BANK FOR INTERNATIONAL SETTLEMENTS

BIS, created in 1930, is an institution essentially owned and controlled by central banks. It provides them with a number of highly specialized services. One of its overriding functions is to promote financial stability through international cooperation on sound bank supervision practices, developing standards relating to risk management, gathering and disseminating data and policy analysis.

BIS functions as a forum for forging international monetary and financial cooperation. It also provides central banks with a broad range of financial services for managing their external reserves. It serves as an agent and trustee in the execution of international financial agreements. Finally, it is a centre for monetary and economic research, contributing to a better understanding of international banking, national monetary policies and financial market developments. Since 1994, the Bank's Board of Directors has been drawn from the 11 countries comprising the Group of Ten (G-10), with which BIS has a close association. In 1996 and 1997, nine additional central banks were admitted to membership, including, from the ESCAP region, China; Hong Kong, China; India; Republic of Korea; and Singapore. In 1999, Argentina, Chile, Malaysia and Thailand also became shareholders.

The international stature of BIS was enhanced in the wake of the Asian crisis, which highlighted the strong interrelationship between finance and the real economy. In both the resolution of the crisis and the discussions on the design of a new financial architecture, BIS provided important inputs, including taking a lead in policy analysis and the construction of standards for fostering financial stability.

The process: modalities to promote financial stability

BIS makes an important contribution to international financial stability by ensuring that policy makers, at least central bankers and other regulators, know each other well and have open lines of communication. In addition, the international community (particularly the central banks of the G-10 countries) has found it appropriate to provide bridging loans through BIS to countries in financial difficulties which are awaiting the receipt of funds from IMF, the World Bank or other sources. However, its main contribution to fostering international monetary and financial cooperation towards financial stability involves undertaking analyses for and organizing regular meetings of senior central bank and other officials on key issues of financial policy. These meetings, which are organized under the aegis of one of the committees outlined below, fall into four categories:

1. Regular consultations among central bank governors and senior officials on conjunctural and monetary issues and on matters affecting financial stability
2. Meetings of standing committees that formulate standards or recommend best practices to promote financial stability
3. Meetings involving broader sets of national authorities and international institutions
4. Meetings centred on technical areas of central bank activities.

To the extent that these activities contribute to exchanges of information and analysis, they should be considered as focused mechanisms for crisis prevention.

In the first category, the central bank governors of the G-10 countries meet regularly to discuss topical issues as well as receive various reports from the Standing Committees. A second set of larger meetings, held on the same day as the G-10 meetings, involves the governors of all BIS shareholding central banks and covers monetary and financial policy issues such as central banks' involvement in the surveillance and supervision of financial institutions; the role of rating agencies in the operation of financial markets; and the design and operation of financial safety nets; the containment of risks posed to the global economy by the Asian crises; as well as the implications of the introduction of the euro. In a third forum, involving central bank governors of the principal industrial and emerging market economies, some of the more important issues discussed have been current account and exchange rate adjustment in the wake of the Asian financial crises; the pace of bank restructuring in emerging markets; and the challenges posed by asset price inflation surrounded by deflationary pressures in goods markets.

BIS provides the secretariat for a number of standing committees¹² working to promote financial stability. The specific modalities pursued at BIS are three-pronged, corresponding to the three pillars of the financial system: financial institutions, financial markets and payment and settlement systems. There is a separate BIS committee dealing with each: the Basle Committee on Banking Supervision (institutions); the Committee on the Global Financial System (formerly the Euro-currency Standing Committee) (market) and the Committee on Payment and Settlement Systems (infrastructure). In general, the meetings are geared towards policy analysis and capacity-building exercises. Included among the tasks of these committees are the design and dissemination of various standards and codes of best practices, of which the Basle Core Principles for Effective Banking Supervision constitute a landmark. BIS also collects and monitors financial data and participated actively in establishing the Joint BIS-IMF-OECD-World Bank Statistics on External Debt. The following is a more detailed description of the functions of the three main committees.

Basle Committee on Banking Supervision. This Committee provides a forum for discussion on the handling of specific supervisory problems. It coordinates the sharing of supervisory responsibilities among national authorities with respect to banks' foreign establishments, with the aim of ensuring effective supervision of banks' activities worldwide. The Committee also seeks to enhance standards on supervision, especially with regard to solvency, so as to help strengthen the soundness and stability of international banking.

Committee on the Global Financial System. Formerly the Euro-currency Standing Committee, this Committee deals with a series of market-related issues, 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. Now with a revised mandate, it focuses on the systematic short-term monitoring of global financial system conditions, longer-term analysis of the functioning of financial markets, and the articulation of policy recommendations for the improvement of market functioning and promotion of stability.

Committee on Payment and Settlement Systems. This Committee is concerned with the promotion of robust payment and settlement systems, so as to strengthen financial market infrastructures and reduce systemic risk. Particularly, it is concerned with the reduction of foreign exchange settlement risk, the promotion of greater transparency in securities settlement arrangements, and an improved understanding of the retail payments industry.

In addition to the above activities, BIS engages in a number of ongoing collaborative activities with other financial institutions in helping to redesign the financial architecture. For instance, three working groups composed of members of the Group of 22,¹³ set up and backstopped by BIS and IMF, have tackled and made recommendations concerning transparency and accountability, strengthening financial systems and managing international financial crises.

Leverage of the Basle process

BIS does not normally use its own financial resources to promote or finance particular courses of action by its members, unlike other international financial institutions such as IMF, the World Bank and the regional development banks. Rather it organizes and facilitates meetings, and produces research.¹⁴ It also supports the setting of standards, codes of best practices and bench-marks, with the expectation that individual authorities from different countries will adopt these. The value added provided by BIS thus lies in the enhanced capacity and understanding of the national representatives who attend its meetings or read its papers.¹⁵

International cooperation at BIS rests on the principle of national (state) control; BIS only suggests and advocates policy changes or practices, and does not impose conditionalities. Members of the various committees that meet at BIS negotiate positions among themselves in order to find an agreement that is acceptable across countries as well as to public and private sector agents, and which can be approved by ministers and governors and eventually implemented through national legislation or regulation. While the members of the committees that meet at BIS are mostly from the G-10 countries, agreements reached are often also accepted by non-G-10 members as effective global standards. In addition, private rating agencies, IMF and the World Bank play supporting roles in communicating what are deemed to be best practices to the non-G-10 countries. Thus, the general Basle process adheres to the modality that decision-making is left in the hands of nation States, while international organizations are tasked with information dissemination.

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Footnotes:

¹² These committees are usually set up by the G-10 central banks and national regulatory authorities, if independent of the central bank. BIS provides them with a secretariat and its offices serve as the location of the meetings of the committees. The secretariat of IAIS is also located at BIS and cooperates closely with the BIS secretariat in supporting the Basle committees.

¹³ Finance ministers and central bank governors from 22 countries with systemically important financial markets, established at the APEC meeting in November 1977 to move forward the reform of the international financial architecture. See IMF, "A Brief Guide to Committees and Groups", available at <http://www.imf.org/external/np/exr/facts/groups.htm> (31 January 2000).

¹⁴ White, "Promoting international financial stability: ..."

¹⁵ This is why countries such as Thailand have decided to buy shares in BIS and so be in a position to participate in the ongoing discussions (Bangkok Post, 12 November 1999).