Bank for International Settlements (BIS)
Owned by central banks worldwide, its purpose is to support global monetary and financial stability
What is The Bank for International Settlements (BIS)?
The Bank for International Settlements (BIS) is an international financial institution that serves as a bank for central banks. It was established in 1930 and is owned by a total of 63 Central Banks representing countries around the world.
With 95% of the world's total GDP, it serves as a central bank for its member countries. Its main role is to promote “global monetary and financial stability,” as stated by the BIS itself.
The head office of BIS has been located in Basel, Switzerland, since its inception. It also has two representative offices in Hong Kong and Mexico.
It also owns several Innovation Hub Centers around the globe for innovating and forming new policies for the BSI member countries, making their day-to-today operations easier.
The Innovation Hub Secretariat is based in the BIS headquarters in Basel. It supervises the activities of the Hubs and its program developments from time to time.
It develops policies and procedures to be adhered to by the BIS and also prepares the background notes for the BIS governing bodies and their management.
One of the main reasons behind setting up Innovation Hubs was to tackle the uprising of financial services globally and catch up to the speedy progress of the IT industry or, as the period was called, the IT Revolution.
The BIS’ mission is to facilitate effortless financial mobility across countries and maintain global monetary stability by acting as an international bank to the central banks. This is crucial for sustained economic growth.
The BIS staff is a community of well-versed and highly-educated individuals who have expertise in the fields of economics, risk management, finance, banking, international law, statistics, etc. Such a mix of backgrounds aids in synergistically growing and improving the experience for all.
However, the BIS was set up with an entirely different motive in 1930 which we will talk about in the upcoming sections.
Key Takeaways
- Bank of International Settlements (BIS), established in 1930, is owned by 63 central banks from different countries, that represent 95% of the global GDP.
- Its core aim is maintaining global monetary and financial stability through supporting central banks.
- BIS is headquartered in Basel, Switzerland, with hubs for innovation and policy-making worldwide.
- It acts as a last-resort lender for central banks, organizes events, and publishes research, aiding global financial cooperation and stability.
History of the BIS
The Bank for International Settlements was born out of the Hague Agreement that took place in 1930.
The countries involved in the agreement were:
- Germany
- Belgium
- Italy
- France
- Switzerland
- the United Kingdom (UK)
- the USA
- Japan
The BIS opened its office for the first time on May 17, 1930.
It is the oldest financial institution with the goal to achieve global coordination among the member countries on a common financial platform. Since its inception around the time of the First World War, it has been a crucial player in the global economy.
The book “Promoting Global Monetary and Financial Stability: the Bank for International Settlements after Bretton Woods”, 1973-2020 (Cambridge University Press), summarizes and reviews BIS’ roles over the past 50 years up until the year 1973.
The BIS started out with the motive of facilitating reparations imposed on Germany after World War 1 and the Treaty of Versailles. Its very existence was suggested by the Young Committee so as to aid Germany with the reparations proceedings, which were later floated in 1930.
In 1944, the Bretton Woods Conference recommended: “the liquidation of the Bank for International Settlements at the earliest moment possible.”
This later resulted in a dispute between the US and the British delegates. The US delegates, along with the delegates of other member countries, agreed upon the dissolution of the BIS. But their British counterpart, John Maynard Keynes, opposed its abolition.
However, the motion to liquidate the BIS was reversed in 1948.
As the world was heading towards the era of globalization, the BIS also globalized its policies throughout the 1990s and 2000s. This led to an increase in its member central banks from 33 countries to 60 countries in 2013.
Resulting of this expansion of the member countries, BIS opened its representative offices in Hong Kong in 1998 and in Mexico in 2002.
Lately, the BIS revoked its dealings with Russia in March 2022 due to the international sanctions following Russia’s declaration of war with Ukraine.
Bank for International Settlement during the Second World War (1939-48)
Thomas McKittrick was the President of the BIS during the Second World War. He was a US citizen staying in Basel at the time of the war.
In the late 1930s, when the War had just started, the BIS aided the European Central Bank in transporting more than 140 tonnes of gold from Europe to the safety of New York.
Moreover, with the onset of WWII, it was no longer possible for the representatives of these warring countries to attend the usual BIS meetings, given that the countries they were at war with were fellow members.
The BIS realized that international cooperation was becoming more difficult owing to the political and military tensions between the member countries. They needed to make a decision regarding their method of dealing with these countries.
Moreover, the Board members knew that keeping BIS alive was more necessary than ever so as to help the warring countries in the reconstruction process post-war.
It rolled out a neutral decision that excluded banking and financial decisions that might benefit one nation over another. This declaration was to avoid any advantages being given to a country in war at the detriment of another.
In December 1939, the BIS circulated the declaration of its neutral decision to the member countries. This declaration had to be followed through the period of war.
As with any other big-scale decision, this decision led to several controversies among the member countries.
One of the most controversial decisions made was when the BIS decided to honor the order received from the Czechoslovak National Bank to transfer a part of its gold reserves from the Bank of England in London to a German Reichsbank Account.
