History of Bank for International Settlements Finance Essay

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Bank for International Settlements is an international organization which fosters international monetary and financial cooperation and serves as a bank for central banks. The BIS is headquartered in Basel, Switzerland and its representative offices are in Hong Kong Special Administrative Region of the People’s Republic of China and in Mexico City. The BIS’s capital is held by central banks only. 60 institutions currently have rights of voting and representation at General Meetings. They are the central banks or monetary authorities of Algeria, Argentina, Australia, Austria, Belgium, Bosnia and Herzegovina, Brazil, Bulgaria, Canada, Chile, China, Colombia, Croatia, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hong Kong SAR, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, the Republic of Macedonia, Malaysia, Mexico, the Netherlands, New Zealand, Norway, Peru, the Philippines, Poland, Portugal, Romania, Russia, Saudi Arabia, Serbia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sweden, Switzerland, Thailand, Turkey, the United Arab Emirates, the United Kingdom and the United States, plus the European Central Bank.

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The BIS was established on 17 May 1930 under the Young Plan, which was the plan for settling German reparation debts following World War I. It is the most ancient global financial institution. The role of BIS has been changing over time to time as it adjusts to the development global financial community and needs from its inception until nowadays.

According to the latest information, the BIS have hired 616 staff from 54 countries. All staff should require to behave in comply with general principles that lay down in the staff Code of Conduct. The rule of the staff Code of Conduct are a) maintain the highest standard of conduct both at and outside the Bank, b) prevent possible conflicts of interest with other activities, c) contribute their working activities to the service of the bank and, d) maintain the utmost discretion with regard to confidential information concerning the bank. The purpose of setting this Code is to specify in more detail the above-mentioned general principles and the way they are applied.

The BIS offers a wide range of financial services to serve central banks and other official monetary institutions in the management of their foreign reserves. BIS provides its support by contributing to international cooperation and offering services to committees established and working at the BIS. Furthermore, the bank also adjusts the product range in order to respond more efficiently to the improving needs of central banks. Central banks usually looked for security, liquidity and return as three basic features of their placement at the BIS. Thus, the BIS offer a competitive and attractive return on the fund deposited by central banks and international organizations. To ensure security of the bank, the bank built up a sizeable equity capital and ample reserves. The BIS pursues an investment strategy focused on combining diversification benefits with intensive credit and market risk analysis. Moreover, to provide liquidity, the BIS stand ready to repurchase its tradable instruments at little cost to its customers and thus respond quickly and flexibly to central banks’ needs.

As its main clients are central banks and international organizations, the BIS does not accept deposit form, or provide financial services to private corporate entities or individuals, nor is it permitted to make advances to governments or open current accounts in their name.

Why Bank for International Settlements is important for banking and finance students?

Today’s world of business is in an environment of borderless finance. The volume of international financial transactions has increased significantly during the past few decades. Therefore, as banking and finance students, we should know how the BIS work with IMF and World Bank, how important of the BIS to central banks and the pros and cons of the BIS.

There is an interoperation relationship between the BIS, IMF and World Bank. IMF and World Bank were formed with two aims: one, to help underdeveloped countries and two, to eradicate poverty from the world. They have been working closely together to achieve these aims since their inception. The BIS, however, help to facilitate the movement of money by issuing loans to central banks in countries where money of IMF and World Bank is pledged but has not yet been delivered.

As global economy has become more and more integrated and it has increasingly obvious that having different banking rules in every country is not so practical. Therefore, the BIS is now a place where the member countries can work together to coordinate the rules. If a lot of savers try to withdraw funds at the same time, it will increase the risk of the bank running out of cash if those banks are independent. Thus, the BIS is laid down agreement with the central banks that require member countries put a portion of money as monetary reserve. The BIS helps control and make sure that all central banks are follow the rules. In addition, banking and finance students can increase their financial knowledge after study the pros and cons of the BIS as well as the important of the BIS to central banks. It is the valuable knowledge for their future.

