BIS Headquarters in Basel
The 'Bank for International Settlements' (or 'BIS') is an
international organization of
central banks which exists to ''"foster cooperation among central banks and other agencies in pursuit of monetary and financial stability"''. It carries out its work through subcommittees, the secretariats it hosts, and through its annual General Meeting of all members. The BIS 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 agreement of
1930.
Organization of central banks
As an organization of central banks, the BIS seeks to make
monetary policy more predictable and transparent among its 55 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 55 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. Contrary to most economists' perceptions, central banks do not unilaterally "set" rates, 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. Accordingly the BIS requires bank
capital/asset ratio to be above a prescribed minimum international standard, for the protection of all central banks involved. The BIS' 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). ''Specific policies are explained below.''
Encourages reserve transparency
Reserve policy is also important, especially to consumers and the domestic economy. To insure
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." - from
an extremely detailed and robust account of the use of reserve policy and other central bank powers in China by
Henry C.K. Liu.
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. ''See history below.''
The BIS has historically had less power to enforce this "safety net" than it deems necessary. Recent head
Andrew Crocket 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
Despite its recent history of taking a narrow central bank mediation role, the BIS was originally formed to facilitate money transfers arising from settling an obligation arising from a peace treaty. After
World War I, the need for the bank was suggested in 1929 by the
Young Committee, as a means of transfer for German reparations payments - ''see
Treaty of Versailles''. The plan was agreed in August of that year at a conference at the Hague, and 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.
The BIS was originally owned by both the 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 makes the bank a unique organisation: an international organisation (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 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 31,
2005, the bank had total assets of U.S. $272 billion, given a dollar/SDR exchange rate of 1.51 for that date. Included in that total were
gold reserves of 712 tonnes, assuming a SDR gold price of 283 units per ounce.
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.
Criticism
The UN agencies are echoing a broader complaint. Critics of
capitalism as presently managed, including
George Soros (who personally made billions exploiting the UK's clumsy attempts to prop up the
pound sterling), argue that there is no will to enforce any significant regulation in the present competitive financial industry, where nations effectively compete to offer less regulation.
These critics often plead for a stronger role for the BIS in part as a hedge against the ideology prevailing at the
International Monetary Fund, which has proven to be disastrous in quite a few cases. Strict reserve and capital discipline based on a non-ideological analysis of fundamental liabilities and rationally and scientifically expected risk would be far less likely, argue the critics, to be subordinated to a passing fashion in development policy.
For instance, regarding
climate change, all of the living
Nobel Prize scientists in the world signed a letter stating that the evidence for it was overwhelming and action was required. It is quite difficult to find any technical economic policy that has a similarly unanimous support, yet the IMF experts are often in a position to impose such fashions, while non-ideological science is not reflected in central bank
decision making.
Other doubts about the BIS's mandate, its program, its effectiveness, and the desirability of any existing institution taking the lead role in
accounting reform, especially in light of serious failures of money-laundering law enforcement, major breaches of prudence and supervision in the United States (e.g.
Enron), have led to some minor critique of the BIS in the
anti-capitalism and
anti-globalization movements. This is incidental usually to critiques of the IMF and
World Bank, whose role is far more visible, and which have far more discretion in their policy.
The BIS is also a frequent target of allegations by
conspiracy theorists, many of whom portray it as a front organisation through which a wealthy elite controls the world. Some argue that the bank has not helped matters through a culture of secretiveness, and that lack of information always encourages some people to imagine what they do not know.
NAZI Gold controversy
"It was indicated that venerable Basel – and, more specifically, the little-known but extremely powerful Bank for International Settlements headquartered in the city – spent the 1930s and ’40s quietly laundering the Nazis’ ill-gotten gains under a cloak of neutrality. Evidence of such murky banking practice was received with shock, anger and disbelief in Basel and around the country, and has yet to be fully accepted. Unaccustomed to being faced with pointing fingers, Baslers may take some decades to assess and absorb the accusations."
(quote: http://switzerland.isyours.com/e/guide/basel/index.html)
For example, it is still yet undetermined who was exactly responsible for the movement ₤6,000,000 of Czechoslovak gold from the Bank of England to the German Reichsbank, in 1939.
[1]
Board of Directors
★ Jean-Pierre Roth, Zürich (Chairman of the Board of Directors)
★
Hans Tietmeyer, Frankfurt am Main (Vice-Chairman)
★ Nout H E M Wellink, Amsterdam
★ Axel Weber, Frankfurt am Main
★ Vincenzo Desario, Rome
★ Antonio Fazio, Rome
★ David Dodge, Ottawa
★
Toshihiko Fukui,Tokyo
★ Timothy F Geithner,
Federal Reserve Bank of New York
★
Ben Bernanke,
Federal Reserve Chairman, Washington DC
★ Lord George, London
★ Hervé Hannoun, Paris
★
Christian Noyer, Paris
★ Stefan Ingves, Stockholm
★
Mervyn King, London
★ Guy Quaden, Brussels
★ Alfons Vicomte Verplaetse, Brussels
Management
★ General Manager:
Malcolm D Knight (
[1]) (1 April 2003 -).
Andrew Crockett (- 1 April 2003).
See also
★
Bank regulation
★
Enron
References
1. Finance and the End of Appeasement: The Bank of England, the National Government and the Czech Gold, , David, Blaazer, Journal of Contemporary History, 2005
External links
★
BIS website
★
Global Banking: The Bank For International Settlements An analysis of the origins and functions of the BIS.
★
Bank for International Settlements Address by John Percival Day to the
Empire Club of Canada, January 9, 1930.
★
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 By 'Henry C K Liu' in the
Asia Times.
★ http://bis2information.org: Practical articles, on BIS2 and risk modelling, submitted by professionals to help create an industry standard.
★
A video documentary about the BIS role in financing Nazi Germany by British Television (HI QUALITY) (LOW QUALITY)
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