Bank for International Settlements and the Federal Reserve

October 1994

900

The Bank for International Settlements and the Federal Reserve

Charles J. Siegman, Senior Associate Director of the organization's name). However, its primary the Board's Division of International Finance, objectives, which have guided the Bank's activities prepared this article. since its inception and are reflected in its current role, were to promote cooperation among central On September 13, 1994, the Chairman of the Board banks and to provide additional facilities for inter- of Governors of the Federal Reserve System national financial operations. assumed the seat on the Board of Directors of the Over time, the BIS has evolved into a major Bank for International Settlements (BIS) desig- international institution, providing an important nated for the central bank of the United States. The forum for frequent consultation among central central bank of the United States has had the right bankers on a wide range of issues. In recent years to be represented on the BIS's Board of Directors the BIS has broadened its role by, for example, since the BIS was established more than sixty years mobilizing supplementary resources for the Inter- ago. For a variety of reasons, however, the Federal national Monetary Fund (IMF) and arranging Reserve had, until this year, never exercised its bridge financing for some heavily indebted middle- right. The Federal Reserve Board's decision to income developing countries and, more recently, assume representation on the BIS's Board was for some Eastern European countries.1 The BIS has made in recognition of the increasingly important also broadened its contacts with central banks out- role of the BIS as the principal forum for consulta- side Europe. tion, cooperation, and information exchange among Since the early 1960s, the BIS has hosted, nine central bankers and in anticipation of a broadening or ten times each year, meetings of central bank of that role. Federal Reserve membership on the governors of the Group of Ten (G-10) countries, BIS Board marks a new chapter in the relationship which provide a forum for ongoing discussion of of the Federal Reserve System with the BIS. issues of common interest.2 The BIS is also the site This article discusses the role of the BIS as an of periodic and ad hoc meetings of central bank international monetary institution, summarizes the officials in the subsidiary committees of the G-10 Federal Reserve's relationship with the BIS since central bank governors—the Basle Committee on that organization's founding, and provides back- Banking Supervision, the Committee on Payment ground information on the organizational structure and Settlement Systems (currently chaired by of the BIS and its financial operations. William J. McDonough, President of the Federal Reserve Bank of New York), the Euro-Currency Standing Committee, and the Gold and Foreign THE BIS'S ROLE AS AN INTERNATIONAL Exchange Committee. MONETARY INSTITUTION The Basle Committee on Banking Supervision developed the international agreement on mini- The Bank for International Settlements is an orga- mum capital standards for internationally active nization of central banks based in Basle, Switzer- land. It was established in 1930, and thus is the 1. The bridge financing consisted of short-term credits extended oldest functioning international financial organiza- until credits became available from the IMF, the International Bank tion. The BIS was formed for the practical purpose for Reconstruction and Development, and other sources. 2. The G-10 countries are Belgium, Canada, France, Germany, of coordinating Germany's World War I repara- Italy, Japan, the Netherlands, Sweden, Switzerland, the United tions payments (hence the term "settlements" in Kingdom, and the United States.