History of Bank for International Settlements

The Bank for International Settlement was established as an international financial institution, enjoying special immunities, pursuant to the Hague Agreements of 20th January 1930. The founder shareholding members were the central banks of Belgium, France, Germany, Italy, Japan, the United Kingdom, and the United States. The BIS was established in Basle, Switzerland on 17 May 1930. The BIS is the world’s oldest international financial institution. The BIS was established in the context of the Young Plan, which dealt with the issue of the reparation payments imposed on Germany by the Treaty of Versailles. Following Germany’s defeat in World War I, the Allies and the US said that Germany had to pay for the war under a system of ‘reparations’ [1] . The repayment system never functioned fully. In 1930, with attempt to get the reparations system working, the BIS was created to handle what were supposed to be flows of money from Germany into the Allies and the US. Its primary purpose at that time was to take over the functions previously performed by the Agent General for Reparation in Berlin which included the collection, administration and distribution of annuities payable as reparations. The Bank’s name is derived from this original role, hence the term "settlements" in the organization’s name. The BIS was also created to act as a trustee for the Dawes and Young Loans. Dawes and Young loans were the international loans issued to finance these reparations. Within the financial and economic crisis of the early 1930s, the reparations issue quickly faded.

After World War II, the BIS turned its focus to the defense and implementation of the World Bank’s Bretton Woods system [2] . Between the 1970s and 1980s, the BIS monitored cross-border capital flows in the wake of the oil and debt crises, which in turn led to the development of regulatory supervision of internationally active banks.

In general, the central bankers liked the BIS idea and want kept it going. The need for such an international central bank for all central banks had become clear a century ago, with the increased expansion of national economies and the important role of stable banking for those economies. Moreover, with the similar increase in international trading, there had to be a system for coordinating the role of banks across borders.

Undeniably, there had been the Wall Street Crash [3] in October 1929 and people were worried that the world was heading for a major financial crisis. In 1930, the Great Depression was one of the major economic events of the twentieth century. These events reinforced in the minds of the central bankers the need for an international central bank to stand behind the national central bankers.

Nowadays, the BIS hold at least 10% of monetary reserves for at least 80 of the world’s central banks, the IMF and other multilateral institutions. The BIS not only serves as financial agent or trustee for international agreement, but also collects information on the global economy and serves as lender of last resort to prevent global financial downfall.

Mission and Objectives of Bank for International Settlements

The mission of the BIS is to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks.

The BIS pursues its mission by:

Promoting discussion and facilitating collaboration among central banks.

Supporting dialogue with other authorities that are responsible for promoting financial stability.

Conducting research on policy issues confronting central banks and financial supervisory authorities.

Acting as a prime counterparty for central banks in their financial transactions.

Serving as an agent or trustee in connection with international financial operations.

Objective of Bank for International Settlements

The objectives of the BIS are:

To promote the cooperation of central banks.

To provide additional facilities for international financial cooperation.

To act as trustee in regard to international financial settlements entrusted to it under agreements with the parties concerned.

Functions of the Bank for International Settlements

BIS’s functions have greatly evolved since its early days of managing Germany’s reparation payments. Currently, the BIS has four main functions.

First, the BIS act as a forum for discussion and decision-making among central banks and within the international financial and supervisory community. The BIS holds regular meetings of the BIS Governors, central bank officials, and experts to discuss issues in monetary and financial stability. The monthly Group of Ten or G-10 [4] meetings are the elite seminars for central bankers. The governors of member central banks meet at the BIS every two months to share their experiences and these meetings facilitate discussions regarding the world economy and financial markets. The BIS also conduct meetings with experts in specific, often highly technical, cooperation and IT system for the international financial community. Besides that, the BIS enable central bankers to meet together out of the public eye to discuss matters of common concern. The 1988 Basle Accord on how banks are to maintain sufficient capital reserves developed out of these private discussions.

Second, it is also a central for economic and monetary research. The purpose of BIS research is mainly to assist with the Governors’ meetings and help BIS committees focus their work on the important issues affecting the international banking community. As a crucial resource for central banks and other financial institutions, the BIS produce research and statistics as well as organize seminars and workshops focused on international financial and monetary issues.

