Since its creation at the Hague Conference in January 1930, the Bank for International Settlements (BIS) has been a central banking institution which is unique at the international level. It is owned and controlled by central banks and provides a number of highly specialised services to central banks and, through them, to the international financial system more generally. At present the BIS is actively deepening its relationships with central banks outside its traditional focus in the industrialised world.
The BIS's predominant tasks are summed up most succinctly in part of article 3 of its original statutes: "to promote the cooperation of central banks and to provide additional facilities for international financial operations". One of the major aims of greater international central bank cooperation has always been to foster international financial stability. Nowadays, with rapidly integrating financial markets, such cooperation is even more essential. The BIS is thus an important forum for international monetary and financial cooperation between central bankers and, increasingly, other regulators and supervisors. At the same time the BIS is a bank, but one whose depositors are limited to central banks and international financial institutions. A significant portion of the world's foreign exchange reserves are held on deposit with the BIS. The BIS also acts as agent or trustee in connection with various international financial agreements.
Since September 1994 the 11 countries from which the members of the Bank's Board of Directors are drawn have been the countries which comprise the Group of Ten (G10), with which the BIS has had a long and close association. The admission to membership in 1996/97 of an additional nine central banks in Asia, Latin America, the Middle East and Europe has reduced the previous heavy concentration of BIS shareholding central banks in the industrialised world and eastern Europe.
The Bank has business and other relations with considerably more than its shareholding central banks because some 120 central banks and international financial institutions use the BIS as a bank; it also increasingly invites central bank officials from the emerging economies to participate in discussions held at the BIS. Furthermore, the central banks or official monetary institutions of a large number of countries are regularly represented at the Annual General Meeting of the BIS in June.
The need to create an international organisation such as the BIS had been perceived from the beginning of the century. However, it was not until the adoption of the Young Plan under the Hague Agreements of 20 January 1930, whose main purpose was to facilitate the German reparations after World War I, that the necessary steps were taken.
The intergovernmental agreements concluded at the Hague Conference in January 1930 provided for the founding of the BIS by a group of six central banks and a financial institution of the United States and for the granting of a Constituent Charter to the BIS by Switzerland, the country in which the BIS was to be established. The new international organisation was destined not only to perform the functions of trustee in the execution of the Young Plan but also, as already noted, to promote central bank cooperation and to provide additional facilities for international financial operations.
The BIS commenced its activities in Basel on 17 May 1930 and is thus the world's oldest international financial organisation and meeting place.
In common with many of its founding central banks in 1930, the BIS was given the legal structure of a limited company with an issued share capital. The Hague Agreements nevertheless established the BIS as an international organisation governed by international law with the privileges and immunities necessary for the performance of its functions. The international legal personality of the BIS and the privileges and immunities which it has enjoyed in Switzerland since its foundation were confirmed in the Headquarters Agreement concluded by the Bank with the Swiss Federal Council on 10 February 1987. It is apparent from that Agreement that the BIS has a legal status comparable to that accorded to the many other international organisations established in Switzerland.
The authorised share capital of the Bank is 1,500 million gold francs, divided into 600,000 shares of equal nominal value (2,500 gold francs per share), of which 517,165 shares are currently issued. They are paid up to the extent of 25% of their nominal value (625 gold francs per share). The amount of the paid-up capital appearing in the balance sheet of the BIS at 31 March 1999 thus stands at 323.2 million gold francs.
The gold franc of the BIS has a gold weight of just over 0.29 grams of fine gold, which is identical with the gold parity of the Swiss franc from the foundation of the BIS in 1930 until September 1936 when, after a number of leading countries had left the gold standard, the Swiss franc's gold parity was suspended. The BIS employs the gold franc solely as a unit of account for balance sheet purposes, assets and liabilities in US dollars being converted into gold francs at the fixed rate of US$ 208 per ounce of fine gold (approximately equivalent to 1 gold franc = US$ 1.94) and all other items in currencies being converted into gold francs on the basis of market rates against the US dollar.
When the Bank's initial capital was issued, the subscribing institutions were given the option of taking up the whole of their respective national issues of shares or of arranging for those shares to be subscribed by the public. As a result, part of the Belgian and French issues and the whole of the American issue are not held by the institutions to which they were originally allocated. In all, some 86% of the Bank's issued share capital is registered in the names of central banks, the remaining 14% being held by private shareholders. While all shares carry equal rights with respect to the annual dividend, private shareholders have no right to attend or vote at General Meetings of the BIS, since all rights of voting and representation are reserved for the central bank of the country in which the relevant national issue of shares was initially subscribed.
