cooperation; and (2) to maintain monetary and financial stability.
A. Fostering international monetary and financial cooperation
One of the bankís main duties is to foster international monetary and financial cooperation, especially for its member central banks. In order to achieve this goal, the BIS operates in four different ways, all of which are described below.
1. A forum to promote discussion and facilitate decision-making processes among central banks and within the international financial community
The BIS holds regular meetings of the BIS Governors, central bank officials, and experts in monetary and financial stability. The meetings of the Governors and senior officials of central banks are held every two months at the BIS headquarters. These meetings facilitate discussions regarding the world economy and financial markets. Through these meetings, the BIS creates a forum for discussion that allows participants to share information and make policy decisions that affect the international financial community as a whole. The bank also sponsors meetings with experts in specific, often highly technical, financial issues. Such meeting topics have included internal audit and technical cooperation and IT systems for the financial community.
2. A principal counterparty for central banks in their financial transactions
The BIS offers numerous financial services to over 140 customers, including central banks and other international financial institutions. Such services include central banks investing their global foreign exchange reserves (assets of central banks held in currencies other than their nationís currency) with the BIS. Over the past few years, central banks have invested approximately 6% of their foreign exchange reserves with the BIS. Additionally, the BIS offers fixed-term deposits as well as other more complicated financial instruments, including money market instruments, tradable instruments, and foreign exchange and gold services. The BIS also offers asset management services, such as fixed income portfolios invested in government bonds or high-grade credit securities, to central banks. Moreover, the BIS offers short-term credits to central banks either secured with collateral or, in times of financial crises, secured by a group of supporting central banks.
3. A center for economic and monetary research on important global issues
The BIS has a broad research agenda, which is divided into the following six key areas: (1) monetary and financial stability; (2) monetary policy and exchange rates; (3) financial institutions and infrastructure; (4) financial markets; (5) central bank governance; and (6) legal issues. The purpose of BIS research is to assist with the Governorsí meetings and help BIS committees focus their work on the important issues affecting the international banking community.
To disseminate its research, the BIS distributes regular publications in the form of Annual Reports, Quarterly Reviews, BIS Papers, and Working Papers. The BIS distributes its Annual Report in June of each year and each report covers several topics, such as issues in emerging market economies, foreign exchange markets, and the global economy. Additionally, the BIS distributes Quarterly Reviews, which provide detailed information on developments in international banking and financial markets within a three-month time span. The BIS Papers are documents prepared for various meetings within the BIS; accordingly, topics vary widely. For example, Evolving banking systems in Latin American and the Caribbean: challenges and implications for monetary policy and financial stability was published in February 2007 in preparation for a BIS-hosted meeting of central bankers in Kingston, Jamaica. The purpose of this paper was to highlight the ways in which smaller economies of Latin America and the Caribbean have dealt with the changes in their financial systems during the previous decade. Like the BIS Papers, Working Papers cover a variety of topics. However, the Working Papers differ in that they are written by BIS economists and do not necessarily represent the views of the BIS as a whole, just those of the authors.
In addition to its publications, the BIS also disseminates its research via seminars and workshops organized by the BISí Financial Stability Institute (FSI). The main role of the FSI is to help supervisors in the financial community strengthen their financial systems. The FSI sponsors over fifty events each year. For example, the FSI conducts seminars in Switzerland to educate senior supervisors on the leading concepts of financial sector supervision and regulation. Additionally, the FSI works with regional financial supervisor groups to conduct regional seminars on various topics geared toward specific financial issues in the region. These seminars are especially helpful to the banking systems of emerging nations. One such regional event was the FSI-sponsored seminar on Practical Skills in Risk-Based Supervision in Cairo for supervisors in the Arab Monetary Fund.
4. An agent or trustee in connection with selected international financial operations
The BIS often assists in the execution of various international financial agreements. For example, the BIS acted as the agent for the European Currency Union Clearing and Settlement System from 1986 until 1998. Additionally, the BIS assumed responsibilities in rescheduling Brazilian external debt during the countryís financial crisis of 1994. During the Brazilian financial crisis, the BIS served as collateral agent to hold and invest bonds in U.S. dollars issued by Brazil under its rescheduling agreements.
B. The BIS Plays an Important Role in Maintaining Global Monetary and Financial Stability
1. The BIS provides emergency financial assistance when needed
One way in which the BIS helps to stabilize the monetary and financial markets is to provide emergency financial assistance to central banks in times of need. The BIS accomplishes this by working very closely with the IMF, which is charged with assisting countries in financial crises by making short-term loans to the governments in need. While the IMF focuses on the financial health of the country as a whole, the focus of the BIS is narrow, focusing on an individual countryís central banking operations. For the IMF to succeed in helping a nation out of a financial crisis, the BIS must be present to oversee the nationís banking system and to coordinate funding from other central banks.