For example, the Financial Stability Institute (FSI) [5] has organizes seminars and lectures on themes of global financial stability. The research is not aimed to find particular investment to avoid or particular investment opportunities, but instead to find how best to maintain international financial stability in an era of great change. Some of the research papers are published on the BIS official website. The BIS has a broad research agenda, which is divided into the following six key areas:

Monetary and financial stability

Monetary policy and exchange rates

Financial institutions and infrastructure

Financial Markets

Central bank governance

Legal issues

Third, the BIS has also functioned as an agent or trustee in connection with international financial operations. For example, the BIS was the agent for the European Monetary System (EMS) [6] , which is the administration that paved the way for a single European currency from year 1979 to 1994. In additional, the BIS was accountabilities in rescheduling Brazilian external debt during the country’s financial crisis in year 1994. During the Brazilian financial crisis, the BIS served as collateral agent to hold and invest bonds in US dollars issued by Brazil under its rescheduling agreement.

Last but not least, the BIS also act as a prime counterparty for central banks in their financial transactions. The BIS allow central banks to exchange currency but it also holds deposits on behalf of its member countries and it will issue loans to central banks and other monetary authorities if necessary. As such, the BIS offer a wide range of financial services specially designed to assist central banks and other monetary authorities in the management of their foreign exchange reserves. As of 31 March 2012 some 140 such authorities, as well as a number of international institutions, made use of BIS financial services. Total currency deposits amounted to SDR [7] 196 billion, representing some 2.7% of world foreign exchange reserves. Moreover, the BIS also offers fixed-term deposits as well as other more complicated financial instrument, including money market instruments, tradable instruments, and foreign exchange and gold services. Besides that, the BIS also offers assets management services, such as fixed income portfolios invested in government bonds or high-grade credit securities to central banks. In addition, the BIS also offers short-term credits to central banks either secured with collateral or, in times of financial crises, secured by a group of supporting central banks. The BIS financial services are provided out of two linked trading: one at its Basel head office and one at its Representative Office for Asia and the Pacific in Hong Kong Special Administrative Region.

Organizational Structure of Bank for International Settlements

The BIS is an intergovernmental organization (IGO) whose membership consists of central banks and national monetary authorities. While initially set up by Belgium, France, Germany, Japan, Italy, the United Kingdom, and the United Stated to channel German war reparations to other European states, its membership and its mandate have since expanded substantially. Today, it not only fulfills a wide range of banking services for its member countries but also acts as a forum to promote discussion and policy analysis. Through a number of important committees that operate out of the BIS’s offices in Basel, Switzerland, the BIS plays a central role in setting new international standards and codes to promote superior global financial and monetary stability.

The BIS’s people and location

BIS is headquartered in Basel, Switzerland, and employs approximately 616 staff from 54 countries. The choice of Switzerland for the seat of the BIS was a compromise by those 7 countries that establishes the BIS. When agreement could not be reached on locating the BIS in London, Brussels or Amsterdam, the choice fell on Switzerland. The country of Switzerland was chosen because of its independent and neutrality location as well as it offered the BIS less exposure to excessive influence from any nations with significant economic power. The city of Basel was chosen because of its excellent railway connections in all directions, especially important at a time when most of the international travel was by train. The BIS has two regional offices in Hong Kong Special Administrative Region and Mexico City.

Governance structures

The BIS’s most important decision-making bodies are:

The General Meeting of member central banks

The Board of Directors

The General Manager, assisted by the Executive Committee

These three decision-making bodies are responsible to made decisions at each levels concern the running of the BIS. As such, they are mainly made decisions of an administrative and financial nature, related to its banking operations, the policies governing internal management of the BIS and the allocation of budgetary resources to the different business areas.

