Finance

What is BIS and what functions does it serve?

What is BIS?

Bank for International Settlements (BIS) is a bank for Central Banks. The mission of BIS, as the organization itself, defines it is to“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 organization was established in 1930 out of the Hague Agreement among Germany, Belgium, Italy, France, the United Kingdom, Japan, Switzerland, and the United States.

BIS is currently owned by 62 central Banks from countries all over the world with GDP aggregating to about 95% of the total world GDP. BIS maintains its head office in Basel, Switzerland, and has 2 representative offices (which are meant to serve as centers for BIS activities in their respective regions) in Hong Kong and Mexico City.

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History of and the need for BIS in Market:

As stated earlier, BIS established in 1930, but initially, its role was different from what it is now and has changed over the years. BIS was formed to serve as a collector, administrator and to distribute the reparations’ that were imposed on Germany after World War 1 through the Treaty of Versailles. It also acted as a trustee of the German Young Loan floated in 1930.

That role, however, went through a drastic transformation in about 1972 after the Lausanne Agreement (abolishing the reparation payments). BIS after that event was tasked mainly to serve to foster cooperation between its member central banks.

During World War 2, the bank was expected to maintain neutrality in terms of conducting business but was pointed at by UK and US that the bank seemed to be leaning towards the benefit of Germany and the discomfort lead to a rising notion for dissolution of the organization. Ultimately, the decision to liquidate the BIS was terminated but the role of BIS had changed once again.

BIS was selected as the agent for setting up the European Payments Union (EPU) in around 1950 the goal of which was to restore the free convertibility of European currencies in line with the Bretton Woods Agreements.

How BIS Operates and Improves Market Stability:

BIS is supposed to work and compete directly with the other private international institutions for global banking activities. It, however, does not hold current accounts for individuals or for governments. Pre 2001 change, private shareholders and central banks held shares in BIS. But post-2001, it was decided that private shareholders should be compensated and that ownership of the BIS should be restricted to the central banks and monetary authorities.

BIS Unit of account is IMF’s Special Drawing Rights. Like any other bank, BIS is committed to offering premium services to attract central banks as clients.

  • BIS serves as a Bank for Central Banks: It functions as a bank competes with other international financial organizations for banking activities. Its clientele comprises of central banks of its member countries. Offering premium services and high returns on invested funds as a way of attracting a central bank, it holds a large volume of equity investments and deposits that are allocated in various portfolios to maximize returns for entities. It also ensures the liquidity of members by buying back tradeable securities from the central bank.
  • A platform for Meetings: Regular meetings of governors and senior officials are held every 2 months and are important to discuss the global economy, financial markets, and other issues that are of interest to the central banks. Voting power is equal to the number of shares issued in the country of each member at the meetings. The annual general meeting is held in late June or early July and includes topics like distribution of profits and dividends, approval of annual financial reports, approval of allowances paid to board members, and selection of the BIS’s external auditors.
  • Decision Maker: Preceding 3 decision making bodies,
    • Board of Directors
    • General Meetings of central banks
    • Management of BIS

BIS maintains some influence over decisions that are administrative and financial in nature, relating to banking operations, allocation of budgetary resources, and internal policies

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Functions of BIS:

Main functions are:

  1. Lender of Last Resort: In 1982 and 1998, it has served the purposed of emergency ‘funder’ by coming to the aid of countries like Mexico and Brazil. When central banks want immediate liquidity, it offers credit services as well as buys back tradable financial instruments offered by these banks. It also acts as a trustee in connection with international financial operations, which helps promote global financial and monetary stability.
  2. Seminars and Workshops: Focused on working on international financial issues, BIS through Financial Stability Institute (FSI) popularizes the work by offering lectures, and practical training on Banking Supervision.
  3. Research and Statistics: BIS also provides information regarding global banking, foreign exchange, financial market securities, and derivatives market, which is shared across central banks for aiding them in their functions and decision making.

 

Author: Aman Aggarwal

About the Author: Aman is an Economics and Finance graduate with a budding interest in Strategic Management and Investment. An avid reader of all things Behavioral and Data Science –I strongly believe in solving problems with solutions backed up by quantitative rigor.

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