Function & History

BIS stands for the “Bank for International Settlements” and is located in Basel. It was founded in 1930 during the aftermath of world war one. Its task was to regulate the reparation payments from Germany. This initial task of collection administration and distribution of money gave the bank its name. Besides this task the bank stimulated the development of and cooperation between central banks.

As the role of payments administrator diminished the role of coordinator grew. The BIS developed into a bank dedicated to cooperation between banks, in order to assure financial and monetary stability. The BIS accomplished this by organising meetings between representatives of central banks and regular banks. Furthermore economic research was done.

After world war two the BIS activities shifted to the main monetary events in the decade. Between 1940 en 1970 the activities mainly involved the Bretton Woods system. This was followed by the oil crisis and the debt crisis in the seventies and eighties. The debt crisis led to the desire for international banking supervision and standards. The BIS coordinated these efforts which in turn led to the first Basel Capital Accord in 1988.

The purpose of this accord was to ensure that financial institutions had enough equity to remain stable during a crisis. This would ensure that the banking system would retain its stability and therefore its credibility.

After the implementation of the first Basel Capital Accord it became apparent that the system was fairly coarse. It does not differentiate well between risks. Banks with riskier portfolios did not necessarily have to retain more equity and vice versa. Therefore discussions were started to improve the current Basel Capital Accord. This new accord is called “International Convergence of Capital Measurement and Capital Standards; A Revised Framework”, affectionately known as BIS2.

More information is available at the BIS site.

Author: Muller, J.J.