General Meeting

The governance structure of the BIS reflects that of a major corporation. The governing body is the General Meeting of the 60 member of central banks, all of which are entitled to be represented and vote in the General Meeting. Each member’s voting power is proportionate to the number of BIS shares issued in the country. The Governors hold General Meeting every two months and the General Meeting is responsible for decisions relating the distribution of dividend and profit, approval of the annual report and BIS’s accounts, adjustments in the allowances paid to Board members, and the selection of the BIS’s external auditors. The Annual General Meeting is held in late June or early July. To change the Statutes of the Bank, alter its equity capital or liquidate the Bank, an extraordinary General Meeting must be called.

Board of Directors

The BIS’s executive body is the Board of Directors and it has 19 members. The Board has six ex officio directors, comprising the Governors of the central banks of Belgium, France, Germany, Italy, the United Kingdom, and the Chairman of the Board of Governors of the U.S. Federal Reserve System. The ex officio members may appoint another member from the same country to the Board. The Board can also include up to nine additional members elected from the remaining member countries. The Governors of the central banks of Canada, China, Japan, Mexico, the Netherlands, Sweden, Switzerland and the President of the European Central Bank (ECB) are currently elected members of the board.

Meeting at least six times a year, the Board is responsible for setting the strategic direction and policies of the BIS, overseeing the BIS’s management as well as fulfilling the specific tasks given to it by the BIS’s Statutes. Currently, the Chairman of the Board of Directors is Christian Noyer from Paris and Vice-Chairman is Masaaki Shirakawa from Tokyo.

General Manager

The General Manager is Jaime Caruana. The Deputy General Manager is Hervé Hannoun. The General Manager is responsible to carry out the policies determined by the Board of Directors and oversees the BIS’s day-to-day activities.

How the BIS works with the IMF and the World Bank

There is an interoperation relationship between the three entities. The International Monetary Fund (IMF) and World Bank interact with governments whereas the BIS interact only with other central banks.

The IMF lends money to national governments, and often these countries are with balance of payments difficulties. The IMF’s objectives are to become an organization of 188 countries, working to foster global monetary cooperation, facilitate international trade, secure financial stability, promote high employment and reduce poverty. In funding itself, the IMF raises money by receiving quota [8] contributions from its 188 member countries.

The World Bank also lends money to the poor country and currently has 185 member countries. It provides technical and financial assistance to underdeveloped countries for development schemes. The main aim for World Bank is to eliminate poverty from the world. World Bank comprises only two institutions which are the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The IBRD focuses on middle income and credit-worthy poor countries, while the IDA focuses on the poorest countries. The World Bank borrows money by direct lending from banks or by floating bond issues and then loans this money through IBRD and IDA to troubled countries.

The BIS, as central bank to the other central banks, facilitates the movement of money. The BIS is well-known for issuing "bridge loans" to central banks in countries where IMF or World Bank money is promised but has not yet been delivered. These bridge loans are then repaid by the respective governments when they receive the funds that had been promised by the IMF or World Bank.

Development and Growth of Bank for International Settlements

In our interdependent and complex world there is, and will continue to be, a clear that we need for a structured and institutionalized central bank cooperation. Since year 1930, central banks cooperation at the BIS has taken place through the regular meetings in Basel, Switzerland with BIS Governors, central bank officials, and experts from central banks and other agencies. In support of this cooperation, the BIS has developed its own research in financial and monetary stability and makes an important contribution to the collection, accumulation and dissemination of economic and financial statistics.

In the monetary policy field, cooperation at the BIS after the Second World War and until the early 1970s focused on implementing and defending the Bretton Woods System. In the 1970s and 1980s, the focus was on managing cross-border capital flows following the oil crises and the international debt crisis. The 1970s crisis also brought the issue of regulatory supervision of internationally active banks to the front, resulting in the year 1988 Basel Capital Accord [9] and its "Basel II [10] " revision of 2001-2006. More recently, the issue of financial stability in the wake of economic integration and globalization, as highlighted by the 1997 Asian crisis, has received a lot of attention.

Besides from fostering monetary policy cooperation, the BIS has always performed "traditional" banking functions for its member countries and baking community. For example, the gold and foreign exchange transactions as well as trustee and agency functions. In the 1950s, the BIS became the agent of the European Payments Union (EUP), in which member countries offset debits and credits in inconvertible European currencies on the books of the BIS. At that time, the BIS is helping the European currencies restore convertibility after the Second World War. Likewise, the BIS has acted as the agent for various European exchange rate arrangements, including the European Monetary system (EMS) which preceded the move to a single currency.

