The Bank for International Settlements (BIS) is an international financial institution which is owned by members' central banks. Its primary goal is to foster international monetary and financial cooperation while serving as a bank for central banks. With its establishment in 1930 it is the oldest international financial institution. Its initial purpose was to oversee the settlement of World War I war reparations.
The BIS carries out its work through its meetings, programmes and through the Basel Process, hosting international groups pursuing global financial stability and facilitating their interaction. It also provides banking services to central banks, monetary authorities and international organizations.
The BIS is based in Basel, Switzerland, with representative offices in Hong Kong and Mexico City.
History
Background
International monetary cooperation started to develop tentatively in the course of the 19th century. An early case was a £400,000 loan in gold coins, in 1825 and facilitated by the Rothschilds, from the Bank of France to the Bank of England, which was facing a bank run. The Bank of England again borrowed from its French counterpart (and from the Hamburger Bank) in 1836 and 1839, and lent to it in return in 1847.
In 1860–1861, because of the disruption from the incipient American Civil War, the Bank of France entered a series of swap agreements in specie with the Bank of England as well as the State Bank of the Russian Empire and De Nederlandsche Bank. That episode was recorded as the "war of the banks", ostensibly because of friction between the Bank of France and the Bank of England about the transaction.
A few years later, monetary cooperation took a novel form with a series of international monetary conferences devoted to better coordination of the coinage system, even though these initiatives, like the Latin Monetary Union started in 1865, did not extend to money other than coins, and therefore involved treasury and mint officials rather than bankers.
At the Brussels Conference in 1892, German academic Julius Wolff submitted a blueprint for an international currency that would be used for emergency lending to national central banks and would be issued by an institution based in a neutral country. In 1893, French economist Raphaël-Georges Lévy suggested the establishment of an international central bank in Bern.
In 1907, Italian statesman Luigi Luzzatti published an article in the Austrian Neue Freie Presse, referencing past examples of bilateral cooperation between central banks and emphasizing the need for more institutionalized cooperation at the international level.
The practice of formalized central bank cooperation made unprecedented advances among allies in the course of World War I. In 1916, the Bank of England and Bank of France made agreements on bilateral lending and established a direct telegraph line between their respective offices to facilitate communication. Similar formal agreements were made that year between those two banks and the Federal Reserve Bank of New York, and in 1917 the Bank of Italy opened an office in New York.
In the war's immediate aftermath, Dutch central banker Gerard Vissering advocated an international currency without reliance on a common gold pool. Similar ideas burgeoned at the Brussels Conference of 1920, the first major discussion of international financial challenges following the war, endorsed by luminaries such as Belgian prime minister Léon Delacroix and American banker Frank A. Vanderlip, who suggested reorganizing Europe's national central banks along similar lines to the U.S. Federal Reserve which he had helped establish in the previous decade. At the Genoa Conference of 1922, following advocacy by several experts that included Ralph Hawtrey, Robert Horne and John Maynard Keynes, a resolution was passed that recommended the creation of "an association or permanent understanding for cooperation amongst central banks, not necessarily limited to Europe, to coordinate credit policies, without detriment to the freedom of each individual central bank."
It was decided to create the BIS in the context of negotiations over World War I reparations which plagued international relations in Europe throughout the 1920s. Following the Treaty of Versailles, a Reparation Commission was set up in January 1920 to determine the amount of German reparations. Conferences at Spa in July 1920 and London in March 1921 were followed by the occupation of the Ruhr in January 1923, and eventually the Dawes Plan approved at another London conference in July–August 1924. The Dawes Plan allowed for a more constructive atmosphere, materialized in diplomacy by the Locarno Treaties in October 1925 and encouraging Montagu Norman, the influential governor of the Bank of England, to envisage the creation of what he described in September 1925 as "a private and eclectic Central Banks' 'Club', small at first, larger in the future." That vision was first materialized at a meeting in early July 1927 which brought together Montagu, his friend Benjamin Strong, head of the Federal Reserve Bank of New York, Reichsbank president Hjalmar Schacht, and Bank of France vice governor Charles Rist at a private home on Long Island (the Bank of Italy had hoped for an invitation but was not included). A second meeting was scheduled in Algeciras, but was not held because of the bad health of Strong, who eventually died in October 1928.
