Established in 1930 in Basel, Switzerland, the Bank for International Settlements (BIS) is a bank for central banks. It takes deposits from, and provides a wide range of services to, central banks, and through them, to the international financial system. The BIS also provides a forum for international monetary cooperation, consultation, and information exchange among central bankers; conducts monetary, economic, and financial research, and acts as an agent or trustee for international financial settlements.
- The Bank for International Settlements (BIS) provides central banks with a wide range of financial services, including reserve management and fiduciary services.
- The BIS promotes cooperation among central banks and provides facilities for international financial operations.
- The BIS facilitates the implementation of international financial agreements and conducts monetary, economic, and financial research and market analysis.
- In June 1999, the Basel Committee on Banking Supervision issued a proposal for a new capital adequacy regulatory framework designed to differentiate degrees of risk more accurately and to improve the risk management practices of banks.
- The Federal Reserve has been a member of the Board of Directors of the BIS since 1994.
Established in 1930 in Basel, Switzerland, the Bank for International Settlements (BIS) is a bank for central banks. It takes deposits from, and provides a wide range of services to, central banks, and through them, to the international financial system. The BIS also provides a forum for international monetary cooperation, consultation, and information exchange among central bankers; conducts monetary, economic, and financial research, and acts as an agent or trustee for international financial settlements.
Organizational Structure
As of March 2006, the BIS had 55 shareholding central banks from around the world. As of March 2006, the Bank’s assets were approximately $221 billion, including $5.8 billion of its own funds.
When the BIS initially raised capital, participating banks were given the option to buy BIS shares or arrange for those shares to be bought by the public. Currently, 86 percent of the shares of the BIS are registered in the names of central banks, and 14 percent are held by private shareholders. The shares owned by private shareholders consist of part of the French and Belgian issues and all of the shares that were in the original U.S. issue in 1930.
All shareholders receive the Bank’s dividends. However, private shareholders do not have voting rights or representation at the BIS annual meetings. Only a country’s central bank or its nominee may exercise the rights of representation and voting.
Board of Directors
The BIS Board of Directors elects a chairman from among its members and appoints the president of the Bank. There are three types of Board members: ex officio, appointed, and elected.
The ex officio members are the heads of the central banks of Belgium, France, Germany, Italy, the United Kingdom, and the United States. Appointed directors, who are from those six countries, hold office for three years and are eligible for reappointment.
The BIS statutes provide for the election of not more than nine governors of other member central banks by a two-thirds majority. Elected directors serve for three years and are eligible for reelection.
Forum for International Monetary and Financial Cooperation
The BIS holds meetings for the governors of the central banks and other officials to examine economic, financial, and monetary issues and to facilitate international cooperation. Also, BIS committees study the changing international economy. In 1974, for example, the Group of Ten (G-10) governors agreed to form the Basel Committee on Banking Supervision to improve collaboration among bank supervisors. The G-10 is made up of 11 industrialized countries: Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States.
Basel Capital Accord
In 1988, the Basel Committee on Banking Supervision developed the Basel Accord, which sets minimum capital standards for internationally active banks. The Committee believed that the framework would strengthen the soundness and stability of the international banking system by encouraging international banking organizations to increase their capital positions. Furthermore, the Committee believed that a standard approach applied to banks in different countries would reduce competitive inequalities.
The Accord created capital requirements for the credit risk in banking assets. Credit risk is defined as the possibility of losses due to borrowers’ defaults or decreased ability to repay their debts. Originally, the Accord applied only to large internationally active banks in G-10 countries, but over 100 countries have adopted it. Overall, implementation of the Accord has significantly increased the capital ratios of large international banks.
While the Accord has been a key element in promoting the safety and soundness of the banking system, financial innovation has exposed certain weaknesses in the current capital Accord. In particular, the Accord has lost some of its effectiveness in ensuring that capital requirements match a bank’s true risk profile.
In June 1999, the Basel Committee on Banking Supervision proposed a new capital adequacy framework to replace the current Basel Accord. The proposed framework focuses on three "pillars": (1) minimum capital requirements, (2) supervisory review, and (3) market discipline. Together, the changes to the current Accord are designed to differentiate degrees of risk more accurately and to improve the risk management practices of banks. Also, the Committee is seeking to expand capital requirements beyond credit and market risks to include interest rate and operational risks.
The Committee received comments on the new proposal until March 2000 and plans to issue a final proposal in early 2001. Copies of "The New Capital Adequacy Framework" and "International Convergence of Capital Measurement and Capital Standards" (the 1988 Basel Capital Accord) are available.
Center for Economic, Financial, and Monetary Research
The Monetary and Economic Department of the BIS conducts research and market analysis. For example, the BIS and central banks compile and analyze data on developments in international banking and financial markets. They collect data on activity in international securities markets, foreign exchange, and over-the–counter derivatives markets. BIS publications include The Central Bank Survey of Foreign Exchange and Derivative Market Activity, International Banking and Financial Market Developments, and the Annual Report of the BIS.
Financial Operations
The BIS offers a wide range of banking services to assist central banks in managing their external reserves. About 140 central banks and international financial institutions have deposits with the BIS. As of March 2006, currency deposits totaled approximately $186 billion dollars, or about seven percent of world foreign exchange reserves. Most of these funds are in the form of investments with large commercial banks and purchases of short-term government securities. The BIS also conducts foreign exchange and gold operations for its customers.
The BIS provides many investment services for its customers and it also lends to central banks some of the funds it receives as deposits from other central banks. The BIS has made short-term loans to central banks on both an uncollateralized and a collateralized basis.
On several occasions, the BIS has provided financial support to countries with the backing or guarantee of a group of leading central banks. For example, in 1998, the BIS coordinated a multi-billion dollar credit facility for the Central Bank of Brazil.
Agency and Trustee Functions
The BIS assists in the execution of international financial agreements as trustee or fiscal agent. From 1986 to 1998, for example, the BIS was an agent for the European Currency Unit (ECU) Clearing and Settlement System.
In April 1994, the BIS assumed new responsibilities in connection with the rescheduling of Brazilian external debt. The BIS acted as a collateral agent to hold and invest collateral for the benefit of the holders of certain U.S.-dollar-denominated bonds issued by Brazil under the rescheduling agreements.
Federal Reserve’s Relationship with the BIS
The Federal Reserve is an active participant and regularly attends meetings of the BIS. The chairman of the Board of Governors of the Federal Reserve System and the president of the Federal Reserve Bank of New York have been members of the Board of Directors of the BIS since 1994.
April 2007
This article has been reprinted with the authorization of the Federal Reserve
