Bank for International Settlements

Bank for International Settlements

BIS members
Established 17 May 1930
Type International company limited by shares
Purpose Central bank cooperation
Location
Coordinates 47°32′53″N 7°35′31″E / 47.54806°N 7.59194°E / 47.54806; 7.59194Coordinates: 47°32′53″N 7°35′31″E / 47.54806°N 7.59194°E / 47.54806; 7.59194
Membership
 60 central banks
Jaime Caruana
Main organ
 Board of directors[1]
Website www.bis.org

The Bank for International Settlements (BIS; French: Banque des règlements internationaux, BRI) is an international company limited by shares owned by central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks".[2] 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

BIS main building in Basel, Switzerland

The BIS was established on May 17, 1930, by an intergovernmental agreement by Germany, Belgium, France, the United Kingdom, Italy, Japan, the United States and Switzerland.[3][4]

The BIS was originally intended to facilitate reparations imposed on Germany by the Treaty of Versailles after World War I.[5] 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.

The evidence had been mounting throughout the war that the BIS had helped the Germans loot assets from occupied countries, including gold rings and other items from labor and prison camp victims.[6] The most notorious incident was the Bank of England's transfer to the BIS gold looted by the Nazis after their invasion of Czechoslovakia in 1939.'[7] The fact that top level German industrialists and advisors sat on the BIS board is ample evidence to understand how the BIS was used by Hitler throughout the war, with the help of American, British and French banks. Between 1933 and 1945 the BIS board of directors included Walther Funk, a prominent Nazi official, and Emil Puhl, as well as Hermann Schmitz, the director of IG Farben and Baron von Schroeder, the owner of the J.H. Stein Bank.

The Bretton Woods Conference recommended the "liquidation of the Bank for International Settlements at the earliest possible moment".[8] This resulted in the BIS being the subject of a disagreement between the non-governmental U.S. and British delegations. The liquidation of the bank was supported by other European delegates, as well as the United States (including Harry Dexter White, Secretary of the Treasury, and Henry Morgenthau),[8] 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.[9] 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.[10]

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 (in the technical sense of public international law), 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.[11] It is now wholly owned by BIS members (central banks) but still operates in the private market as a counterparty, asset manager and lender for central banks and international financial institutions.[12] 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 60-member central banks, except in the case of Eurozone countries which forfeited the right to conduct monetary policy in order to implement the euro. While monetary policy is determined by most sovereign nations, 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 60 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" (Gresham's Law).

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 (at about 5 to 1) and for-profit corporations (at about 2 to 1) 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."[13]

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 (OFCs), highly leveraged institutions (HLIs), large and complex financial institutions (LCFIs), 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 (SDRs). As of 31 March 2013, 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 (890,658 pounds) of fine gold. Until 2003, the Bank for International Settlements used as currency the Gold Franc.

Members

The number of countries represented in each continent are: 35 in Europe, 13 in Asia, 5 in South America, 3 in North America, 2 in Oceania, and 2 in Africa. Sixty member central banks or monetary authorities of these countries:

Leadership

Chairman of the board and president

Chairman Nationality Dates President Nationality Dates
Gates W. McGarrah*  United States of America April 1930 – May 1933 N/A
Leon Fraser*  United States of America May 1933 – May 1935 N/A
Leonardus J. A. Trip*  Netherlands May 1935 – May 1937 N/A
May 1937 – December 1939 J. Willem Beyen  Netherlands May 1937 – December 1939
O. E. Niemeyer*  United Kingdom May 1937 – May 1940 N/A**
January 1940 – June 1946 Thomas H. McKittrick  United States of America January 1940 – June 1946
Ernst Weber   Switzerland December 1942 – November 1945 N/A**
Maurice Frère  Belgium July 1946 – June 1948 N/A**
June 1948 – June 1958 Maurice Frère  Belgium June 1948 – June 1958
Marius W. Holtrop*  Netherlands July 1958 – June 1967 N/A
Jelle Zijlstra*  Netherlands July 1967 – December 1981 N/A
Fritz Leutwiler*   Switzerland January 1982 – December 1984 N/A
Jean Godeaux*  Belgium January 1985 – December 1987 N/A
W. F. Duisenberg*  Netherlands January 1988 – December 1990 N/A
Bengt Dennis*  Sweden January 1991 – December 1993 N/A
W. F. Duisenberg*  Netherlands January 1994 – June 1997 N/A
Alfons Verplaetse*  Belgium July 1997 – February 1999 N/A
Urban Bäckström*  Sweden March 1999 – February 2002 N/A
A. H. E. M. Wellink*  Netherlands March 2002 – February 2006 N/A
Jean-Pierre Roth   Switzerland March 2006 – February 2009 N/A***
Guillermo Ortiz  Mexico March 2009 – December 2009 N/A***
Christian Noyer  France March 2010 – October 2015 N/A***
Jens Weidmann  Germany November 2015 – present N/A***
Source:[14]

* President and chairman.
** None.
*** Position abolished on 27 June 2005.

Vice-chairmen

Name Nationality Dates
Raghuram Rajan[15][16]  India November 2015 – present

General managers

Name Nationality Dates
Jaime Caruana  Spain April 2009 – present
Malcolm D. Knight  Canada April 2003 – September 2008
Sir Andrew Crockett  United Kingdom January 1994 – March 2003
Alexandre Lamfalussy  Belgium May 1985 – December 1993
Gunther Schleiminger  Germany 1981 – May 1985
René Larre  France 1971–1981
Gabriel Ferras  France 1963–1971
Guillaume Guindey  France 1958–1963
Roger Auboin  France 1938–1958
Pierre Quesnay  France 1930–1938

Board of directors

See also

References

  1. ↑ "Board of Directors". www.bis.org/. Archived from the original on 22 April 2011. Retrieved 2011-04-14.
  2. ↑ "About BIS". Web page of  Bank for International Settlements. Archived from the original on 14 May 2008. Retrieved May 17, 2008. C1 control character in |work= at position 57 (help)
  3. ↑ "UNTC".
  4. ↑ "About BIS".
  5. ↑ BIS History – Overview. BIS website. Retrieved 2011-02-13.
  6. ↑ "Banking With Hitler". Top Documentary Films.
  7. ↑ "BoE helped sell looted Nazi gold". Financial Times.
  8. 1 2 United Nations Monetary and Financial Conference, Final Act (London et al., 1944), Article IV.
  9. ↑ Raymond Frech Mikesell. The Bretton Woods Debates: A Memoir. Princeton: International Finance Section, Dept. of Economics, Princeton University. p. 42. ISBN 0-88165-099-4. Retrieved 8 July 2013. Essays in International Finance 192
  10. ↑ brief history of the BIS
  11. ↑ "Press release: BIS completes redistribution of shares".
  12. ↑ "Products and services".
  13. ↑ Liu, Henry C. K. China: PART 4: China steady on the peg
  14. ↑ "Functionaries of the Board of Directors".
  15. ↑ "Raghuram Rajan elected as VC".
  16. ↑ "Press release: BIS Board appoints Raghuram Rajan as Vice-Chairman".

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