Bank for International Settlement

From FXPedia

As part of the 1919 Treaty of Versailles that ended WWI, Germany was forced to make reparation payments. During a series of meetings held at the Hague in 1930 to discuss payment details, the Bank for International Settlement was formally created with the express mandate of administering these payments.

Because the Bank for International Settlement (BIS) was created to serve as a non-partisan counterparty, it was also decided to headquarter the BIS in the Swiss city of Basel as Switzerland had remained neutral throughout the war. It was felt that by locating the BIS in Basel, it would be less-likely to be influenced by any of the major powers sharing the ownership of the new organization.

Much has changed in the world since the BIS was originally established, including the primary reason the BIS was created initially. However, the Bank has kept pace with changes in the industry and the BIS continues to play an important role in international finance. Today, the Bank’s role as described on the BIS website consists of “fostering cooperation among the central banks and other agencies in pursuit of monetary and financial stability”.^[1] The BIS accomplishes this goal directly by way of a series of services it offers to the international financial community and also indirectly as the host of a series of meetings and working groups.

1 Financial Stability
- 1.1 General Meetings
- 1.2 Group of 10
2 Working Groups and Specialist Meetings

Financial Stability

Fulfilling its mandate of fostering cooperation leading to financial stability, the BIS conducts regularly-scheduled meetings – referred to simply as General Meetings – attended by representatives of the central banks of the member nations. As of January 2008, the BIS counted 55 countries as members. The BIS also sponsors other working groups specializing in areas such as reserve fund management, audit cooperation, and IT and telecommunications. A full listing of members is available on the BIS website.

General Meetings

Considered to be the most important of the meetings and seminars sponsored by the BIS, General Meetings are held six times a year and all members are invited to attend. General Meetings provide an open forum in which to discuss the challenges facing the world economy and financial markets. Members are permitted to vote on points raised at the General Meetings, but because the BIS is privately-held by the members, the number of votes available to each member is based on the number of BIS shares held by the member’s central bank.

Group of 10

The Group of 10 consists of the world’s industrial leaders and actually contains the following eleven countries:

Belgium
Canada
France
Germany
Italy
Japan
The Netherlands
Sweden
Switzerland
The United Kingdom
The United States

The Ministers of Finance and Central Bank leaders for the Group of 10 typically meet once a year in Basel to discuss strategies for economic and monetary policy actions. In addition, junior officials of the Group of 10 meet more frequently as needed.

Working Groups and Specialist Meetings

As well as the General Meetings and Group of 10 meetings, the BIS also conducts sessions routinely attended by senior central bank officials centered on discussions of a particular interest. Some of the key meeting groups include:

Committee on the Global Financial System

The Committee on the Global Financial System is chaired by Donald L. Kohn, Vice Chairman of the U.S. Federal Reserve Board of Governors. This committee reviews the state of the global economy with a mandate to promote functional improvements and ensure stability within the global system.

Committee on Payment and Settlement Systems

The Committee on Payment and Settlement Systems works with BIS members to promote and develop relationships between central banks. These sessions encourage the sharing of information regarding domestic settlement and clearing practices in order to improve cross-border, multi-currency transactions.

The Financial Stability Institute

The Financial Stability Institute (FSI) was created in 1999 to distribute guidelines for the development of global financial systems and works closely with the Basel Committee on Banking Supervision. The primary mandate for the FSI is to “promote sound supervisory standards and practices globally, and to support full implementation of these standards in all countries”.^[2]

Banking Services for Central Banks

Emergency Funding

The BIS has a long history of working with central banks and providing support and guidance for market economies facing financial crisis. The BIS can even provide emergency short-term funding relief if necessary to ensure the overall stability of the international financial system.

When distributing funds, the BIS draws from the foreign exchange deposits it holds for many of the world’s central banks. Essentially, the BIS operates under the authority of, and on behalf of, the member central banks when providing financial assistance.

Statistical Analysis

The Bank for International Settlement conducts extensive research in matters of multi-national finance and international law. The BIS serves as a central repository for this information, making it available to all members. This research and subsequent statistical analysis is used to generate several publications including the Annual Report, a Quarterly Review, as well as a host of discussion papers and professional journals.

Regulatory and Compliance Issues

The second half of the twentieth century marked a rapid increase in international trade. This activity continued to grow with the development of telecommunications and the subsequent wide-spread use of computer networks to conduct international trade and transactions. While most countries had regulations in place to deal with domestic banking, when conducting international transactions – particularly electronic transactions – the international banking system was woefully ill-prepared.

It did not take long for these deficiencies to be exploited, and in what is considered to be one of the major turning points leading to an international standard, the U.S. banking system was rocked by the failure of the Franklin National Bank. Long Island-based Franklin National was America’s 20th largest bank but due to extreme mismanagement and out-right fraud perpetrated by senior bank officials, the bank was declared insolvent in October, 1974. At the time, it was the largest bank failure in U.S. history.^[3]

The Franklin National case – together with several other high-profile schemes – led to the establishment of the Basel Committee on Banking Supervision. The Basel protocol – issued in 1988 as the Basel Capital Accord – mandates a required standard of risk assessment together with a high level of transactional transparency.^[4] The goal of the Basel Accord is to reduce the kinds of fraud that caused Franklin National to collapse. In 2006, Basel II was implemented as an update to the original Basel Accord.

Related Articles

Bank for International Settlement website

Basel Committee on Banking Supervision

references