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901

banks and continues to be the forum for designing officials to draw on each other's experiences with a cooperative framework for supervision of interna- policy, operational, statistical, and technical issues. tional bank activities. Meetings of the Basle Com- The various meetings held under the auspices of mittee are also attended by bank supervisors from the BIS have become increasingly important to G-10 countries who represent institutions other central banks in carrying out their missions in an than the central banks. (Representing the United interdependent world. The information, under- States, for example, are officials from the Comp- standing, and analyses acquired at these meetings troller of the Currency and the Federal Deposit and through the statistical activities carried out Ml^pccr Corporation as well as the Federal under BIS auspices contribute to more effective Reserve.) and more efficient policies. The BIS has become The Committee on Payment and Settlement increasingly useful to central banks throughout the Systems has formulated principles and minimum world as a forum for collecting information, shar- standards for the operation and oversight of cross- ing insights, developing analyses, and cooperating border payment systems. Its ongoing efforts to find on a wide range of policy-related matters. ways to reduce risk in payment systems are funda- mental to international efforts to minimize the potential for systemic risk and to promote interna- THE FEDERAL RESERVE'S RELATIONSHIP tional financial stability. WITH THE BIS The numerous studies on a wide range of international financial, banking, and payment system The Federal Reserve over the years has played an issues prepared by the subsidiary committees of the active role in the meetings of the G-10 central bank G-10 central banks provide comprehensive infor- governors and of that group's subsidiary commit- mation for analyzing new developments and for tees and in the other specialized meetings of central addressing common financial, monetary, and super- bankers held at the BIS. Participation in the activi- visory issues facing central banks. For example, the ties held under the auspices of the BIS has helped Euro-Currency Standing Committee, which moni- the Federal Reserve in the implementation of U.S. tors and analyzes international financial markets in monetary policy and in carrying out its responsibil- the context of concerns about systemic risk, has ities for the supervision and stability of the U.S. initiated a coordinated reporting system for interna- banking and financial system in today's global tional banking data and has conducted a series of financial markets. studies of international interbank markets. Its most Although the Federal Reserve has been an active recent study of interbank relations, prepared by a and continuing participant in meetings on a wide working group chaired by a Federal Reserve staff range of central bank-related matters that are dis- member, is widely cited for having laid out for the cussed and analyzed under the auspices of the BIS, first time some of the major international impli- until this September its relationship with the BIS cations for central banks and market participants had been unique. The United States was the only of the increased use of derivative instruments, and country whose central bank had the continuous for having laid the foundation for subsequent dis- right, under the statutes of the BIS, to be repre- cussions and studies of derivatives at national and sented on the BIS's Board of Directors that had international levels. chosen not to do so. The BIS also organizes other specialized meet- The question of whether or not the Federal ings of central bankers, such as periodic meetings Reserve should join the BIS's Board of Directors of the Group of Computer Experts and the Group dates back to 1929, when the BIS was being of Experts on Monetary and Economic Data Bank formed. At that time, and in the 1930s, it was Questions, semiannual meetings of central bank concluded that because one of the principal func- economists and of coordinators of central bank tions of the BIS was to handle Germany's war technical assistance to Eastern Europe and the reparations, and because the United States was not former Soviet Union, and periodic meetings of a party to the reparations settlement with Germany, experts on monetary policy, money markets, and it was not appropriate for the Federal Reserve to legal matters. These meetings enable central bank join the BIS Board.

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902 Federal Reserve Bulletin • September 1994

The issue of Federal Reserve representation on gress on the matter. That report, submitted in 1984, the BIS's Board of Directors was left in abeyance concluded: during the World War II period. During the war there were moves, supported by the U.S govern- [We] see no urgent need to change the current relationship of the Federal Reserve with the BIS and the ment, to liquidate the BIS, particularly because assumption by the Federal Reserve of the seat on the the new Bretton Woods institutions (the IMF and Board of Directors of the BIS that is reserved for the the International Bank for Reconstruction and Governor of the central bank of the United States. In the Development) were viewed as the primary organi- absence of a strong case to change the current status of zations for dealing with postwar international mon- the United States relationship with the BIS, there are certain technical and policy reservations that militate etary affairs. After the war, the U.S. government against the Federal Reserve's becoming a member of the reconsidered its position with regard to the BIS, Board of Directors of the BIS. This matter obviously acknowledging that the BIS was able to perform deserves to be reviewed periodically in light of evolving some functions that would be beneficial for the developments in the international monetary and financial international monetary system that the new Bretton system. Woods institutions were not in a position to handle, for example, certain activities in connection with Previous technical and policy reservations about Marshall Plan aid to Western Europe. the Federal Reserve being represented on the BIS During the 1950s and 1960s, the Federal Reserve Board have substantially diminished in recent Board considered the question of Federal Reserve years. representation on the BIS Board on several occa- For a number of years the BIS has been working sions. Although it was becoming more favorably cooperatively with, rather than as a competitor of, inclined toward representation, it did not act, for the IMF. For example, it has mobilized supplemen- several reasons. First, the Federal Reserve Board tary resources for the IMF and is working closely had lingering concerns that joining the BIS might with the IMF in coordinating the technical assis- be construed as an expression of preference for the tance that is being provided by central banks to BIS over the IMF. Second, it had reservations Eastern European countries and to the countries of about the European character of the BIS. Third, the former Soviet Union. there were concerns about the Federal Reserve With regard to the BIS's European orientation, becoming involved in the BIS's operations, espe- in recent years the BIS has broadened its reach cially in the gold market, a market that had impor- beyond Europe and has included representatives of tant international economic policy implications at central banks from Latin America and East Asia in that time. The BIS's role in assisting South Africa some of its meetings. Also, to reflect its more in certain gold transactions was also a concern. global character, the BIS in July 1994 elected to its By the 1970s, the Federal Reserve Board had Board of Directors (effective September 13, 1994) reached an informal consensus that the BIS had the governors of the central banks of Canada and become a sufficiently important international mon- Japan; from 1945 until then, the Board had etary institution for the Federal Reserve to seek to included only representatives of Western European be a full participant in its deliberations, and that central banks. representation on the BIS Board of Directors would Ideological disagreements about the role of gold enable the Federal Reserve to contribute to the in the international monetary system have become evolution and policies of that organization. How- muted since the early 1970s. Similarly, political ever, in the end, the consensus was not acted concerns about South Africa's membership in the upon. BIS and the BIS's assistance to South Africa in The question of Federal Reserve representation certain gold transactions have waned as the situa- on the BIS Board was again considered in 1983-84 tion in that country has changed. when, because of the BIS's increased role in inter- The end of the Cold War removed another reser- national monetary affairs, the Congress requested vation that the Federal Reserve had once had about the Secretaries of State and the Treasury and the being represented on the BIS Board and becoming Chairman of the Board of Governors of the Federal involved in BIS's operations for central banks— Reserve System to prepare a report for the Con- namely, that the BIS was performing banking func-