Furthermore, the BIS has also provided or organized emergency financing to its member countries in order to support the international monetary system when needed. For example, the BIS organized support credits for both the Austrian and German central banks during the 1931 to 1933 financial crisis. Later, in the 1960s, the BIS arranged special support credits for the French Franc [11] (1968), and two so-called Sterling Group Arrangements (1966 and 1968) to support pound sterling. More recently, the BIS has provided emergency finance in the context of IMF-led stabilization programs [12] such as for Mexico in 1982 and Brazil in 1998.

The BIS continually adapts its product range to respond to the growing needs of central banks. Besides the standard services such as sight or notice accounts and fixed-term deposits, the BIS has developed a range of financial products which central banks can actively trade with the BIS to increase the return on their foreign assets. The bank also transacts foreign exchange and gold on behalf of its customers.

Besides that, the BIS also offer asset management services in sovereign securities or high-grade assets. These may be either a specific portfolio mandate negotiated between the BIS and the central bank or an open-end fund structure that is the BIS Investment Pool (BISIP). BIS Investment Pool allowing customers to invest in a common pool of assets. The two Asian Bond Funds which are ABF1 and ABF2 are administered by the BIS under the BISIP umbrella. ABF1 is managed by the BIS and ABF2 is managed by a group of external fund manager.

The BIS sometimes grants short-term credits to central banks, usually on a collateralized basis, and coordinates emergency short-term lending to countries in financial crisis. It also acts as a trustee for a number of international government loans and performs collateral agent functions.

Today, the BIS has developed a range of banking services specifically designed to assist central banks, monetary authorities and international financial institutions in the management of their foreign exchange and gold reserves. Like any other bank, the BIS strive to offer premium services in order to attract central banks as clients. In order to provide security, it maintains abundant equity capital and reserves that are diversely invested following risk analysis. The BIS ensures liquidity for central banks by offering to buy back tradable instruments from central banks and many of these instruments have been specially designed for the central bank’s needs. The service available for central banks and others international financial institutions are summarize as Table 1:

1) BIS Money Market Instrument

– Sight or notice accounts and fixed and floating-rate deposits in most convertible currencies

– Fixed-term deposits can also be denominated in and index-linked to a basket of currencies such as the SDR

– Standard and non-standard amounts and maturities

2) BIS Tradable Instruments

– Issued in major currencies

– Available in two forms: Fixed Rate Investments at the BIS (FIXBIS) for any maturities between 1 week and 1 year and Medium-Term Instruments (MTIs) for quarterly maturities from 1 year and up to 10 years

– MTIs available also with an embedded call feature (Callable MTIs)

3) Foreign Exchange and Gold Services

Services offered are:

– Spot deals, swaps, outright forwards, options, FX-linked deposits

– Foreign exchange overnight orders

– Safekeeping and settlements facilities available loco London, Berne or New York

– Purchases and sales of gold: spot, outright, swap or options

4) Asset Management Services

Fixed income portfolios are:

– Invested in government bonds or high-grade credit securities

– Structured as dedicated portfolio mandates or BIS Investment Pool (open-end funds)

– Offer as either single currency or multi-currency mandates in the major world reserve currencies

5) Other Services

– Short-term advances to central banks, usually on a collateralized basis

– Trustee for a number of international government loans

– Collateral agent functions

Table 1: The products and services offered by the Bank for International Settlement.