At 31 March 1999 forty-five central banks had rights of voting and representation at General Meetings. These included all the G10 central banks - those of Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States - and the central banks of Australia, Austria, Brazil, Bulgaria, China, the Czech Republic, Denmark, Estonia, Finland, Greece, Hong Kong SAR, Hungary, Iceland, India, Ireland, Korea, Latvia, Lithuania, Mexico, Norway, Poland, Portugal, Romania, Russia, Saudi Arabia, Singapore, Slovakia, South Africa, Spain and Turkey, together with the Central Bank of Bosnia and Herzegovina, the Croatian National Bank, the National Bank of the Republic of Macedonia and the Bank of Slovenia, which have been issued shares of the Bank pending a comprehensive settlement of all outstanding questions in connection with the legal status of the suspended Yugoslav issue of the Bank's capital.
The BIS has three administrative bodies: the General Meeting, the Board of Directors and the Management.
The General Meeting is held annually, usually on the second Monday in June.
The Board of Directors comprises the governors of the central banks of Belgium, France, Germany, Italy and the United Kingdom and the Chairman of the Board of Governors of the US Federal Reserve System, as ex officio members, each of whom appoints another member of the same nationality. The statutes also provide for the election to the Board of not more than nine governors of other member central banks. The governors of the central banks of Canada, Japan, the Netherlands, Sweden and Switzerland are currently elected members of the Board.
The Board of Directors elects a Chairman from among its members and appoints the President of the Bank. Since 1948 the two offices have been vested in one person. They are currently held by Urban Bäckström, Governor of Sveriges Riksbank.
The Board of Directors appoints the General Manager, currently Andrew Crockett, and the other members of the Management. The staff of the Bank (including temporary staff) now numbers 485 and is drawn from 32 countries.
The Bank's offices in Basel are the meeting place for the governors and other officials of not only the above-mentioned shareholding central banks but also the central banks of many other countries. In July 1998 the BIS established a Representative Office for Asia and the Pacific in the Hong Kong Special Administrative Region of the People's Republic of China. The aim is to achieve a high degree of mutual understanding of monetary and economic questions and to facilitate international cooperation in areas of common interest, in particular as regards the monitoring of and support to the international financial system.
The stability of the international monetary and financial systems has long been a central concern of the central bankers meeting at the BIS. For example, the Bank played an important role in the creation and operation of the various intra-European payments arrangements between 1947 and 1958. Then, during the period between 1960 and 1971, which was characterised by currency crises, the Basel meetings contributed to initiatives being undertaken by the central banks.
The General Arrangements to Borrow (GAB) of 1962, under which 10 member countries of the International Monetary Fund (together with Switzerland, not then an IMF member) agreed to make resources available to the IMF outside their quotas, led to the countries participating in the GAB being known as the Group of Ten. As well as making resources available to the IMF under the GAB the G10 has since 1963 been a principal forum for discussion of international monetary questions. From the outset, the BIS has been a participant in G10 meetings, above all because the governors of the G10 central banks meet on the occasion of the regular meetings at the BIS. It was thus through their contacts at the BIS that between 1961 and 1968 the G10 central banks coordinated their interventions in the gold markets through the so-called gold pool, which was operated on the basis of directives formulated and issued in Basel by the central bank governors. Furthermore, the network of swap arrangements between the US monetary authorities and a number of central banks to reinforce confidence in the US dollar had its origins in 1962 within the framework of the BIS. The G10 meetings have become the pivotal forum in which much wider activities have been set in motion by the G10 central banks in the pursuit of international financial stability - for example, in the fields of monetary and financial market monitoring and analysis, banking supervision, and payment and settlement systems.
The BIS is also - and increasingly - a forum for meetings of the governors and other officials from those central banks which make a substantial contribution to international monetary cooperation. Moreover, the BIS contributes actively to the ongoing work on reforming the international financial architecture. The importance of this work was first given prominence in 1995 at the Halifax summit of heads of state and government of G7 countries, work that has since involved finance ministries and central banks from industrial countries and emerging economies. A result has been the establishment of a Financial Stability Forum in February 1999. The Forum promotes information exchange and coordination among the national authorities, international institutions and international regulatory and experts' groupings with responsibilities for questions of international financial stability. The BIS and other international institutions and groupings participate in the meetings of the Forum and jointly provide secretariat support.
