The Bank for International Settlements) is an international organization of central banks
which "fosters international monetary and financial cooperation and serves as a bank
for central banks". The BIS carries out its work through subcommittees,
the secretariats it hosts and through an annual general meeting of all member banks. It also
provides banking services, but only to central banks and other international organizations.
It is based in Basel, Switzerland, with representative offices in Hong Kong and Mexico City.
History The BIS was established on May 17, 1930 by
an intergovernmental agreement by Germany, Belgium, France, United Kingdom, Italy, Japan,
United States and Switzerland. The BIS was originally intended to facilitate
reparations imposed on Germany by the Treaty of Versailles after World War I. The need
to establish a dedicated institution for this purpose was suggested in 1929 by the Young
Committee, and was agreed to in August of that year at a conference at The Hague. A
charter for the bank was drafted at the International Bankers Conference at Baden Baden in November,
and its charter was adopted at a second Hague Conference on January 20, 1930. According
to the charter, shares in the bank could be held by individuals and non-governmental entities.
The BIS was constituted as having corporate existence in Switzerland on the basis of an
agreement with Switzerland acting as headquarters state for the bank. It also enjoyed immunity
in all the contracting states. Between 1933 and 1945 the BIS board of directors
included Walther Funk, a prominent Nazi official, and Emil Puhl, who were both convicted of
war crimes at the Nuremberg trials after World War II, as well as Hermann Schmitz, the director
of IG Farben, and Baron von Schroeder, the owner of the J.H.Stein Bank, which held the
deposits of the Gestapo. There were allegations that the BIS had helped the Germans loot assets
from occupied countries during World War II. As a result of these allegations, at the Bretton
Woods Conference held in July 1944, Norway proposed the "liquidation of the Bank for
International Settlements at the earliest possible moment". This resulted in the BIS
being the subject of a disagreement between the American and British delegations. The
liquidation of the bank was supported by other European delegates, as well as the United
States, but opposed by John Maynard Keynes, head of the British delegation.
Fearing that the BIS would be dissolved by President Franklin Delano Roosevelt, Keynes
went to Morgenthau hoping to prevent the dissolution, or have it postponed, but the next day the
dissolution of the BIS was approved. However, the liquidation of the bank was never actually
undertaken. In April 1945, the new U.S. president Harry S. Truman and the British government
suspended the dissolution, and the decision to liquidate the BIS was officially reversed
in 1948. The BIS was originally owned by both governments
and private individuals, since the United States and France had decided to sell some
of their shares to private investors. BIS shares traded on stock markets, which made
the bank an unusual organization: an international organization, yet allowed for private shareholders.
Many central banks had similarly started as such private institutions; for example, the
Bank of England was privately owned until 1946. In more recent years the BIS has bought
back its once publicly traded shares. It is now wholly owned by BIS members but still
operates in the private market as a counterparty, asset manager and lender for central banks
and international financial institutions. Profits from its transactions are used, among
other things, to fund the bank's other international activities.
Organization of central banks
As an organization of central banks, the BIS seeks to make monetary policy more predictable
and transparent among its 58 member central banks. While monetary policy is determined
by each sovereign nation, it is subject to central and private banking scrutiny and potentially
to speculation that affects foreign exchange rates and especially the fate of export economies.
Failures to keep monetary policy in line with reality and make monetary reforms in time,
preferably as a simultaneous policy among all 58 member banks and also involving the
International Monetary Fund, have historically led to losses in the billions as banks try
to maintain a policy using open market methods that have proven to be based on unrealistic
assumptions. Central banks do not unilaterally "set" rates,
rather they set goals and intervene using their massive financial resources and regulatory
powers to achieve monetary targets they set. One reason to coordinate policy closely is
to ensure that this does not become too expensive and that opportunities for private arbitrage
exploiting shifts in policy or difference in policy, are rare and quickly removed.
Two aspects of monetary policy have proven to be particularly sensitive, and the BIS
therefore has two specific goals: to regulate capital adequacy and make reserve requirements
transparent. Regulates capital adequacy
Capital adequacy policy applies to equity and capital assets. These can be overvalued
in many circumstances because they do not always reflect current market conditions or
adequately assess the risk of every trading position. Accordingly the BIS requires the
capital/asset ratio of central banks to be above a prescribed minimum international standard,
for the protection of all central banks involved. The BIS's main role is in setting capital
adequacy requirements. From an international point of view, ensuring capital adequacy is
the most important problem between central banks, as speculative lending based on inadequate
underlying capital and widely varying liability rules causes economic crises as "bad money
drives out good". Encourages reserve transparency
Reserve policy is also important, especially to consumers and the domestic economy. To
ensure liquidity and limit liability to the larger economy, banks cannot create money
in specific industries or regions without limit. To make bank depositing and borrowing
safer for customers and reduce risk of bank runs, banks are required to set aside or "reserve".