For example, the BIS worked with the United States, Canada, and the IMF to collect an estimated $48.8 billion to assist Mexico when its pesoís devaluation triggered a devastating crisis during 1994-95. A portion of this $48.8 billion included a $10 billion short-term facility raised by the BIS to help Mexico overcome its short-term liquidity crises. With the support of several central banks, the BIS also funded one-half of a $12 billion swap facility, which was designed to help Mexico get through its August 1995 presidential election. The BIS provided similar assistance to Brazil during its crisis in 1998. While coordinating with the IMF, the BIS secured $14.5 billion in guaranteed loans from twenty countries to help Brazil after the devaluation of its currency triggered a financial crisis.
2. The BIS supports standards and policies to strengthen the international financial architecture
Another way the BIS works to stabilize the monetary and financial markets is by supporting central banks and supervisory agencies by proposing measures and developing standards to strengthen the international financial architecture. For example, the BISí support of the BCBS was significant in the promulgation of the Core Principles and enacting Basel I and Basel II. The BISí involvement and guidance to the other committees discussed above are further examples of the BISí work to maintain international monetary and financial stability.
The BIS also works with other multilateral financial institutions in its endeavor to strengthen the international financial community. The BIS works closely with the IMF, the World Bank, and the regional development banks to create international standards in several areas including the following: data dissemination; fiscal, monetary, and financial policy transparency; banking regulation and supervision; securities and insurance regulation; accounting, auditing, and bankruptcy; and corporate governance. For example, the BIS and the IMF worked with central banks, financial agencies and other banks to create a Code of Good Practices on Transparency in Monetary and Financial Policies.
Another example of the BISí cooperation with other multilateral financial institutions is its work with the World Bank in formulating principles for international remittances. Remittances—transfers of funds from immigrant workers in developed countries to their families still living in their native developing nations—have increased significantly during the past decade. (For more information on remittances and how they affect developing nations, please visit the new E-Book chapter on Remittances and Development.) This increase in remittances created a need for the development of principles to guide recipient countries in order to improve the market for these transfers. Therefore, in January 2007, the BIS and World Bank published a report that analyzed remittances and set forth five general principles recipient countries should follow. According to the report, the principles abide by the public policy concerns regarding remittances and strive to create a safe and efficient market for remittance transfers.
IV. Criticisms of the BIS
Although the BIS is the oldest operating international financial institution and has been a valuable asset in creating and maintaining economic stability, the bank is not without its critics. Some critics view the BIS as an organization through which a wealthy elite controls the world. Critics are concerned that since control in the BIS is in the hands of a handful of developed countriesí central banks, it may have the power to shift billions of dollars too easily. Examples of such complaints include the way in which the BIS and the IMF have responded to financial crises. Although the IMF bears the brunt of the criticism for these bailouts, the BIS has also been criticized for its involvement. Critics believe that the wealthy ìWall Street creditorsî who fund the bailouts have too much input into the monetary policies enforced in the countries in crisis. To alleviate this problem, some suggest that international financial institutions, such as the BIS, should have formal representation from developing countries, which have experienced growing importance in the global economy.
Another major criticism of the BIS is its obscurity and secrecy. These critics call for an increase in transparency in the BIS operations. Proponents of the BISís secrecy, however, insist that some confidentiality is necessary when the BIS facilitates transactions between central banks. For example, if the impact of certain transactions in foreign exchange or gold is made public, then ìsevere consequencesî could occur in the international financial markets. Other critics call for the BIS to take a greater leadership role in increasing transparency in other financial and banking transactions across the world. They warn that such transparency is necessary to decrease the unfairness to consumers and investors that occurs when the proper information is not made public. Although the Code of Good Practices on Transparency in Monetary and Financial Policies promulgated with the IMF (discussed above) is a good start, critics believe that it will take more than general principles to encourage the necessary transparency. The BIS, with its affiliations with other multilateral financial institutions and its connection with the central banks, is in a great position to take the lead in this endeavor.
James Calvin Baker, The Bank for International Settlements: Evolution and Evaluation (2002).
Basel Committee on Banking Supervision, Core Principles for Effective Banking Supervision (Sept. 1997), available at http://www.bis.org/publ/bcbs30a.pdf.
Basel Committee on Banking Supervision, Core Principles for Effective Banking Supervision (Oct. 2006), available at http://www.bis.org/publ/bcbs129.pdf.
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Enrique Carrasco & Jane Ro, Remittances and Development, http://www.uiowa.edu/ifdebook/ ebook2/ contents/part4-II.shtml.
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Katherine Fluke, Basel Core Principles Changed to Reflect Need for International Cooperation, Oct. 2006, http://www.baselalert.com/public/showPage.html?page=348303.
Michael P. Malloy, Emerging International Regime of Financial Services Regulation, 18 Transnatíl Law. 329 (2005)
Reforming the Governance of the IMF and the World Bank, (Ariel Buira ed., 2005)
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Wikipedia, Foreign Exchange Reserves, http://en.wikipedia.org/wiki/Foreign_exchange _reserves.
Wikipedia, Bank for International Settlements, http://en.wikipedia.org/wiki/Bank_for_ International_Settlements