The Pros of Bank for International Settlements

The BIS plays an important role in maintaining global monetary and financial stability. The BIS has provided significant advantages to the banking sector since it was established in 1930s. There are some pros of the BIS. One of the pros of the BIS is it provides emergency financial assistance when needed. The BIS helps to stabilize the monetary and financial markets by provide emergency financial assistance to its member countries when those central banks are facing financial difficulties. In order to provide emergency financial assistance, the BIS is working very closely with the IMF. The main goal of IMF is to foster global monetary cooperation by offers short-term financial assistance to poor countries, making it an international lender of last resort. While the IMF oversees the monetary system of the world, the focus of the BIS is narrow, which is focusing on central banks’ routine operations. As such, for the IMF to succeed in helping a country out of a financial trouble, the BIS must be present to regulate the banking system and to coordinate funding from other member central banks. For example, during 1994 to 1995, the BIS worked closely with the Canada, United States and the IMF to accumulate an estimated $48.8 billion to help Mexico when its peso was depreciated. A $10 billion short-term financing included in the $48.8 billion was raised by the BIS to help Mexico overcome its short-term liquidity trouble. Moreover, with the support of few central banks, the BIS also funded one-half of a $12 billion swap financing, which was intended to help Mexico get through its August 1995 presidential election. Besides that, the BIS also provided similar financing assistance to Brazil during its crisis in 1998. The BIS was able to secure $14.5 billion in guaranteed loans from twenty countries with the help of IMF, to assist Brazil after the devaluation of its currency caused a financial crisis.

Besides that, another pro of the BIS is its supports standards and policies to strengthen the international financial architecture. In the era of changing economic condition, another way the BIS works to stabilize the monetary and financial markets is by supporting central banks and guiding agencies by suggesting measures and developing standards to strengthen the international financial architecture. Financial architecture can be explain as broadly to the framework that can help prevent crises and manage them better in the more integrated international financial environment. For example, the BIS support of the Basel Committee on Banking Supervision (BCBS) [13] was significant in the declaration of the Core Principles and legislating Basel I [14] and Basel II. The BIS contribution and supervision to the other committees discussed above are further examples of the BIS’s work to sustain international monetary and financial stability. Furthermore, the BIS also work together with other multilateral financial institutions in its efforts to strengthen the international baking community. Currently, the BIS is working closely with the IMF, the World Bank, and the central banks of each country to create international standards in several areas. The areas including as below:

Data dissemination

Fiscal, monetary and financial policy transparency

Banking regulation and supervision

Securities and insurance regulation

Accounting, auditing and bankruptcy

Corporate governance

For example, a Code of Good Practices on Transparency in Monetary and Financial Policies was created by the BIS and the IMF worked with central banks, financial agencies and other banks. Additional example of the BIS cooperation with other multilateral financial institutions is its work with the World Bank in formulating principles for international remittances [15] .Remittances have increased dramatically over the past decade. This rise in remittances generated a need for the development of principles to monitor recipient countries in order to improve the market for these transfers. Therefore, the BIS and World Bank published a report that analyzed remittances and set 45 general principles recipient countries must follow in January 2007. According to the report, the principles accept by the public policy concerns regarding remittances and endeavor to create a safe and efficient market for remittance transfers.

Moreover, the BIS is powerful in overcome any uncertainty about types of shocks that may trigger a banking and financial crisis and more important to catch up fast pace of financial innovation. The operations of BIS display flexibility in adjusting its strategy to changed circumstances. The long history of the BIS had clearly mentioned that it can adapt for the changed circumstances. The adaption has been made probable by a relatively flexible organization as well as by a small and similar member with long term relationship. For instance, the BIS was very fast to rise to the challenge of meeting regulatory deficiencies at the international level. In its effort to adapt the changes, it carried together the relevant regulatory organization and tried to achieve uniformity and competitive equity among various banking sectors. Even though the BIS has not been absolutely successful, but its complete success may be beyond anyone’s capabilities and competence. The BIS’s contribution on this process is in itself a remarkable achievement.