The Young Plan and the Hague Conference
A deadline for French repayment of its bilateral debt to the United States provided impetus for a new initiative, which took the form of a Committee of Experts appointed to work out a final settlement of the German reparations, known as the Young Committee for its chairman the American banker Owen D. Young. The committee first met at the Bank of France on , then in 28 successive sessions ending on at the Hotel George V. The seven participating countries were Belgium, France, Germany, Italy, Japan, the United Kingdom and the United States. The need for a jointly governed bank emerged in these discussions as a means to overcome information asymmetries and increase the likelihood that commitments would be effectively met, not least by helping the creditors to act collectively and facilitating the reinvestment of German payments into the German economy. The first draft concept for the new bank was presented by Belgian banker Émile Francqui on , and amended with suggestions from Bank of France governor Émile Moreau. It was envisaged as a private institution with shareholders from all participating countries (including Germany) that would settle reparation payments, issue bonds to be serviced by the reparation transfers, and (as advocated by Schacht) provide international long-term credit for countries in need, including Germany. In a memo to Young a few days later, Schacht first used the name "International Settlements Bank" while referring to the projected new institution. Young asked his American peers Warren Randolph Burgess, Shepard Morgan and Walter W. Stewart to sail promptly to Paris, and on they presented a compromise text that formed the basis for subsequent developments.
Under the Young Committee's consensus concept, made public on , the bank would serve a threefold purpose as a trustee, bank, and international organization of central bankers: receiving, managing, and distributing German reparation annuities as a trustee; facilitating German transfers by issuing counterpart bills, notes, and bonds; and serving national central banks by taking their deposits, granting them credit, and carrying out currency and gold transactions on their behalf. It would rely on nonpolitical staff located in a country not directly involved in the reparations disputes. Subsequent fine-tuning discussions revolved around the scope for the bank's lending to foster economic growth and trade, which would have given it a role similar to that of the later World Bank. Such a role was advocated by Schacht but opposed by France and by commercial bankers, on the grounds that it could be inflationary and create unfair competition to private-sector lenders. An overall agreement on the future bank, with draft statutes prepared by the Bank of England's Charles Stewart Addis, was achieved by the Young Committee on .
Political positions within the Herbert Hoover administration made it impossible for U.S. Federal Reserve System officials to be formally involved in the initiative, but the U.S. was still able to retain major influence in the proceedings because of a shared perception amongst negotiators that the project would fail without U.S. participation. Major figures of the U.S. financial world would participate in the joint bank, and act in close cooperation with the Federal Reserve Bank of New York. The leverage held by the U.S. allowed Young and J. P. Morgan Jr. to make sure that Americans would be in leadership position at the bank when it started operations, as indeed happened.
The BIS concept was agreed to in August 1929 at the first part of the Hague conference on reparations. The bank's Charter, Statutes, Trust Agreement, and Convention on its relations with the host country were subsequently drafted by a special Organisation Committee chaired by Jackson Reynolds, president of the First National Bank of New York, which met in the discreet location of Hôtel Stéphanie (part of which later became ) at Baden-Baden from 3 October to ; the intense work was marred by the death of Delacroix from a heart attack during the proceedings. Aside from Reynolds, American participants in Baden-Baden also included Melvin Alvah Traylor, president of the First National Bank of Chicago, Warren Randolph Burgess, Shepard Morgan, and (a legal expert with the Agent General for Reparation Payments), with J. P. Morgan Jr. monitoring the proceedings and advising from London.
As in the Paris discussions earlier in the year, the Baden-Baden committee had to reconcile the different visions for the future BIS, from purely a creation of central banks (as espoused by Italy's Alberto Beneduce and by Montagu Norman) to a supranational development bank with policy tasks such as developing world trade (as advocated by Schacht and UK Chancellor Philip Snowden). Other points of contention included the future institution's official language(s), for which the committee endorsed French, and location. For the latter, several delegates favored London, but that was vetoed by the French who proposed Brussels instead, which in turn was vetoed by the British; after Amsterdam failed to gain sufficient support, a consensus was eventually found on Basel, which combined neutral country status and good railway connections. The founding texts of the BIS were then approved at the second part of the Hague conference, on , with only minor changes from the Baden-Baden drafts such as the addition of English to French as official language. These texts included the constituent Charter and Statutes for the bank, and a Convention (intergovernmental agreement) between Germany, Belgium, France, the United Kingdom, Italy, Japan, the United States, and Switzerland, establishing the bank's special status on Swiss soil and committing Switzerland to grant the Charter and approve the Statutes.
Creation