Nevertheless, the BIS handled the dilemma pretty well, given the circumstances of the war.
It is usually focused foremost on European monetary and financial matters.
Post-World War II
The regular meetings of the BIS started taking place in December 1946. After the war ended, Europe sought to stabilize different national currencies before the trade and forex restrictions were set to be lifted.
During this time, France, Italy, and the Benelux (Belgium, Netherlands, Luxemburg) countries completed the Agreement on Multilateral Monetary Compensation in November 1947.
The European Payments Union (EPU) was also set up by the EU countries. It was an organization in existence from July 1950 to December 1958, ultimately being replaced by the European Monetary Agreement when Europe was struck by economic depression.
For both of these agreements, the BIS was appointed as the agent to propagate further actions.
The EPU aimed at restoring the free convertibility of European currencies in reference to the Bretton Woods agreements. To accomplish this, every member country of the BIS reported their trade deficits and surplus with each other monthly.
The BIS later calculated the aggregate deficit or surplus to compare it with the reported figures of each country. These deficits and surpluses did not have to be settled immediately but were transformed into debts and credits with respect to the EPU.
This activity helped restore intra-European multilateral trade without any effect on the other countries in the play.
The ratio of credits to debits gradually decreased with time. As soon as the goal of achieving full current account convertibility was achieved in 1958, the EPU was dissolved.
In 1958, a new treaty signed by the EU countries came into force. Under the treaty, the European Economic Community (EEC) was formed, aiming at coordinating monetary policies among the member states as much as possible.
The treaty was followed by an EEC decision to create a committee of all the governors of the respective member states. The Committee of Governors decided upon a consensus that they all should meet at the BIS in Basel.
The committee was dissolved in 1993, running for 29 years. The European Monetary Cooperation Fund (1973) and the European Monetary System (1979) were managed in Basel, where the BIS provided them with the technical support needed.
Later, the Committee of Governors was replaced with the European Monetary Institute (EMI) and was shifted to Frankfurt from Basel by the end of 1993. In 1997, the EMI became the European central bank.
Functions of the BIS
BIS performs several functions, which can be narrowed down to the main three functions as explained below:
1. Lender of the last resort
The Bank for International Settlements (BIS) acts as the banker for its member central banks.
It provides them with a plethora of financial services to assist them in managing their financial resources in an efficient manner and without the formalities that they would otherwise have to perform.
When central banks require immediate liquidity for their activities, the BIS offers them credit facilities in exchange for tradable financial instruments.
Thus, at times when the central banks are unable to obtain financial liquidity, they seek to borrow from BIS, making it the Lender of Last Resort (LOLR).
It also acts as the trustee bank for its member banks, standing responsible if one of its members defaults on loans or any other commitments.
The ECB or the European Central Bank, formerly called The European Monetary Institute (EMI), is responsible for the European Union member countries that function on the euro currency.
This region is called the eurozone and consists of 19 member nations. Its goal is to maintain the stability of the euro, thus, keeping up with the purchasing power of the currency.
2. Meetings and seminars
The BIS regularly organizes meetings for its members. These events are focused on international financial issues through the Financial Stability Institute (FSI).
The FSI was set up by the BIS and the Basel Committee on Banking Supervision (BCBS) in 1998. This institution was largely set up to mandate supervisors around the world to assist in strengthening of their financial stability.
The FSI also organizes workshops and seminars in the form of lectures and practical training on the global-level stability of financial systems.
One of the other purposes of these regular meetings and gatherings is to contribute significantly to international cooperation among international supervisors.
For operating a multilateral institution, one has to be aware of all the regulations and rules followed by each international member.
Since coordinating becomes arduous, these institutions seek to obtain regular updates from leaders and/or representatives. They also appeal to each member for coordination and the nearest possible standardization of rules among the group.
BIS Research Publications
The BIS also publishes research performed by the researchers under them. Their reports are based on international laws, financial derivatives markets, financial securities, global banking, etc.
According to the BIS website:
“Their research places emphasis on the links between the real economy and the financial system, on global rather than country-specific aspects, and on longer-term drivers of activity.”
BIS also makes sure their research team has an on-ground opportunity to conduct their research better.
They operate visiting programs, like the Lamfalussy for Senior Research Fellowship for long-term visits by resident scholars and the BIS Research Fellowship for short-term collaborative visits by academics.
The Central Bank Research Fellowship program for the central bank researchers of the member countries also takes place occasionally.
BIS issues an Economic Report every year, reviewing and summarizing the economic performance of global economies. Since 2018, the BIS has published the Economic Report and the Annual Report as separate documents.
The BIS, like many other organizations, does a review of financial performance. This is what the Annual Report shows.
The BIS has strived to achieve its goals ever since its inception. However, it is to be noted that the BIS is not accountable to any national government.
With its various organizations and its well-controlled operations, it keeps assisting its members in promoting financial steadiness in their individual economies, thus ensuring a stable global economy and a better future.
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