Bank for International Settlements

The Bank for International Settlements (BIS) is the world’s oldest international financial organisation, established in 1930 under the Hague Agreements, and operates from Basel, Switzerland. BIS have two representative offices in Hong Kong Special Administrative Region of the People's Republic of China and in Mexico. Its members comprise of central banks member states. Since its inception, BIS has grown from a group of the 10 largest economies nation states, known as the G-10 countries, to a present grouping of fifty-five central banks member states. As at December 2003, BIS employs 526 staffs from 44 countries.
As BIS is a private legal entity, its share ownerships are largely held by the G-10 member countries. As of now, the Board of Directors consists of 17 members, out of which six are permanent ex-officio directors. They are namely from 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. Each ex officio member appoints another member of the same nationality. The constitution allows not more than nine Governors of other member central banks to be elected to the Board. Presently, the other Governors are from Canada, Japan, the Netherlands, Sweden and Switzerland. The Board of Directors then elects a Chairman from among its members and appoints the President of BIS for a three-year term. Since 1948 these two offices have been held by the same person.
The role of BIS has evolved to cater for the increased memberships and this is reflected in its role. Primarily set up in the 1930 to function as a centre for collection, administration and distribution of annuities payable as reparation payments by Germany following the First World War, and to service the external loans contracted to finance the reparation works, BIS later began to focus on fostering cooperation among central banks following the end of the Second World War. With its enlarged memberships, BIS acts as a forum for governors, officials from its member central banks and the international financial community to discuss and facilitate the decision- making processes. And, BIS acts almost exclusively for central banks providing services related to their financial operations. Trustee and collateral agency functions are also part of these services.
BIS also fulfils its more traditional banking functions, such as reserve management and gold transactions for central banks and international organizations - as of March 2000, BIS had currency deposits of US$128 billion, or 7% of world foreign exchange reserves. It also conducts economic and monetary research and publishes regular statistical material on international finance and, through committees of national experts, making recommendations to the financial community aimed at strengthening the international financial system. However increasingly, BIS has focussed with other international agencies to promote monetary and financial stability. In the 1960s and early 1970s, BIS worked to support the International Monetary Fund and the World Bank and, later, was involved in managing capital flows following the two oil crises and the international debt crises in the 1980s. More recently, it has attempted to foster financial stability in the wake of economic integration and globalisation. Through its influence on the committees, for example, BIS has had developed a core set of obligations and guidelines (such as minimum capital requirements, capital adequacy and supervisory review of an internal assessment process) for all central banks to adopt and incorporate into their respective financial regimes. In its fervency to restructure the world’s financial system, its processes overlook the political, social and cultural differences that almost always necessitate tailored type solutions to issues affecting different countries.
That is why BIS is seen as yet another organization attempting to strengthen global political and economic orthodoxies and perceived to be a closed and secretive club, both unaccountable and suffering from a 'democratic deficit'. We will look at two of its most important agencies - The Basel Committee on Banking Supervision and Financial Stability Forum – to understand whether BIS has successfully played in its roles to restructure the financial regimes and improve financial stability.

