Headquartered in Basel, Switzerland, the Bank for International Settlements (BIS) is a bank for central banks.(To learn more about central banks, see the article What Are Central Banks?) Founded in 1930, the Bank for International Settlements is the oldest global financial institution and operates under the auspices of international law. But from its inception to the present day, the role of the BIS has been ever-changing, as it adapts to the dynamic global financial community and its needs. Read on as we explain this bank and its role in global banking.

Financial Chameleon
The BIS was created out of the Hague Agreements of 1930 and took over the job of the Agent General for Repatriation in Berlin. When established, the BIS was responsible for the collection, administration and distribution of reparations from Germany - as agreed upon in the Treaty of Versailles - following World War I. The BIS was also the trustee for Dawes and Young Loans, which were internationally issued loans used to finance these repatriations.

After World War II, the BIS turned its focus to the defense and implementation of the World Bank's Bretton Woods System. 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.

The BIS has also emerged as an emergency "funder" to nations in trouble, coming to the aid of countries such as Mexico and Brazil during their debt crises in 1982 and 1998, respectively. In cases like these, where the International Monetary Fund is already in the country, emergency funding is provided through the IMF structured program.

The BIS has also functioned as trustee and agent. For example, from 1979 to 1994, the BIS was the agent for the European Monetary System, which is the administration that paved the way for a single European currency.

Notwithstanding all the roles mentioned above, the BIS has always been a promoter of central bank cooperation in an effort to ensure global monetary and financial stability.

Lean On Me
Given the continuously changing global economic structure, the BIS has had to adapt to many different financial challenges. However, by focusing on providing traditional banking services to member central banks, the BIS essentially gives the "lender of last resort" a shoulder to lean on. In its aim to support global financial and monetary stability, the BIS is an integral part of the international economy.

To promote such stability, the BIS offers a forum of cooperation among member central banks (including monetary agencies). It does so by offering support and banking services for central banks:

The BIS offers its support by:

  • Contributing to international cooperation - As a crucial resource for central banks and other financial institutions, the BIS produces research and statistics, and organizes seminars and workshops focused on international financial issues. For example, the Financial Stability Institute (FSI) organizes seminars and lectures on themes of global financial stability. The governors of member central banks meet at the BIS twice a month to share their experiences, and these meetings function as the core of central bank cooperation. Other regular meetings of central bank executives and specialists, as well as economists and supervisory specialists, contribute to the goal of international cooperation, while also ensuring that each central bank serves its country effectively. The ultimate goal of all these high-level meetings is global financial stability.
  • Offering services to committees established and working at the BIS - By offering its services to various secretariats of financial committees and organizations created under its patronage, the BIS also functions as an international "think tank" for financial issues. Committees such as the Markets Committee debate and improve upon fundamental issues regarding the workings and regulations of the international financial infrastructure.

As the bankers' bank, the BIS serves the financial needs of member central banks. It provides gold and foreign exchange transactions for them and holds central bank reserves. The BIS is also a banker and fund manager for other international financial institutions.

How the Bank Operates
The BIS does compete directly with other private financial institutions for global banking activities; however, it does not hold current accounts for individuals or governments. At one time, private shareholders as well as central banks held shares in the BIS. But in 2001 it was decided that the private shareholders should be compensated and that ownership of the BIS should be restricted to the central banks (or equivalent monetary authorities). There are currently 55 member central banks.

The BIS's unit of account is the IMF's special drawing rights, which are a basket of convertible currencies. The reserves that are held account for approximately 7% of the world's total currency.

Like any other bank, the BIS strives 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; many of these instruments have been specifically designed for the central bank's needs. In order to compete with private financial institutions, the BIS offers a top return on funds invested by central banks.

The statutes of the BIS are presided over by three bodies: the general meeting of member central banks, the board of directors and the management of the BIS. Decisions on the functions of the BIS are made at each level and are based on a weighted voting arrangement.

Conclusion
The BIS is a global center for financial and economic interests. As such, it has been a principal architect in the development of the global financial market. Given the dynamic nature of social, political and economic situations around the world, the BIS can be seen as a stabilizing force, encouraging financial stability and international prosperity in the face of global change.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Europe Financials

    Learn about the iShares MSCI Europe Financials fund, which invests in numerous European financial industries, such as banks, insurance and real estate.
  2. Markets

    Moral Hazard in the Chinese Market

    The Chinese government faces the issue of balancing its desire to maintain stable markets through manipulation with the danger of a looming bubble if stock prices run up too much.
  3. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares US Regional Banks

    Obtain information and analysis of the iShares US Regional Banks ETF for investors seeking particular exposure to regional bank stocks.
  5. Technical Indicators

    Key Financial Ratios to Analyze Retail Banks

    Learn about key financial metrics that investors use to evaluate retail banks, and how the industry is fundamentally different from most other industries.
  6. Economics

    Is the Yuan a Yawn or a Nightmare for Investors?

    China’s decision to change the method of setting its currency exchange rate caused global shock waves last week.
  7. Stock Analysis

    Benefits of Regional Bank ETFs over Commercial Banks

    The SPDR S&P Regional Banking ETF offers a stable local alternative to broad-based multinational commercial banking sector funds.
  8. Stock Analysis

    Morgan Stanley's Profitablity: Bank on It (MS)

    The economy offers few certainties, but Morgan Stanley's profitability might be one of them.
  9. Investing

    4 Things Millennials Can't Live Without

    Millennial investors are different from those in previous generations. Here are four Gen Y needs which are instrumental to understanding them.
  10. Investing

    Jamie Dimon Biography

    Jamie Dimon must be the most fearless man on Wall Street.
RELATED TERMS
  1. European Sovereign Debt Crisis

    A period of time in which several European countries faced the ...
  2. Caribbean Development Bank (CDB)

    The Caribbean Development Bank (CDB) is a multilateral financial ...
  3. Regional Asset Liquidation Agreement ...

    An agreement between an asset manager and the Federal Deposit ...
  4. Portfolio Sale

    The sale of a large group of related financial assets in a single ...
  5. D’Oench Duhme Doctrine

    A banking rule which states that a borrower or guarantor cannot ...
  6. Accelerated Resolution Program ...

    A program designed to reduce the time and cost of resolving failed ...
RELATED FAQS
  1. How are international investment banking practices regulated?

    The first step in creating international investment banking regulations occurred in 1930, when the Bank for International ... Read Full Answer >>
  2. How is the Federal Reserve audited?

    Contrary to conventional wisdom, the Federal Reserve is extensively audited. Politicians on the left and right of a populist ... Read Full Answer >>
  3. Who decides when to print money in the US?

    The U.S. Treasury decides to print money in the United States as it owns and operates printing presses. However, the Federal ... Read Full Answer >>
  4. How can the federal reserve increase aggregate demand?

    The Federal Reserve can increase aggregate demand in indirect ways by lowering interest rates. Aggregate demand is a measure ... Read Full Answer >>
  5. How does the stock market react to changes in the Federal Funds Rate?

    The stock market reacts to changes in the federal funds rate in various ways depending on where it is in the business cycle. ... Read Full Answer >>
  6. What is the difference between a Debit Order and a Standard Order in a bank reconciliation?

    While both debit orders and standard orders represent recurring transactions that must be considered in bank reconciliations, ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!