BIS Headquarters in Basel
The Bank for International Settlements (BIS) is an international organization of central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks." [1] 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 für Internationalen Zahlungsausgleich (BIZ), in French: Banque des Reglements 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 57 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 57 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. 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). 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 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 of the Bank
The BIS was formed in 1930, the main actors in the establishment of the BIS were the then Governor of The Bank of England, Montague Norman and his German colleague Hjalmar Schacht, later Adolf Hitler's finance minister. The Bank was originally intended 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 original board of directors of the BIS included two appointees of Hitler, Walter Funk a prominent Nazi official, and Emil Puhl, 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.
After the Second World War, in 1944 at the Bretton Woods Conference The BIS became the crux in a fight that broke out between the Americans, Harry Dexter White, Secretary of the Treasury Henry Morgenthau, and the British delegation headed by John Maynard Keynes and Chase Bank representative Dean Atchison, who tried to veto the dissolution of the bank.
As a result of allegations that the BIS had helped the Germans loot assets from occupied countries during World War II, the United Nations Monetary and Financial Conference recommended the "liquidation of the Bank for International Settlements at the earliest possible moment." [2] This task, which was originally proposed by Norway and supported by other European delegates, as well as the United States and Morgenthau and White, was never undertaken.[3]
In July 1944, Atchison interrupted Keynes in a meeting fearing that the BIS would be dissolved by President Franklin Delano Roosevelt. Keynes went to Henry Morgenthau to prevent the dissolution of the BIS, or have it postponed, but the next day the dissolution of the BIS was approved. The British delegation did not give up and the dissolution of the bank was held up just long enough until after Roosevelt had died. In April of 1945 the British and Harry S. Truman stopped the dissolution of the BIS.
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 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 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, 2007, the bank had total assets of U.S. $409.15 billion, given a dollar/SDR exchange rate of 1.51 for March 30, 2007. Included in that total were 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.
Criticism
The UN agencies are echoing a broader complaint. It has been argued by critics like George Soros, that there is no current will to enforce any significant regulation in the present competitive financial industry. In this situation nations effectively compete to offer less regulation.
Asserting that a stronger role for the BIS is a necessary hedge against the ideology prevailing at the International Monetary Fund, strict reserve and capital discipline are based on a non-ideological analysis of fundamental liabilities. To prevent disastrous cases like the IMF, the BIS must rationally and scientifically assess risk in order to prevent load disbursement from passing development policy trends.
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[who?]. 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,[who?] many of whom portray it as a front organization through which a wealthy elite controls the world. Some argue that the bank has not helped matters through a culture of secretiveness[who?].
Board of Directors
- Ben Bernanke, Washington, DC;
- Mark Carney, Ottawa;
- Mario Draghi, Rome;
- William Dudley, New York;
- Stefan Ingves, Stockholm;
- Mervyn King, London;
- Jean-Pierre Landau, Paris:
- Christian Noyer, Paris;
- Guy Quaden, Brussels;
- Jean-Pierre Roth, Zürich;
- Masaaki Shirakawa, Tokyo;
- Jean-Claude Trichet, Frankfurt am Main;
- Paul Tucker, London;
- Alfons Vicomte Verplaetse, Brussels;
- Axel Weber, Frankfurt am Main;
- Nout Wellink, Amsterdam;
- Zhou Xiaochuan, Beijing
Management
Quotes
"...the powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basle, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations."
Carroll Quigley, Tragedy and Hope: A History of the World in Our Time (1966)
On November 21, 1933 President Franklin Roosevelt told Edward M. House 'The real truth .. is, as you and I know, that a financial element in the larger centers has owned the Government ever since the days of Andrew Jackson - and I am not wholly excepting the administration of W[oodrow]. W[ilson]. The country is going through a repetition of Jackson's fight with the Bank of the United States - only on a far bigger and broader basis.'[4]
See also
References
- ^ "About BIS". Web page of Bank for International Settlements. http://www.bis.org/about/index.htm. Retrieved 2008-05-17.
- ^ United Nations Monetary and Financial Conference, Final Act (London et al., 1944), Article IV.
- ^ R.F. Mikesell, The Bretton Woods Debates: A Memoir, Essays in International Finance 192 (Princeton: International Finance Section, Dept. of Economics, Princeton University, 1994), p. 42 . ISBN 0881650994.
- ^ Urofsky, Melvin; Paul Finkelman (2002). A March of Liberty: A Constitutional History of the United States Volume II From 1877 to the Present 2nd Edition. Oxford University Press. pp. 674. ISBN 0195126378.
External links
Coordinates: 47°32′53″N 7°35′31″E / 47.54806°N 7.59194°E / 47.54806; 7.59194