We critically analyze the progress of BIS and in particular it’s most important agencies-The Basel Committee on Banking Supervision and Financial Stability Forum in achieving its goals and visions. Its views on the ways in which markets should be regulated and the role it attributes to nation states in achieving its core concerns have been tested in an environment where economic processes have gravitated towards a single world market and this gravitation is fractured by political, social and cultural processes that assert national and regional differences.
Since 1930 the Bank’s goals and visions have grown. Originally a forum for central bank governors and other experts from central banks in the 10 largest national economies, the Bank developed its own research in financial and monetary economics focusing on the collection, compilation and dissemination of economic and financial statistics. In the aftermath of the Second World War and until the 1970’s it focused on implementing and defending the Bretton Woods system of fixed exchange rates. Through the 1980’s the focus was on managing cross-border capital flows following the oil crises and the international debt crises. In 1988 the Basel Capital Accord was agreed, followed by the Basel II revision of 2001-06. More recently the focus has been on global financial stability in the wake of economic integration and globalization. The expansion of the Banks visions has raised some interesting arguments. How dominant are the economic, political and cultural mores of the G10 nations in forming Bank policy? Does it matter the members are not elected? Who funds the organization? Are issues of equity being addressed? These and other questions need to be answered.
Central bankers have referred to the ‘club effect’ of the meetings of the Bank, particularly the G10. ( Fratianni & Pattison, 2001 p202) A Euro-centric group, it has been historically structured by its members to provide freedom from intrusion from government and press oversight. Although the G10 central banks are its parent, recently the Basel Committee on Bank Supervision has become distinct. This move into international regulation required opening the door to an expanded representation from the other 45 central bank members. The network developed is credited with a significant effect on international financial markets. ( Fratianni & Pattison, 2001 p203)
This raises another issue. These individuals are not elected. Although most of the central banks are run by elected governments, the largest are independent and pursue monetary policy that may or may not be attuned to the short run fiscal policies of elected governments. Foremost in the last decade are national policies to tackle structural unemployment. It would be reasonable to suppose BIS is not concerned with a rise in national unemployment from the implementation of a recommended monetary policy.
On the other hand monetary policy independence has its advantages. Long run policies can be implemented without regard to populist sentiment. The economic cycle tends to be longer than the political cycle and it could be argued an international oversight body is in a better position to research and promote more efficient policies for financial stability and national financial institution capital adequacy.
Although BIS has claimed research and publication of its recommendations is the most important feature of its role in fact its website only lists a small number of publications. In comparison, the European Central Bank has 1400 articles archived after just 5 years of operation. This leads to perceptions of the perpetuation of the old guard thinking common in long established organizations such as IMF, World Bank and BIS. Critics of this lack of transparency including James Wolfenson, new president of the World Bank, point to other equity issues such as how representative is the Bank of all of the members of the international financial community. If the aim is to influence rather than legislate, the widest possible consultancy needs to be undertaken combined with a higher publishing profile.
Of further concern is the source of funding for BIS and its committees. Given the mood of triumphalism common among neo-classical economist in the wake of the economic slide in socialist’s states in the recent past, there is no guarantee funding would continue if alternatives to the Washington Consensus were suggested by the Bank. There are a number of assumptions inherent in the adoption of the dominant paradigm. When the committees make recommendations for the capital adequacy requirements of national financial institutions no account is taken of cultural or social differences. If these institutions want to operate in the world financial markets they have to conform to the orthodoxy.
The power and reach of the committees have grown recently. Previously the BCBS was involved in discussions that led to a design for methods of international co-operation, how to close gaps in bank supervision between states and ways to improve mutual understanding and the quality of bank supervision. (BCBS 1988 p55-79) The BCBS is now constructed to include not just central bankers but national regulators. Thus the recommendations are quickly transformed into legislation in national jurisdictions. Now they have dealt with the supervision of cross border banking, bank capital standards, bank transparency, risk management standards and the regulation of financial conglomerates. In particular the standards can be used as a barrier to restrict entry to a national market if minimums have not been met. The Basel Capital Accords have proved the most contentious. The Basel capital rules act to allocate financial resources among different sectors and different competing projects in a national economy thereby potentially creating distortions in national economies. In 1999 a new framework was introduced to broaden the coverage of risk. (BCBS, 1999) This links capital weights to the credit ratings issued by agencies like Standard and Poors. However this creates a difference in standards between states where credit ratings are active such as most but not all industrialized economies and those that are not. Similarly attempts to extend the regulatory regime to include insurance and securities have cut across intra and inter-national standards in a number of ways. Different laws and regulations, different political constituencies, different accounting rules, capital standards and institutions have led to competitive advantages and disadvantages. Those who are disadvantaged exert considerable pressure for change. ( Fratianni & Pattison, 2001 p210)
These difficulties led BIS and BCBS to form the Financial Stability forum in 1999. This expanded the membership to include finance ministries and regulatory bodies but also introduced a potential loss of efficiency and increased risk. Larger organizations with a plethora of objectives cannot adapt quickly. The uncertainty about the types of shocks that trigger a financial crises and the pace of financial innovation require flexibility in adjusting strategies. It remains to be seen how effective this forum will be when dealing with the next international financial crisis.
Of further concern is the lack of transparency. It has been suggested without privacy central bankers would be reluctant to hold frank discussions because of the fear of insider trading and potential opposition to strategy from other government agencies, monetary policy actions would be rendered ineffectual and governments are reluctant to carry on a public discussion of domestic and international monetary policy co-operation because of local political sensitivities. ( Fratianni & Pattison, 2001 p213) We dispute this noting the change in the change in the role of independent central banks over the last decade. For example the Governor of the Reserve Bank of Australia and the Chairman of the United States Federal Reserve spend a great deal of time broadcasting their concerns over inflation and the intended use of the overnight interest rate to control it. This ‘jawboning’ of the markets is in stark contrast to previous techniques. Not long ago interest rates were changed in secret and impending changes to monetary policy was difficult to divine. The days when central banks had enough foreign currency reserves to effectively intervene in foreign exchange markets to protect national currencies are long gone for most of the G10 nations. Interestingly it is the central banks still under the control of non-democratic governments which still maintain the ability to intervene effectively. There is a question mark over how long this will continue to be possible if the national currency is allowed to float.

In summary we suggest the work of the BCBS and the Financial Stability Forum is indicative of the Bank’s attitude to financial market regulation. The returns to capital must be protected and enhanced. Financial markets are informationaly asymmetric and agents have an incentive to cheat and will do so in the absence of regulation. The regulation should be in two forms. Bring together the most powerful econocrats in the world and in an atmosphere of trust decide on a common approach. Then using national legislation, enforce a uniform set of procedures on all institutional players in local and international financial markets. Ignore or circumvent political, cultural or social processes that do not conform to the dominant economic paradigm as interpreted by the central bankers and regulators of the richest, euro-centric nations.
In this paper we have provided a brief introduction to the Bank for International Settlements and its two most important agencies; Basel Committee on Bank Stability and the Financial Stability Forum outlining what they are, where they are, membership and purpose. We focused on core concerns and the immediate concerns and provided an analysis of how successful they are in achieving their goals. In particular we have illustrated their attitude to financial markets and the role of nation states in regulating these markets. We have taken a critical external line partly because the Bank lacks transparency.
References


BIS (2004) http://www.bis.org/index.htm
Accessed 14 April 2004

Fratianni, M & Pattison J (2001) ‘The Bank for International Settlements: An assessment of its Role in International Monetary and financial Policy Co-ordination’. Open Economies Review. 12: 197-222 Kluwer Academic Publishers. Netherlands.
BCBS (1988) ‘International Convergence of Capital Measurement and Capital Standards’. in BCBS, Compendium of Documents produced by the Basel Committee of Banking Supervision, Vol. 1. Basel.
BCBS (1999) ‘A New Capital Adequacy Fr