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The Bank for International Settlements and the Federal Reserve 903

tions for some countries that at that time were part of the Eastern bloc. In the Cold War environment, Member Central Banks of the Bank the United States at times expressed disapproval for International Settlements of such financial relationships with these countries. With the end of the Cold War, this factor is no Country Central bank longer relevant in considering whether the Federal Reserve should exercise its right to be represented Australia Reserve Bank of Australia on the BIS Board. In fact, Federal Reserve repre- Austria Austrian National Bank sentation on the BIS Board is fully consistent Belgium National Bank of Belgium with the integration of Eastern European countries Bulgaria Bulgarian National Bank (and, over time, the countries of the former Soviet Canada Bank of Canada Union) into the global economy. For example, the BIS organizes semiannual meetings of coordinators Czech Republic Czech National Bank of central bank technical assistance to Eastern Denmark National Bank of Denmark Europe and the former Soviet Union and serves as Estonia Bank of Estonia a clearinghouse for information on technical assis- Finland Bank of Finland Bank of France tance related to central banking that is being pro- France vided to these countries. Germany German Bundesbank Given these developments, the Federal Reserve Greece Bank of Greece Board concluded that its previous reservations Hungary National Bank of Hungary about joining the BIS's Board of Directors were no Iceland Central Bank of Iceland longer as powerful, and that the positive benefits of Ireland Central Bank of Ireland being represented on the BIS Board in helping to achieve the Federal Reserve's objectives have been Italy Bank of Italy enhanced. The United States is an active member Japan Bank of Japan of other international and regional financial organi- Latvia Bank of Latvia zations, and its non-membership status on the BIS Lithuania Bank of Lithuania Board of Directors was becoming an increasingly Netherlands The Netherlands Bank questionable anomaly.3 By being represented on the BIS Board, the Federal Reserve will be able Norway Central Bank of Norway to play a more active role in shaping the future Poland National Bank of Poland of the BIS and to further international monetary Portugal Bank of Portugal cooperation. Romania National Bank of Romania Slovakia National Bank of Slovakia

ORGANIZATIONAL STRUCTURE OF THE BIS South Africa South African Reserve Bank Spain Bank of Spain Membership and Shares Sweden Bank of Sweden Switzerland Swiss National Bank The BIS currently has thirty-three central banks as Turkey Central Bank of the members (see box). The Reserve Bank of Aus- Republic of Turkey

United Kingdom Bank of England 3. The United States is a founding member of the International United States Federal Reserve System Monetary Fund (IMF), the International Bank for Reconstruction 1 and Development, the Organization for Economic Cooperation and Yugoslavia National Bank of Yugoslavia Development (OECD), the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, and the 1. The membership of the central bank of Yugoslavia European Bank for Reconstruction and Development. The Federal Reserve is a collaborating (associate) member of the Center for is currently suspended pending a final determination Latin American Studies (CEMLA), the Chairman of the Federal of the legal status of the Yugoslav issue of the BIS's Reserve Board is the Alternate Governor of the IMF, and Federal capital. Reserve officials participate actively in meetings of the OECD.

