The Bank for International Settlements (BIS) is an intergovernmental
organization of central banks which "fosters international monetary and
financial cooperation and serves as a bank for central banks."[2] It is not
accountable to any national government. The BIS carries out its work through
subcommittees, the secretariats it hosts, and through its annual General
Meeting of all members. It also provides banking services, but only to central
banks, or to international organizations like itself. Based in Basel,
Switzerland, the BIS was established by the Hague agreements of 1930. The name
of the BIS in German: Bank f r Internationalen Zahlungsausgleich (BIZ), in
French: Banque des R glements Internationaux (BRI), in Italian: Banca dei
Regolamenti Internazionali (BRI). It has representative offices in Hong Kong
and Mexico City.
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. 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 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 unrealistic. 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 US also did this, by dividing
federal monetary management into nine regions, in which the less-developed
Western US 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 vs. 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."[3]
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.
History
The BIS was formed in 1930. The main actors in its establishment were the
then-Governor of The Bank of England, Montagu Norman, and his German
counterpart Hjalmar Schacht, later Adolf Hitler's finance minister. The Bank
was originally intended to facilitate reparation payments imposed on Germany by
the Treaty of Versailles after the First World War.[4] The need for the bank
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. The charter
was adopted at a second Hague Conference on January 20, 1930.
During the period 1933 45, the board of directors of the BIS included Walter
Funk, a prominent Nazi official, and Emil Puhl, who were both convicted at the
Nuremberg trials after World War II, as well as Herman Schmitz the director of
IG Farben and Baron von Schroeder, the owner of the J.H.Stein Bank, the bank
that 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 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 (including Harry Dexter White, Secretary of the Treasury and Henry
Morgenthau),[5] but opposed by John Maynard Keynes, head of the British
delegation. The disagreement led to Chase Bank representative Dean Atchison
interrupting Keynes at one of the conference sessions. 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 undertaken.[6] The British delegation did not give up and
the dissolution of the bank was still not accomplished when Roosevelt died. In
April 1945, the new president Harry S. Truman and the British suspended the
dissolution and the decision to liquidate the BIS was officially reversed in
1948.[7]
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 a
unique organization: an international organization (in the technical sense of
public international law), yet with 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[when?] the BIS has
forcibly bought back all shares held by private investors, and is now wholly
owned by its member central banks.
Since 2004, the BIS has published its accounts in terms of Special Drawing
Rights, or SDRs, replacing the Gold Franc as the bank's unit of account. As of
March 2007 (end of month) the bank had total assets of $409.15 billion, given a
dollar/SDR exchange rate of 1.51 for March 30, 2007. Included in that total is
150 tons of fine gold.
Role in banking supervision
The BIS provides the Basel Committee on Banking Supervision with its
twelve-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 US, EU and UN officials regarding the degree of
capital adequacy and reserve controls that global banking now requires. Put
extremely simply, the US as of 2006 favoured strong strict central controls in
the spirit of the original 1988 accords, 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.