The progressive globalisation of financial markets and the continuous process of financial innovation over the last two decades have also added to the need for deeper understanding of the resulting systemic implications and for cooperation among those central banks most affected. As early as 1971 concern among central banks about the evolution of the eurocurrency markets led to the establishment of a Standing Committee of the G10 central banks which has met periodically in Basel ever since. The Euro-currency Standing Committee has dealt with a series of specific questions, such as the implications of international debt problems, the evolution of financial market structures, the macroeconomic and prudential implications of derivative instruments, and the collection of new statistical information. In February 1999 the G10 governors approved a new name - Committee on the Global Financial System - and a revised mandate, emphasising three tasks: systematic short-term monitoring of global financial system conditions; longer-term analysis of the functioning of financial markets; and the articulation of policy recommendations aimed at improving market functioning and promoting stability. The Committee now meets quarterly. In sessions held at the BIS the Committee of Experts on Gold and Foreign Exchange also monitors financial market developments with a view to identifying their implications for central bank policies and operating procedures. The Committee occasionally addresses longer-term structural issues as well, with a strong but not exclusive focus on the evolution of foreign exchange markets.
Another initiative was the agreement of the G10 governors in December 1974 to set up a committee to improve collaboration between bank supervisors in light of the experiences earlier that year in connection with Bankhaus Herstatt in Germany and Franklin National Bank in New York. The work of the Basel Committee on Banking Supervision, the secretariat for which is provided by the BIS, encompasses three main areas. First, the Committee provides a forum for discussion on the handling of specific supervisory problems. Second, it coordinates the sharing of supervisory responsibilities among national authorities in respect of banks' foreign establishments with the aim of ensuring effective supervision of banks' activities worldwide; a report on this matter - the Basel Concordat - was issued in 1983, and in 1992 the Committee strengthened these arrangements by agreeing on minimum standards for the supervision of international banking groups and their cross-border establishments. Third, it seeks to enhance standards of supervision, notably in relation to solvency, so as to help strengthen the soundness and stability of international banking. In this respect, it has over the years issued a wide range of papers designed to guide bank supervisors in the establishment of sound supervisory standards. The best known of these is the agreement reached in 1988 (currently under review) to achieve international convergence in the measurement of the adequacy of banks' capital and to establish minimum capital standards. More recently, the Committee has issued the Core Principles for Effective Banking Supervision, which is a comprehensive blueprint for an effective supervisory system, backed by a three-volume Compendium of guidance documents.
The efficiency and stability of domestic and cross-border payment and settlement systems have also been a key central bank concern. The BIS hosts meetings of and provides the secretariat for the Committee on Payment and Settlement Systems (CPSS) and its various working parties. Following the publication in 1990 of the report of the ad hoc Committee on Interbank Netting Schemes, the CPSS has more recently focused on foreign exchange settlement risk, securities lending and retail payment systems and has increasingly involved non-G10 central banks in its work. A CPSS task force comprising central banks from the G10 countries and emerging economies as well as the World Bank and the IMF is currently working on core principles for the design and operation of payment systems.
The need to strengthen financial systems worldwide has led to increased demand for assistance in implementing sound policies in all areas bearing on financial stability. In 1998, to help respond to these demands, and to improve the effectiveness with which training is planned, coordinated and delivered, the BIS, in a joint initiative with the Basel Committee on Banking Supervision, established the Financial Stability Institute. Its early focus is to promote better and more independent banking, capital markets and insurance supervision based on the implementation of core principles for financial sector supervision.
Since January 1998 the BIS has hosted the secretariat of the International Association of Insurance Supervisors (IAIS). The IAIS is a relatively new organisation, founded in 1994. It aims to cooperate to ensure improved supervision of the insurance industry, to develop practical standards for supervision of insurance, to provide mutual assistance and to exchange information in order to promote the development of domestic insurance markets. In 1997 the IAIS issued its first papers: Insurance supervisory principles: guidance on insurance regulation and supervision for emerging economies, comparable to the Basel Concordat, and a model Memorandum of Understanding that can be used by supervisors to improve the exchange of information and to facilitate cooperation. In 1998 three papers were added, setting international standards on licensing of insurance companies, on-site inspections and use of derivatives.
The secretariat operates in full independence of the BIS but has its offices at the BIS and enjoys its support in certain technical and administrative areas. The proximity to the Basel Committee and the other secretariats at the BIS focusing on issues of financial stability facilitates the cooperation and exchange of information which is becoming increasingly necessary as differences between financial institutions and sectors diminish and therefore call for joint supervisory approaches.
