On May 17, the Bank for International Settlements (BIS) completed 90 years. In normal times, the BIS might have celebrated a louder birthday, but these are hard times. The only thing the BIS did was to release a podcast with historian Piet Clement. On June 30, it released its mandatory annual report documenting the 90 years of the institution. The BIS also announced that it would not pay any dividend— a first since 1950.
The BIS was established in 1930 in Basel (Switzerland) by central banks/banks of seven nationalities: Belgium, France, Germany, Italy, the United Kingdom, Japan and the United States. The objective was to ‘settle once and for all the question of reparation payments imposed on Germany (and to a lesser extent on other central European countries) by the Treaty of Versailles’.
Given BIS founders, it was also given the task of enabling central banks cooperation. In the above mentioned podcast, Clement notes how then Bank of England Governor Montagu Norman travelled for nearly a week for attending BIS meetings.
The Great Depression and German crisis of 1931 led to cancellation of the reparations. Thus, central bank cooperation became the major task of the BIS.
The World War II made cooperation all the more difficult as the member countries were at war with each other. However, it was decided to keep the BIS functioning as it would help in reconstruction after the war. During the war, the BIS played a crucial role in shipping European gold away from Nazis to safer haven of the US.
After WWII, the World Bank and the International Monetary Fund (IMF) were created for post-war reconstruction. There was discussions on liquidating the BIS but the European central bankers resisted the move. They shaped BIS as a forum for European monetary matters which then played an instrumental role in reforming European currencies as per Bretton Woods (BW) arrangement.
The BIS typically came into its own after the demise of the BW in 1971 which exposed countries to spate of crises such as oil shock, monetary instability and currency crises. All these crises in turn impacted financial and banking stability.
Being a forum for central banks, the BIS realised early the importance of focusing on financial stability. In the late 1980s, it prepared norms for banking system now famously called as Basel capital norms. The Basel norms specified that banks need to maintain a capital adequacy ratio (CAR) of at least eight percent.
In 2004, Basel-II norms divided the risks into three types: credit, market and operational. During the 2008 crisis, it was observed that banks found loopholes in the norms to show higher capital than was actually there in the books.This led to Basel-III, where banks are required to maintain countercyclical and liquidity buffers.
Right at its inception, BIS developed competency in economic research which continues till today. Before the 2008 crisis, the BIS economists led by William White had warned about financial bubble and advocated central bankers to ‘lean against the wind’ by tightening interest rates. Post-2008 crisis, the BIS research on digital finance, cryptocurrencies and climate change (terming it as green swan) has been really impressive.
As of today, the BIS capital is subscribed by 62 member countries. This suggests how BIS transformed from being a European institution to a global financial institution. The Reserve Bank of India (RBI) became a member of the BIS in 1996-97, when the BIS invited nine additional central banks to become its members including China, Brazil, Korea, etc.
One could make a case that the BIS is more decentralised compared to other institutions. In the podcast, Clement argues that the BIS makes regulations based on consensus and it does not have powers to enforce any rules.
However proof of pudding lies in its eating. BIS continues to be dominated by the developed world. In its 18-member board of directors, six central banks are ‘ex-officio, permanent members — England, France, Germany, Italy, Belgium and the US. The Chair of the board is usually appointed from either the six founder countries or other developed countries. Only exception was appointment of Guillermo Ortiz, Governor of Bank of Mexico as the Chair of the Board in 2009.
A rare chance of reform was seen in Nov-2015 when RBI Governor Raghuram Rajan was appointed as the vice-chair of the board. However, Rajan had to vacate the position as his tenure as RBI Governor finished in Sep-2016. The BIS could have appointed then next Governor Urjit Patel as the vice-chair but this was not to be.
The BIS in its latest annual report notes that the Board of Directors now include the central banks of major emerging market economies. While it is true that the central banks of India, China etc. are on the BIS board but not in leadership roles.
In 2019, the BIS got another opportunity when it decided to establish innovation hubs in different locations to foster research in financial technology. BIS could have chosen to establish these hubs in emerging/developing economies which would benefit maximum from these experiments. However, it chose to establish the hubs in developed country centres which already have resources: such as Hong Kong, Singapore, Switzerland, London etc.
To sum up, the BIS may have come a long way, but still has a longer way to go.
If the BIS manages to reform and democratise its governance, its 100th birthday will not just balance the highly-distorted power equations in world economy, but also act as a benchmark for other global institutions.
Amol Agrawal is faculty at Ahmedabad University. Views are personal.
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