The Bank for International Settlements (BIS) is an organisation that serves as a bank for central banks and fosters international monetary and financial cooperation. Its customers are central banks and international organisations; the BIS does not accept deposits or provide financial services to private individuals or corporate entities.
It is the world’s oldest international financial organisation and provides a focal point for research and cooperation in global banking regulation – the ‘regulators’ regulator’. The headquarters of the BIS is in Basel, Switzerland. It operates representative offices in Hong Kong and Mexico City.
The regulatory guidelines produced by the BIS do not have any force in national or international law, and countries worldwide that choose to implement them do so by making changes to their own legal and regulatory processes.
History of the BIS
The Bank of International Settlement was established out of the Hague Agreement of 1930 by Germany, Belgium, Italy, France, the United Kingdom, Japan, Switzerland, and the United States. The BIS first opened its offices on May 17, 1930.
Its primary role was to collect, administrate and distribute reparations imposed on the German Government by the Treaty of Versailles after World War I. It also acted as the trustee of the Germany Young Loan, which was floated in 1930.
First Roles of the BIS
The task of facilitating reparation payments became obsolete after the Hoover Moratorium of June 1931 suspended it, and later, in July 1932, the Lausanne Agreement abolished the reparation payments. After its initial function was terminated, the BIS was then tasked with fostering cooperation between member central banks.
BIS worked to provide banking facilities to central banks and conduct meeting forums where central bank governors would meet to deliberate. One of its initial activities as a bank for central banks was to help the continental European central banks in the shipping part of their gold reserves to London and New York.
Post-World War II
After the outbreak of World War II, there were concerns about the continued operations of the bank. The members agreed that the bank would remain open and that no board of directors meetings would be held during hostilities. The members also decided that the bank would remain neutral while conducting business.
However, as the war progressed, the BIS was seen as leaning towards the Germans, increasing discomfort from the UK and the US. During the Bretton Woods Conference in 1944, the members agreed to liquidate the bank at the earliest possible moment.
The dissolution was supported by the American and European delegates but opposed by the British delegation. However, the dissolution was halted in 1945 by the new US government and the British government, and the decision to liquidate the BIS was terminated in 1948.
How the BIS operates
According to the BIS Charter formally adopted on January 20, 1930, both individuals and central banks would subscribe to shares issued by the BIS. However, the charter limited the voting rights and representation at the BIS meetings to countries’ central banks in which the shares were officially subscribed.
In 2001, the BIS reviewed the share subscription rights and restricted the share ownership to central banks or equivalent monetary authorities in its respective member countries. The individual shareholders were locked out of share ownership and were compensated rightfully.
Bank for central banks
The Bank of International Settlements functions as a bank, and it competes with other international financial organisations for banking activities. Its clientele comprises central banks of its member countries, but it does not hold current accounts for individuals and governments.
BIS offers premium services and high returns on invested funds to attract central banks. It maintains high levels of equity capital and reserves invested in various portfolios to earn returns for the institution. The BIS ensures the liquidity of its members by buying back tradable securities from the central banks.
During the general meetings, all members are entitled to vote and be represented. The voting power is equivalent to the number of shares issued in each member’s country at the meetings.
The most important meetings at the BIS are the regular meetings of governors and senior officials, held every two months. The sessions provide a platform for members to discuss the global economy, financial markets, and other issues of interest to the central banks.
The Annual General Meeting is held in late June or early July. The topics of discussion at this meeting include distribution of profits and dividends, approval of annual financial reports, approval of allowances paid to board members, and selection of the BIS’s external auditors.
Also, the bank may sometimes call for extraordinary general meetings when liquidating a bank, changing the equity capital, or amending the BIS statutes.
The Bank of International Settlements is presided over by three decision-making bodies, including the general meetings of central banks, the board of directors, and the management of the BIS. Decisions made at these levels are based on a weighted voting arrangement. The decisions are of administrative and financial nature, and they relate to banking operations, allocation of budgetary resources, and internal policies.
Functions of the BIS
Some of the functions performed by the BIS include:
Lender of last resort
As a banker to central banks, the BIS provides a wide range of financial services to assist central banks and other monetary financial institutions in managing foreign reserves. When central banks want immediate liquidity, it offers credit services and buys back tradable financial instruments provided by these central banks.
It also acts as a trustee in international financial operations, which helps promote global financial and monetary stability.
Seminars and workshops
The BIS organises workshops and seminars focused on international financial issues through the Financial Stability Institute (FSI). Through the FSI, the BIS popularises the work undertaken by the Basel Committee on Banking Supervision and its recommendations on the financial markets.
FSI also organises lectures and practical training on global financial stability. The meetings of central bank executives, specialists, economists, and supervisors contribute to international cooperation.
Research and statistics
The BIS publishes research and statistics on global banking, foreign exchange, financial market securities, and derivatives markets. The information is shared across its member central banks to help in their functions and decision-making.
The research is also published in the banks’ regular and external publications like academic journals. The study is conducted by the BIS’s staff and researchers from its member central banks.