As central bank cooperation has intensified in other parts of the world, within either existing regional political associations or specialised central banking organisations, the BIS has been in touch with most of them, notably with CEMLA (Centro de Estudios Monetarios Latinoamericanos) in Latin America, EMEAP (Executive Meeting of East Asian and Pacific Central Banks), SEANZA (Central Banks of Southeast Asia, New Zealand and Australia), SEACEN (Southeast Asian Central Banks), SAARC (South Asian Association for Regional Cooperation), the AMF (Arab Monetary Fund), the GCC (Gulf Cooperation Council) and in SADC (Southern African Development Community). The BIS contributes to the activities of these organisations and conducts joint seminars with an increasing number of them.
The BIS performs functions in the field of technical assistance for the central banks of central and eastern Europe, the Commonwealth of Independent States and some Asian economies in transition, and coordinates the technical assistance and training being provided by the central banks of over 20 industrial countries. That coordination is founded on a database and on regular meetings bringing together officials of the donor and recipient central banks concerned as well as the IMF and other international organisations. The BIS also participates with the EBRD, IBRD, IMF, OECD and WTO in a training institution - the Joint Vienna Institute - set up in September 1992 to offer courses chiefly for officials of the central banks and economic and financial authorities of the countries whose economies were formerly subject to central planning.
The BIS also regularly organises meetings of central bank economists and other experts on a variety of matters, such as economic and monetary issues of interest to central banks, including, for example, monetary policy techniques and operating procedures. Meetings of central bank experts also take place on more specialised topics, such as data bank management, security, automation, internal management procedures, collection of international financial statistics and specific legal topics of interest to central banks. In recent years, participation has been increasingly extended to representatives from emerging markets, who also attend special meetings at the BIS on topics of particular interest to them.
From 1964 until end-1993 the BIS hosted the secretariat of the Committee of Governors of the Central Banks of the Member States of the European Economic Community (the Committee of Governors). From 1 June 1973 until end-1993 the secretariat of the Committee of Governors also served the Board of Governors of the European Monetary Cooperation Fund (EMCF) and the Bank acted as EMCF agent (see below). Until they were replaced by the European Monetary Institute (EMI) on 1 January 1994, the Committee of Governors and the EMCF were the Community bodies which provided the institutional framework for monetary cooperation in the European Community.
In addition to the specific tasks performed by the BIS and the various committees and groups of experts described above, the Monetary and Economic Department conducts research, particularly into monetary and financial questions, collects and publishes data on international banking and financial market developments, and maintains an intra-central bank economic database to which contributing central banks have automated access.
Research tends to focus on questions of direct interest to central banks and is thus of an applied nature. The Bank's economic research and analysis are published in its various economic and working papers, as well as in academic journals and conference volumes of central banks and international agencies. Much of the work undertaken also serves, directly or indirectly, as an important input to the wide-ranging review of international economic and financial developments in the Bank's Annual Report, the publication for which it is perhaps most widely known. The BIS also publishes its own research, along with papers submitted by central banks, in its conference and policy papers.
At the request of central banks, the BIS also compiles and analyses data on developments in international banking and financial markets. The data relating to international banking statistics, currently the most extensive part of the data compiled, shed light on the growing international business of banks and on an important component of countries' international indebtedness. The data have been adapted for use in the compilation of more accurate national balance of payments statistics. In addition, the Bank has been mandated to build up databases on activity in international debt securities markets, as well as in exchange and over-the-counter traded derivatives. Finally, the Bank maintains a database on the results of the triennial Central bank survey of foreign exchange market activity, which was expanded in 1995 to include comprehensive information on derivatives markets.
Most of the data are published by the BIS in its quarterly International banking and financial market developments which also provides a detailed commentary on market developments. Some of the statistics appear in the Annual Report of the BIS, where a chapter is devoted to international financial market developments. Data on consolidated international bank lending and on global OTC derivatives market activity are published separately twice yearly, accompanied by a commentary, and the BIS also contributes data on bank and securities financing to internet-based publication of joint BIS-IMF-OECD-World Bank statistics on external debt. The triennial Central bank survey of foreign exchange and derivatives market activity is issued as a separate report.
