Bank for International Settlements (BIS)
The Bank for International Settlements (BIS) was established in 1929, when representatives of the World War I reparations conference set up a committee of experts to provide a definitive financial framework for German war reparations. The BIS was chartered the following year in Switzerland under an international convention. The new institution appealed to different constituencies with different interests. TheGermanswanted to increase their exports and link the size of their obligations to capacity to pay; the French sought to replace a debt of the German government to private investors with a debt owed directly to the French government and, ultimately, to thwart German industrial development; the British were keen to secure enough payments to settle their debt with the United States; and the United States aimed to separate reparations fromwar debts. But war reparations were only one part of the Bank for International Settlements mission; the other involved extending and deepening cooperation among central banks.
From the beginning, the BIS was a club of central bankers interested in preserving their independence from finance ministries and governments in general. Emblematic of the distinction between central bankers and governments was the decision of the U.S. government not to allow the Federal Reserve System to join the BIS because membership was believed to conflict with the official U.S. position on reparations. Over time, the distinction between central bankers and governments became less sharp, although it still exists; for example, the chair of the Basel Committee on Banking Supervisionmust be a central bank governor.
The launching of the new institution suffered from poor timing, with much of the industrialized world sliding into economicdepression.Germanwar reparations certainly did not help the international economy. In 1931, the Credit-Anstalt, a large bank based in Vienna, went bankrupt, sparking a banking crisis that spread to Germany, Britain, the United States, and most of the countries on the gold standard. The Bank for International Settlements acted as a crisismanager and lent to the central banks of Austria, Hungary, Germany, and Yugoslavia, but the treatment was too feeble for the disease. At the core of the problemwas an inability of policymakers to understand that feasible cooperation was inadequate to sustain the combination of a gold standard and high employment.The BIS remained a staunch supporter of the gold standard. This position, in addition to allegations that the institution had been too much under (Nazi) German influence before and during World War II, almost brought the Bank for International Settlements to extinction at the BrettonWoods conference in July 1944; it was saved by the Europeans.
The BIS after World War II
After World War II, the surviving BIS was out of step with the prevailing economic paradigm and policy prescriptions. The institution emphasized budget discipline, sound money, free trade, and international monetary cooperation, and had little sympathy for mechanical applications of the standard Keynesian model. Furthermore, central bankers, the Bank for International Settlements’s clientele, had lostmuch of their luster and prestige because of their support of the gold standard in the interwar period. Inevitably, power shifted to finance ministers, who made central banks subordinate to government. Yet, despite this decline in power and prestige, the BIS remained an important forum for central bankers and the international financial community to discuss and find agreement on critical issues of monetary policy and financial stability.
The terms of reference for cooperation have changed over time. In the interwar period, cooperation meant to sustain and ‘‘lubricate’’ the mechanisms of the gold standard. In the 1950s, the focus was on the mechanism of the European Payments Union, in which member countries offset debits and credits in inconvertible European currencies on the books of the Bank for International Settlements and settled balances in convertible currencies. In the 1960s, the BIS became a central point for the discussion of the tensions that were developing in the gold-dollar exchange standard.
Arrangements were made by central banks and among central banks, sometimes using the BIS as the organizer. Central bankers were searching for ways todefend themselves against speculative attacks. The defense arsenal included mutual guarantees all theway to the prohibition of converting funds placed by foreign speculators. Guarantees were implemented by means of swap agreements among central banks and the stipulation that a central bank would repay borrowed funds at the original exchange rate. The techniques evolved over the years. In the mid-1960s, the Bank for International Settlements began to provide regular reviews and analysis of the Eurodollar and Eurocurrencies markets, aswell asquarterly statistics onbank lending in the G10 group of countries (Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom, and the United States) and Switzerland to approximately 100 individual countries.
The demise of the Bretton Woods systemin 1973 did not spell the end of international financial crises and the role played by the BIS club.On the contrary, financial liberalization in many nations and the abolition of capital and exchange controls exposed the international financial community to more and bigger crises; large currency, debt, and banking crises occurred in Mexico in 1982 and 1994, Southeast Asia in 1997, Russia in 1998, Brazil in 1999, and Argentina in 2001.
The BIS after Bretton Woods
The end of Bretton Woods rejuvenated the BIS through a different agenda: European monetary integration and financial regulation. European monetary integration was the natural extension of the European Payments Union. As to financial regulation, the Bank for International Settlements became involved in it after the failure of a German bank, Bankhaus Herstatt, in 1974. Before this date the fixed exchange-rate regime was buttressed by exchange controls and domestic regulation that reduced the risk of financial crises.
Some central banks are also bank regulators and supervisors (e.g., the Bank of Italy); others share this responsibility with other financial regulatory agencies (e.g., the Federal Reserve System); others retain some responsibilities but the bulk of these lies with other government agencies (e.g., Deutsche Bundesbank); and some have no regulatory role aside from that pertaining to the payments system (e.g., Bank of Canada). In practice, however, it is difficult to separate ‘‘narrow’’ central banking from regulation. Even a ‘‘narrow’’ central bank needs credit information on financial participants to prevent losses to either itself or participants in the payments system. Thus it is not surprising that central bank governors considered financial regulation as part of their mandate (Fratianni and Pattison 2001, 205 6).
The BIS acts as a host and secretariat for various committees on financial regulation, of which the best known is the Basel Committee on Banking Supervision (BCBS), which promulgates international standards and ‘‘best practices.’’ The BCBS works with national banking regulators, among others, and also participates more broadly, where required, with securities regulators and insurance regulators. In 1988, a new regime, the Basel Capital Accord, or Basel I, went into effect: internationally active banks were subject to a somewhat common regime for minimumcapital requirements.Basel I linked banks’ capital requirements to their credit risk through mandated weights for different categories of bank credit. Basel I was ultimately adopted by more than 100 countries and was deemed a success, despite criticism of the crudeness and political bias of the mandated weights: for example, the preferential treatment given to government debtors and to industrial countries that were members of the Organization for Economic Cooperation and Development (OECD).
For several years now, the financial and prudential regulatory committees meeting in Basel have been working on Basel II, a new international agreement on bank capital measurement and minimum capital requirements (BCBS 2004).Themain innovation of Basel II is to assess credit risk as themarketswould, in contrast tomandated fixedweights.Market-sensitive credit risk assessment, however, requires expensive investments in sophisticated risk management systems and, in practice, can best be implemented by large and internationally active banks. These systems would pay off in terms of lower capital requirements. Smaller banks, instead, would rely on the cheaper and mechanistic formulas of Basel I. Basel II, which has yet to go into effect, got stuck because of U.S. opposition. Small U.S. banks perceive that large banks will gain a competitive advantage, through lower capital requirements, by the implementation of Basel II and have pushed for changes in it. The proposed changes, in turn, would make investment in sophisticated risk management systems cost ineffective and consequently would frustrate one of the main objectives of the new accord.
In sum, the BIS was created with two initial objectives: handlingGerman war reparations payments and promoting and extending central bank cooperation. The first objective is long gone; the second remains central to the current activities of the Bank for International Settlements. The effectiveness of this institution rests on the confidence and commitments that can be made by a relatively small number of players who meet frequently and in relative seclusion to ensure a high degree of confidentiality. The geographical expansion of the BIS inAsia and LatinAmerica, in the early part of the 21st century, suggests a strategy of enlarging the size of the club. See also Bretton Woods system; capital controls; convertibility; currency crisis; euro; EuropeanMonetaryUnion; Federal Reserve Board; financial crisis; gold standard, international; international liquidity; International Monetary Fund (IMF); speculation