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904 Federal Reserve Bulletin • September 1994

tralia, the Bank of Canada, the Federal Reserve 1930. In practice, Citibank exercised these voting System, the Bank of Japan, and the South African rights by appointing the president or the general Reserve Bank are the only non-European central manager of the BIS to act as its proxy. banks that are members. The membership includes When the Federal Reserve assumed its ex officio most of the Eastern European countries (except seat on the BIS Board of Directors in September Albania and the countries that have emerged from 1994, it was not required to make a financial outlay the former Yugoslavia4). The three Baltic states by purchasing shares of the BIS. However, starting resumed their membership in June 1992. Russia with the annual general meeting in June 1995, the and the other former Soviet republics have never Federal Reserve will be entitled to vote the shares been members. issued as part of the U.S. issue. Some 84 percent of the 473,125 shares of the BIS currently outstanding are owned by central Board of Directors banks; the remainder are held by private shareholders, mainly in Europe. The shares owned by According to current BIS statutes, the governors of private shareholders consist of the shares originally the central banks of Belgium, France, Germany, issued as part of the U.S. issue in 1930 that were Italy, the United Kingdom, and the United States not subscribed by the U.S. central bank and a are ex officio members of the BIS Board of Direc- portion of the original issue for Belgium and tors. Ex officio directors serve as long as they France to which the National Bank of Belgium and remain governors of their central banks. Following the Bank of France did not subscribe. Because the the Federal Reserve Board's decision to be repre- central bank of the United States decided not to sented on the BIS's Board, Alan Greenspan, Chair- subscribe to its share of the original capital sub- man of the Board of Governors of the Federal scription of the BIS, a United States banking group Reserve System, assumed the ex officio seat for the (composed of J.R Morgan and Company, the First United States on September 13,1994. National Bank of New York, and the First National BIS statutes also empower each ex officio direc- Bank of Chicago) subscribed or arranged for the tor to appoint to the BIS Board of Directors another subscription of these shares. Since that time, these person of the same nationality, representing "American" shares have been sold to other parties, finance, industry, or commerce. Most of the current mostly European. appointed members of the BIS Board are former The BIS declares an annual dividend, and all officials of their respective country's central bank shares carry equal rights with regard to such divi- now serving as private citizens (four are former dends. However, the ownership of shares carries no heads of their central banks). Appointed directors right of voting or representation at annual general hold office for three years and are eligible for meetings and extraordinary general meetings of the reappointment. Federal Reserve Board Chairman BIS. The right of representation and voting, in Alan Greenspan named William J. McDonough, proportion to the number of shares subscribed in President of the Federal Reserve Bank of New each country, can be exercised only by the central York, as the appointed director for the United bank of that country or its nominee; if the central States. bank does not nominate an institution, the BIS may In addition to the six ex officio directors and the designate a financial institution not objected to by six directors appointed by the ex officio directors, the central bank of the country in question. Thus, in BIS statutes provide for the election, by a two- the past, whenever a general or extraordinary gen- thirds majority of the BIS Board members, of as eral meeting of the BIS was held, the BIS Board of many as nine directors from among the governors Directors appointed Citibank N.A. of New York to of the central banks of the countries that have exercise the right of voting all the "American" subscribed to shares of the BIS, excluding the shares resulting from the original U.S. issue in six central banks that are entitled to designate ex officio directors. Elected directors serve for three 4. The State Bank of Albania was a member for many years but years and are eligible for reelection. The current withdrew its membership in 1977. The membership of the central members of the BIS Board of Directors are listed in bank of Yugoslavia is currently suspended pending a final determination of the legal status of the Yugoslav issue of the BIS's capital. the box.

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The Bank for International Settlements and the Federal Reserve 905

Financial Operations Board of Directors of the Bank for International Settlements, As an international financial organization, the BIS September 1994 performs a variety of banking, trustee, and agent Basis of functions, mainly for central banks and interna- Member membership tional organizations. The BIS accepts deposits of currencies and gold, primarily from central banks; Willem F. Duisenberg Elected in June 1994, about one hundred central banks held President, The Netherlands Bank deposits at the BIS. In turn, the BIS places its Chairman, Board of Directors of the assets in the money markets and on occasion makes BIS, and President of the BIS loans to central banks. The BIS has performed the Carlo Azeglio Ciampi Appointed functions of trustee with regard to the outstanding Former governor, Bank of Italy indebtedness associated with the German post- Vice Chairman, Board of Directors of the BIS World War I reparations agreements. It has also served as the depository for the secured loans of Urban Backstrom Elected the European Coal and Steel Community and has Governor, Bank of Sweden exercised the functions of agent for the European Bernard Clappier Appointed Monetary Cooperation Fund. More recently, the Former governor, Bank of France BIS has become the agent for the collateral Antonio Fazio Ex officio arrangements in connection with the Brazilian Governor, Bank of Italy commercial bank debt restructuring and is acting Edward A. J. George Ex officio as a sub-agent for the Federal Reserve Bank of Governor, Bank of England New York in connection with the collateralized Alan Greenspan Ex officio Venezuelan Brady bonds. Chairman, Board of Governors of the Before any financial operation in a given market Federal Reserve System or given currency is carried out by or on behalf of Lord Kingsdown Appointed the BIS, the BIS Board must give the central bank [formerly Robin Leigh-Pemberton] or central banks directly concerned an opportunity Former governor, Bank of England to disapprove, in order to avoid disrupting national Markus Lusser Elected financial markets. If a central bank objects, the President, Swiss National Bank proposed operation does not take place. William J. McDonough Appointed Information about the banking functions per- President, Federal Reserve Bank of formed by the BIS is included in the BIS's annual New York report, in the chapter that reviews the operations of Yasushi Mieno Elected the BIS's Banking Department. The following data Governor, Bank of Japan provide some salient points concerning the finan- Helmut Schlesinger Appointed cial operations of the BIS: Former president, German Bundesbank Jean-Claude Trichet Ex officio • As of March 31, 1994, the BIS's balance-sheet Governor, Bank of France total stood at 65 billion gold francs, with the BIS's Hans Tietmeyer Ex officio own funds (capital and reserves) at 1.8 billion gold President, German Bundesbank francs.5 The equivalents in U.S. dollars, with gold Gordon Thiessen Elected at the then-current market price, were $134 billion Governor, Bank of Canada and $4.5 billion respectively. Alfons Verplaetse Ex officio Governor, National Bank of Belgium 5. The BIS uses the gold franc (equivalent to 0.29 gram of fine Philippe Wilmes Appointed gold) as a unit of account for balance-sheet purposes. Assets and liabilities in U.S. dollars are converted at $208 per ounce of fine Member of the board of regents, gold (equivalent to 1 gold franc = $1.94); all other items in National Bank of Belgium currencies are converted into gold francs on the basis of market rates against the U.S. dollar.

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906 Federal Reserve Bulletin • September 1994

• The preponderant share of deposits of currencies) has declined steadily over time and amounted cies placed at the disposal of the BIS is derived to nearly 7 percent at the end of March 1994, from deposits of central banks. The proportion of compared with 22 percent at the end of central bank deposits of currencies to total deposits March 1984. of currencies, always high, has increased over • For the financial year 1993-94, the BIS recent years and stood at 96 percent on March 31, reported a profit of $268 million equivalent; of that 1994. The other 4 percent were mainly currency amount, nearly $80 million equivalent was dis- deposits by international institutions, with a minus- tributed as dividends, and the remainder was placed cule amount from commercial banks. in various reserve funds. On March 31, 1994, total • The proportion of central bank deposits of reserves of the BIS amounted to $3.4 billion gold in relation to total deposits (gold and curren- equivalent. •

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