At 31 March 1999 the Bank's balance sheet total stood at 66.2 billion gold francs, with the Bank's published own funds (capital and reserves) at 2.9 billion gold francs. Expressed in US dollars with gold at the then current market price the figures can be put at US$ 131 billion and US$ 5.7 billion respectively.
The Banking Department carries out a wide range of banking operations, which arise from its role of providing financial services to assist central banks in the management of their external reserves. At present, around 120 central banks and international financial institutions from all over the world place deposits with the BIS. The total of the currency deposits so placed with the BIS amounted to about US$ 112 billion at 31 March 1999, representing around 7% of world foreign exchange reserves.
The substantial size of the Bank's balance sheet total reflects the importance of the function of the BIS as banker to central banks. Because a high proportion of the reserve assets which central banks hold in the form of deposits with the BIS needs to be available at rather short notice, the Bank's employment of these resources focuses upon maintaining a high degree of liquidity. Most of these funds are placed in the market, mainly in the form of investments with top-quality commercial banks and purchases of short-term government securities. While these operations today constitute the bulk of the Bank's business, it also conducts a range of foreign exchange and gold operations on behalf of its customers.
The guiding principle that must be observed by the BIS in its banking operations is laid down in article 19 of its statutes, which states that: "The operations of the Bank shall be in conformity with the monetary policy of the central banks of the countries concerned". The Bank is not permitted to make advances to governments or open current accounts in their name.
In recent years the Bank has expanded the investment services it offers to central banks. A range of BIS financial products enables central banks to manage their liquidity more efficiently and, to help them with longer-term reserve management, the Bank offers investment instruments of up to five years as well as tailor-made portfolio management schemes.
In addition to placing funds in the international markets, the BIS sometimes makes short-term advances to central banks. These usually take the form of secured credits against gold, other collateral or currency deposits held with the BIS, but on occasion they may be granted on an unsecured basis, for example in the form of a standby credit which a central bank can draw on at very short notice.
The BIS has at various times since the early 1980s provided financial support to countries with the backing (in the form of guarantees) of a group of leading central banks. Multilateral assistance of this kind has usually prefinanced disbursements of credits granted by international bodies such as the IMF or the World Bank. As with the US$ 13.28 billion BIS Credit Facility put together in late 1998 for Brazil, it has on occasion taken the form of a contribution to a wider financial support programme.
The BIS assists, in a number of fields, in the execution of international financial agreements as agent or trustee.
In the past, the BIS performed various functions as trustee, fiscal agent or depositary with regard to a number of international loan agreements, such as the Dawes and Young loans issued by the German government in 1924 and 1930 respectively, and the secured loans issued by the European Coal and Steel Community from 1952. Following its reunification the Federal Republic of Germany has issued a new series of funding bonds concerning arrears of interest under the Dawes and Young loans.
A function which has now lapsed but whose influence survives in various forms of monetary cooperation is that which the BIS fulfilled in the context of the European Payments Union (EPU) (1950-58) and its forerunners, the multilateral payments agreements of 1947-50. At end-1958, after the European currencies had become fully convertible, the EPU was replaced by the European Monetary Agreement (EMA), a multilateral system of settlements, and the Bank assumed responsibility for the execution of all financial operations connected with the Agreement until its termination in 1972. It then lent its services as agent for the application of the OECD Exchange Guarantee Agreement, concluded in place of the EMA and in force until end-1978.
From June 1973 until end-1993 the BIS acted as agent for the European Monetary Cooperation Fund (EMCF). With effect from 1 January 1994 the EMCF was dissolved and, pursuant to the Maastricht Treaty on European Union of December 1991, the tasks previously performed by the EMCF were taken over by the European Monetary Institute (EMI).
From October 1986 until end-1998 the BIS performed the functions of agent for the private ECU Clearing and Settlement System in accordance with the provisions of successive agreements concluded between the Euro Banking Association (EBA), formerly the ECU Banking Association, Paris, and the BIS.
In April 1994 the BIS assumed new functions in connection with the rescheduling of Brazilian external debt which had been agreed by Brazil in November 1993. In accordance with two Collateral Pledge Agreements, the BIS acts in the capacity of collateral agent to hold and invest collateral for the benefit of the holders of certain US dollar denominated bonds, maturing in either 15 or 30 years, issued by Brazil under the rescheduling arrangements.
The BIS has undertaken similar functions for Peru since March 1997 and for Côte d'Ivoire since March 1998 in connection with the external debt rescheduling arrangements agreed in November 1996 and May 1997 respectively.
The BIS is: