The Bank for International Settlements and the Federal Reserve

Federal Reserve Bulletin, Oct, 1994 by Charles J. Siegman

On September 13, 1994, the Chairman of the Board of Governors of the Federal Reserve System assumed the seat on the Board of Directors of the Bank for International Settlements (BIS) designated for the central bank of the United States. The central bank of the United States has had the right to be represented on the BIS's Board of Directors since the BIS was established more than sixty years ago. For a variety of reasons, however, the Federal Reserve had, until this year, never exercised its right. The Federal Reserve Board's decision to assume representation on the BIS's Board was made in recognition of the increasingly important role of the BIS as the principal forum for consultation, cooperation, and information exchange among central bankers and in anticipation of a broadening of that role. Federal Reserve membership on the BIS Board marks a new chapter in the relationship of the Federal Reserve System with the BIS.

This article discusses the role of the BIS as an international monetary institution, summarizes the Federal Reserve's relationship with the BIS since that organization's founding, and provides background information on the organizational structure of the BIS and its financial operations.

THE BIS'S ROLE AS AN INTERNATIONAL MONETARY INSTITUTION

The Bank for International Settlements is an organization of central banks based in Basle, Switzerland. It was established in 1930, and thus is the oldest functioning international financial organization. The BIS was formed for the practical purpose of coordinating Germany's World War I reparations payments (hence the term "settlements" in the organization's name). However, its primary objectives, which have guided the Bank's activities since its inception and are reflected in its current role, were to promote cooperation among central banks and to provide additional facilities for international financial operations.

Over time, the BIS has evolved into a major international institution, providing an important forum for frequent consultation among central bankers on a wide range of issues. In recent years the BIS has broadened its role by, for example, mobilizing supplementary resources for the International Monetary Fund (IMF) and arranging bridge financing for some heavily indebted middle-income developing countries and, more recently, for some Eastern European countries.(1) The BIS has also broadened its contacts with central banks outside Europe.

Since the early 1960s, the BIS has hosted, nine or ten times each year, meetings of central bank governors of the Group of Ten (G-10) countries, which provide a forum for ongoing discussion of issues of common interest.(2) The BIS is also the site of periodic and ad hoc meetings of central bank officials in the subsidiary committees of the G-10 central bank governors--the Basle Committee on Banking Supervision, the Committee on Payment and Settlement Systems (currently chaired by William J. McDonough, President of the Federal Reserve Bank of New York), the Euro-Currency Standing Committee, and the Gold and Foreign Exchange Committee.

The Basle Committee on Banking Supervision developed the international agreement on minimum capital standards for internationally active banks and continues to be the forum for designing a cooperative framework for supervision of international bank activities. Meetings of the Basle Committee are also attended by bank supervisors from G-10 countries who represent institutions other than the central banks. (Representing the United States, for example, are officials from the Comptroller of the Currency and the Federal Deposit Insurance Corporation as well as the Federal Reserve.)

The Committee on Payment and Settlement Systems has formulated principles and minimum standards for the operation and oversight of cross-border payment systems. Its ongoing efforts to find ways to reduce risk in payment systems are fundamental to international efforts to minimize the potential for systemic risk and to promote international financial stability.

The numerous studies on a wide range of international financial, banking, and payment system issues prepared by the subsidiary committees of the G-10 central banks provide comprehensive information for analyzing new developments and for addressing common financial, monetary, and supervisory issues facing central banks. For example, the Euro-Currency Standing Committee, which monitors and analyzes international financial markets in the context of concerns about systemic risk, has initiated a coordinated reporting system for international banking data and has conducted a series of studies of international interbank markets. Its most recent study of interbank relations, prepared by a working group chaired by a Federal Reserve staff member, is widely cited for having laid out for the first time some of the major international implications for central banks and market participants of the increased use of derivative instruments, and for having laid the foundation for subsequent discussions and studies of derivatives at national and international levels.