As we know, the BIS is an international organization that focus on specific goal which is to facilitate the assessments of regulatory capital adequacy. As banks were becoming progressively international in their daily operations, there was a need for a uniform rule to set minimum levels of capital that banks must hold across the developed countries. An international rule was considered necessary to guarantee that banks had adequate capital to ensure their reliability and thus safeguard the international financial system and their depositors. The Basel Committee on Banking Supervision (BCBS) has decided to introduce a new capital adequacy framework to replace the old 1988 Basel Accord. The new capital framework consists of three pillars which are minimum capital requirements, a supervisory review process, and effective use of market discipline. The first pillar concern with maintenance of regulatory capital calculated for three major components of risk that a bank usually faces which are credit risk, operation risk, and the market risk. The second pillar addresses the supervisory review of capital adequacy. This is to ensure that a bank’s capital position is constant with its overall risk profile and strategy. Last but not least, the third pillar highlighted the efficient use of market discipline encourages high disclosure requirements and enhances the role of market participants in encouraging banks to hold adequate capital. This new framework has advantage towards better management of risk, as well as justified difference among different types of credit on the basis of their value.

The Cons of Bank for International Settlements

Although the BIS is the oldest operating international financial institution and has been a valuable asset in creating and maintaining economic stability, the BIS is not without its cons. There are some of the significant cons of BIS. One of the cons of the BIS is its operations are not visible and confidential to public. Some of the commentators appeal BIS to increase the transparency in their operations. However, some confidentiality is needed when the BIS facilitates the transactions between central banks and other banking community. For example, if some of the certain transactions in gold or foreign exchange are open to public, it will bring severe impact towards the international financial market. But in general, there is a need for the BIS to increase its transparency in other banking and financial transactions around the world by applying its greater leadership role. Such transparency is necessary in order to reduce the unfairness occurs between consumers and investors when the appropriate information is not made public. The BIS will be in a good position to take the lead in this effort because of its relationships with other multilateral financial institutions and its wide connection with the member countries.

Since BIS is the central bank for all central banks and consists of 60 members countries, it may become an organization through which wealthy elite controls the world. Since control in the BIS is in the hands of a few powerful developed countries’ central banks, it may have the power to move billions of dollars too easily. For example, one of the complaints towards this situation is the way in which the BIS and IMF have replied to financial crises. Not only IMF been criticized but BIS also include. The powerful countries who helping in financial crises have too much input into the monetary policies enforced into country in crisis. There are some suggestions to ease up this problem such as the BIS should have formal representation from each developing country, which have experienced growing importance in the global economy.

Besides that, the BIS will be less attributable to the institution than to the International Financial Architecture (IFA) [16] architects. There are many international financial institutions make a competition in the same market. For example, International Monetary Fund (IMF), World Bank and BIS are the players in the IFA. These institutions are playing their roles in the financial market. Their roles in the financial markets are some of similar to causes the competition occurs. For further information, the roles of IMF are short and medium term lending, surveillance, monitoring standards of data and other standards such as fiscal transparency. World Bank is being in charge of development assistance and long term lending, private sector financing and technical assistance. Last but not least, the roles for the BIS are in charge of forum for cooperation and consultation in bank regulation, supervision and monetary policy, the capital adequacy requirements for banks and standard setting for financial institutions and central banks. Although the competition among administrators and institutions was been supported, but this competition among international financial institutions is not control by clear rules. In addition, these organizations also do not have a well thought out plan for the mandates. Frequently, they need to spend a lot of energy and resources to meet the common needs. This has been causes the cooperation to become imperfect and costly. Here is for an example. There is a calls for broad participation of international organizations, it including the BIS, IMF, World Bank and some others international organizations. But it was useless because they will be no clear judgment of who perform what task, although everyone has been assist. There is still no clear solution exists to solve this problem. So the better solution to solve this problem in the future is having more international institutions, which consists additional overlapping memberships and goals, and together with self-protective measures for each individual institutions.

Because of the lack of an explicit mandate, the BIS created its own after the failure of Bankhaus Herstatt [17] . The management has conducted their effort of its council towards particular issues. One of the issues will be the publicity of foreign exchange netting and derivatives activities rather than propose wider strategic regulatory questions. As a result, there was an under distribution to liquidity management and an excessive allocation of resources to bank capital management. The aim of 1988 Capital Accord was desired to form an impartial competition environment. But this competition environment is not the priority objective. Financial integration not bring the meaning of all assets must be the same. If this situation occurs, there is no value in diversification. A more operational definition of financial integration is that there are no impediments to portfolio diversification (von Furstenberg and Fratianni, 1995, pp, 72-76). The prices and assets will be incompletely substitutable since there are differences in credit risk. This should propose no important challenge to individuals and institutions who have mastered the principle of portfolio diversification.

