Bank for International Settlement (BIS) :
BIS offers a wide range of financial services specifically designed to assist the central banks and the other official monetary institutions in management of their foreign exchange reserves. It is headquartered at Basel and has 140 customers including various international financial institutions who currently make use of these services. It provides Asset Management services in sovereign securities or high grade assets. It also extends short term credits to central banks, usually on a collateralized basis. It does not provide services to private individuals or private entities/ corporate…
– Since 1930, the BIS have the legal form of a corporation. Its Board of Directors consists of 19 members out of which the Governors of central banks of Belgium, France, Germany, Italy, UK and US Fed chairman are the ex-officio members.
– The objective of BIS as per its Article : ‘The objects of the bank are to promote the cooperation of central banks and to provide additional facilities for international financial operations, and to act as trustee or an agent in regard to international financial settlements entrusted to it under agreements with the parties concerned’.
One of the important roles played by BIS was to create a Standing Committee of Bank Supervisors to address
various international issues including international payment problems which arose on account of Herstatt crisis.
Further, Banks across the globe have been advised by BIS to follow the systems and procedures in respect of
capital adequacy norms, loan loss provisioning etc:
Herstatt Crisis: In the early stages of the floating exchange rate regime, the risk of default by the counter party in a spot foreign exchange transaction was highlighted by the Herstatt crisis. In this case, Deutsche (German) marks, were sold to Herstatt on 24th June 1974, by a number of banks on spot basis, the settlement of dollars was due on 26th June1974. On the date of settlement the German marks were debited to the respective bank’s account and the funds were deposited in Landes-Central Bank the clearing house of Bundesbank, and in turn credited to Herstatt. Before the settlement in dollars was made to the respective counterparty banks, Bankhaus Herstatt was officially declared bankrupt around 4.00 pm on 26th June, 1974. This happened after the market closed in Germany but while foreign exchange was being traded in New York. By closing Herstatt before dollar settlements for the day, the Bundesbank exposed a risk (inter-bank credit risk) involved in spot foreign exchange transactions. This was one of the important cases in International Banking Scenario which highlighted the importance of the credit risk among banks.
Basel Concordat (1974) Highlighting the need for better supervision, guidelines were framed and approved by the Central Bank Governors of the Group of Ten in December 1975, and is called as “Basel Concordat”. This is considered as an important milestone of international banks’ supervisory cooperation’. The group of ten countries consist of Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom and the United States, Switzerland was also included as part of the group.
Basel Concordat (1974) – Important features
(a) The supervision of foreign banking establishments is the joint responsibility of parent and host authorities
(b) The supervision of liquidity is the primary responsibility of the host authorities
(c) The supervision of solvency is essentially a matter for the parent authority in the case of foreign branches and in case of foreign subsidiaries the responsibility rest with the host authority
Revised Basel Concordat (1983)
In 1983, a revised version of the Basel Concordat was introduced. Effective cooperation between host and parent authorities is a central precondition for the supervision of banks’ international operations. The supervision of banks’ foreign establishments is considered from three aspects viz: solvency, liquidity and foreign exchange operations and position.
Solvency: The allocation of responsibilities for the supervision of solvency of banks foreign establishment between host and parent authorities will depend upon the type of establishment. For branches, their solvency is indistinguishable from that of the parent bank. For subsidiaries, thesupervision of solvency is a joint responsibility of both host and parent authorities. For joint ventures, the supervision of solvency should normally for practical reasons, be primarily the responsibility of the authorities in the country of incorporation.
Liquidity: The host authority is responsible for monitoring the liquidity of the foreign banks
Establishment in its country; the parent authority has responsibility for monitoring the liquidity of the banking group as a whole. For subsidiaries, primary responsibility for supervising liquidity should rest with the host authority.
Foreign Exchange Operations and Position: There should be a joint responsibility of parent and host authorities. Host authorities should be able to monitor the foreign exchange exposure of foreign establishments in their territories. They also need to be informed of the status of supervision undertaken by the parent authorities on these establishments.
Basel Capital Accord (1988): A committee of central banks of G10 countries was formed to stabilize the international banking system and regulate them as well. This is called as Basel Committee on Banking Supervision (BCBS). The Basle committee published a set of minimal capital requirements for Banks and this is called as the 1988 Basel Accord, which was enforced by law in G10 nations in 1992.
The main objective of the Basel Accord was to reinforce the capital base of the world’s major banks, which were being eroded due to severe competition among the banks. This is also recognized as Basel I.
As per 1988 Accord, banks were advised to maintain capital equal to a minimum 8% of a basket of assets measured based on the basis of their risk. Banks were advised to maintain two tiers of capital viz., Tier I consisting of shareholders’ equity and retained earnings, and Tier II covering additional internal and external resources available to the bank (example – Undisclosed reserves; Asset revaluation reserves, General provisions/general loan loss reserves, Hybrid (debt/equity) capital instruments and Subordinated debt.
The twin objectives of Basel I were:
(a) to ensure an adequate level of capital in the international banking system and
(b) to create a more level playing field in the competitive environment.