Reserve policy is harder to standardize as it depends on local conditions and is often
fine-tuned to make industry-specific or region-specific changes, especially within large developing
nations. For instance, the People's Bank of China requires urban banks to hold 7% reserves
while letting rural banks continue to hold only 6%, and simultaneously telling all banks
that reserve requirements on certain overheated industries would rise sharply or penalties
would be laid if investments in them did not stop completely. The PBoC is thus unusual
in acting as a national bank, focused on the country not on the currency, but its desire
to control asset inflation is increasingly shared among BIS members who fear "bubbles",
and among exporting countries that find it difficult to manage the diverse requirements
of the domestic economy, especially rural agriculture, and an export economy, especially
in manufactured goods. Effectively, the PBoC sets different reserve
levels for domestic and export styles of development. Historically, the United States also did this,
by dividing federal monetary management into nine regions, in which the less-developed
western United States had looser policies. For various reasons it has become quite difficult
to accurately assess reserves on more than simple loan instruments, and this plus the
regional differences has tended to discourage standardizing any reserve rules at the global
BIS scale. Historically, the BIS did set some standards which favoured lending money to
private landowners and for-profit corporations over loans to individuals. These distinctions
reflecting classical economics were superseded by policies relying on undifferentiated market
values—more in line with neoclassical economics. Tier 1 versus total capital
The BIS sets "requirements on two categories of capital, tier 1 capital and total capital.
Tier 1 capital is the book value of its stock plus retained earnings. Tier 2 capital is
loan-loss reserves plus subordinated debt. Total capital is the sum of Tier 1 and Tier 2
capital. Tier 1 capital must be at least 4% of total risk-weighted assets. Total capital
must be at least 8% of total risk-weighted assets. When a bank creates a deposit to fund
a loan, its assets and liabilities increase equally, with no increase in equity. That
causes its capital ratio to drop. Thus the capital requirement limits the total amount
of credit that a bank may issue. It is important to note that the capital requirement applies
to assets while the bank reserve requirement applies to liabilities."
Goal: a financial safety net The relatively narrow role the BIS plays today
does not reflect its ambitions or historical role.
A "well-designed financial safety net, supported by strong prudential regulation and supervision,
effective laws that are enforced, and sound accounting and disclosure regimes", are among
the Bank's goals. In fact they have been in its mandate since its founding in 1930 as
a means to enforce the Treaty of Versailles. The BIS has historically had less power to
enforce this "safety net" than it deems necessary. Recent head Andrew Crockett has bemoaned its
inability to "hardwire the credit culture", despite many specific attempts to address
specific concerns such as the growth of offshore financial centres, highly leveraged institutions,
large and complex financial institutions, deposit insurance, and especially the spread
of money laundering and accounting scandals. Role in banking supervision
The BIS provides the Basel Committee on Banking Supervision with its 17-member secretariat,
and with it has played a central role in establishing the Basel Capital Accords of 1988 and 2004.
There remain significant differences between United States, European Union, and United
Nations officials regarding the degree of capital adequacy and reserve controls that
global banking now requires. Put extremely simply, the United States, as of 2006, favoured
strong strict central controls in the spirit of the original 1988 accords, while the EU
was more inclined to a distributed system managed collectively with a committee able
to approve some exceptions. The UN agencies, especially ICLEI, are firmly
committed to fundamental risk measures: the so-called triple bottom line and were becoming
critical of central banking as an institutional structure for ignoring fundamental risks in
favour of technical risk management. Accounting and use of SDRs
Since 2004, the BIS has published its accounts in terms of special drawing rights. As of
32013, the Fiscal Year Report of the bank had total assets of SDR 211,952.4 million.
One SDR is equivalent to the sum of USD 0.660, EUR 0.423, JPY 12.1 and GBP 0.111. Included
in that total is 404 tonnes of fine gold. Until 2003, the Bank for International Settlements
used as currency Gold Franc. Members
60 member central banks or monetary authorities of these countries:
General managers Board of directors
Christian Noyer, Paris Masaaki Shirakawa, Tokyo
Janet Yellen, Washington, D.C. Stephen S Poloz, Ottawa
Agustín Carstens, Mexico City Luc Coene, Brussels
Andreas Dombret, Frankfurt am Main Mario Draghi, Frankfurt am Main
William Dudley, New York Stefan Ingves, Stockholm
Thomas Jordan, Zurich Mark Carney, London
Klaas Knot, Amsterdam Anne Le Lorier, Paris
Guy Quaden, Brussels Fabrizio Saccomanni, Rome
Ignazio Visco, Rome Jens Weidmann, Frankfurt am Main
Zhou Xiaochuan, Beijing See also
Bank regulation Basel III
Continuous linked settlement Global financial system
International Court of Justice League of Nations
Gold Franc References
Further reading LeBor, Adam. Tower of Basel: The Shadowy History
of the Secret Bank that Runs the World excerpt and text search
"Never mind the Czech gold the Nazis stole... The Bank for International Settlements actually
financed Hitler’s war machine", LeBor, Adam, The Telegraph, 31 Jul 2013
External links BIS website
Global Banking: The Bank For International Settlements An analysis of the origins and
functions of the BIS. The Money Club By Edward Jay Epstein, Harpers,
1983. Andrew Crockett statement to the IMF.
An account of the use of reserve policy and other central bank powers in China at the
Wayback Machine By Henry C K Liu in the Asia Times.
Banking with Hitler on YouTube, Timewatch, Paul Elston, producer Laurence Rees, narrator
Sean Barrett, BBC, 1998 Bank for International Settlements in the
Dodis database of the Diplomatic Documents of Switzerland