Furthermore, financial standards are not independent products. The usefulness of financial standards are depends on the real value of the information provided by the banks. In the views shows that financial institutions and banks have existing informational advantages with respect to not only the public but also to the administrators, reliance in the numbers are very essential for the standard to succeed.

Due to the financial crisis on five years ago, international financial institutions have decreased the interest rates as low as possible trying to recover global economy entity. For example, the U.S. Federal Reserve has reduced the rates near to zero and created new money through buying financial assets. The European Central Bank also make the effort trying to recover the financial system by decrease interest rates to a record below 1.0% and made cheap loans. After five years at now, the BIS wants to raise the interest rates. By increase the interest rates, it will give the benefits for financial institutions and banks that act as creditors in bond market. Furthermore, increase in interest rates will also bring to high return and low inflation rate. As a result, higher interest rate can maintain the true value of bond payments. Of course the way that the BIS practice can give benefits to financial institutions and banks, but at the same time this will causes the higher unemployment rates, reduced economic output and real income. Although the world has escaped from the financial crisis five years ago, but the global economy is still unbalanced and seems to be more interacting that the weaknesses continue to amplify with each other, which is stated in 82nd annual report of the BIS. In year 2011, the BIS has been stated that the central banks should raise the interest rates as soon as possible to control the inflation rates. But now in year 2012, there is the situation that governments, banks and households are struggling with too much debt because of rising interest rate and this has causes the global economy going down. According to economic advisor and head of Monetary and Economic Department Stephen Cecchetti (Robert, 2012, p.11), "beyond a certain level, debt is bad for growth. For government debt, the number is about 85% of GDP. For corporate debt, the threshold is closer to 90%. And for household debt, we report a threshold of around 85%of GDP." Therefore, the BIS should think carefully whether to raise the interest rate and take appropriate actions when needed.


The BIS as an international financial institution is to fuel the expansion of global business and to ensure the liquidity and confidence in the economy markets. The BIS has well-known itself as efficient, trusted and independent financial institution since it established. The power will increase as the activities of bank continue to expand. This will increase the role in coordinating and setting standards for the activities of central banks. From the history and the development of the BIS, we can see through how the BIS growing, improving, and performing their missions that have been taken.

In the current operations, the BIS have focused on two main roles as to retain the global monetary and financial stability, and to cultivate international monetary and financial cooperation. As we have seen through the history and development of the BIS, we know that the BIS is very important to the banking community and functions of the BIS has been evolved to adapt its role to respond to the growing needs of central banks. Just for an example, during the financial crisis in year 1931 to 1933, we have overseen that how the BIS performed to solve the problems. In addition, since the BIS is the oldest international financial institution, of course the organizational structure will be very huge. As expanded the wide range of banking services throughout the world, the BIS also acts as a forum to uphold discussion and policy analysis. Nowadays, we need to appreciate the hard work of the BIS as a central bank for all the central banks and their efforts towards financial market.

There are some significant pros for the BIS. The more important pro of the BIS is act as a lender of last resort by provides emergency financial assistance to its member countries when those central banks are facing financial difficulties. From the action of BIS in helping its member countries, we know that cooperation is very important to stabilize the monetary and financial markets.

We know that the one of the role for banks and financial institutions is maintain the inflation rate. When the financial crisis occurs at five years ago, the BIS also include helping to recover the economy. At now the BIS will raise back the interest rate. It sure can help the financial markets be better since increase the interest rate will increase the return. But at the same time, the unemployment rate will increase because the global economy still unbalanced from financial crisis. It is better that the BIS increase the interest rate but not too much, this can bring benefits to financial markets and also can regulate the inflation.

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History Of Bank For International Settlements Finance Essay. (2017, Jun 26). Retrieved December 3, 2022 , from

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