THE BANK FOR INTERNATIONAL SETTLEMENTS (BIS) AND THE BASEL COMMITTEE ON BANKING SUPERVISION (BCBS)

The Bank for International Settlements (BIS), owned by its 60-member central banks, is an international financial institution meant to foster international monetary and financial cooperation and serve as a bank for central banks. Its headquarters are in Basel, Switzerland; it also has representative offices in Hong Kong SAR and in Mexico City. Currently, it has 35 member countries in Europe, 13 member countries in Asia, five members in South America, three in North America, two in Oceania, and two in Africa.

The bank is the first international financial institution and was set up in 1930 by an agreement between Germany, Belgium, France, the United Kingdom, Italy, Japan, the United States of America, and Switzerland. Operations started on 17 May 1930. It was initially set up as a clearinghouse for German war reparations imposed by the Treaty of Versailles but evolved into a forum for cooperation and a counterparty for transactions among central banks.

The bank works to promote international cooperation among monetary and financial authorities. It conducts economic research and analysis on policy issues to inform policymakers, academics, and the general public. It also provides banking services to the central bank community and other international organisations. The BIS carries out its work through meetings, programmes, and the Basel Process - hosting international groups pursuing global financial stability and facilitating their interaction.

A number of committees and associations are involved in financial stability and have their secretariats at the BIS. These include the Basel Committee of Banking Supervision, the Committee on Payments and Market Infrastructures, the Committee on the Global Financial System, the Markets Committee, the Central Bank Governance Group, and the Irving Fisher Committee on Central Bank Statistics. For these groups, being located in the same place facilitates communication and collaboration. Their location also makes it easy for interactions with policymakers, makes it easier to coordinate efforts, and prevent overlaps and gaps in various work programmes. Some associations also have their secretariats at the BIS but have their own separate legal identity and governance structure and report to their members. These are the Financial Stability Board, the International Association of Deposit Insurers, and the International Association of Insurance Supervisors.

The BIS contributes to the international financial architecture by promoting reserve transparency in central bank operations and regulating capital adequacy. The Basel Committee on Banking Supervision, which is hosted at the BIS, is in charge of setting capital adequacy requirements. Ensuring capital adequacy is critical for central banks since speculative lending on the basis of inadequate underlying capital and widely varying liability rules can cause economic crises; as Gresham's law states, 'bad money drives out good money'. In addition, the Basel Committee on Banking Supervision, which is hosted by the BIS, played an important role in creating the Basel Capital Accords, the Basel II framework, and the Basel III framework.

The Basel Committee on Banking Supervision (BCBS)

The Basel Committee on Banking Supervision (BCBS) is the primary global standard setter for the prudential regulation of banks and provides a forum for regular cooperation on banking supervisory matters. Its 45 members comprise central banks and bank supervisors from 28 jurisdictions.

The BCBS was set up by the central bank governors of the G10 countries in 1974. It provides a medium for regular cooperation on banking supervisory matters. Its objective is to improve the understanding of important supervisory issues and improve the quality of bank supervision all over the world.

The following are some of the frameworks that the committee has created:

• 1 International standards on capital adequacy.
• 2 Core principles for effective banking supervision.
• 3 Concordat on cross-border banking supervision.

The committee's secretariat is situated at the Bank for International Settlements in Basel, Switzerland. However, it has its own governance arrangements, reporting lines, and agenda overseen by the central bank governors of the G10 countries. The BCBS works primarily as an informal medium for developing policy solutions and standards. Along with the International Organisations of Securities Commissions and the International Association of Insurance Supervisors, they form the joint forum of international financial regulators. It also has subgroups that work on specific issues: the Standards Implementation Group (SIG), the Policy Development Group (PDG), the Accounting Task Force (ATF), and the Basel Consultative Group (BCG).

The committee agrees on nonbinding principles for bank capital, liquidity, and funding. Member countries are expected to create opportunities for implementation, such as by enacting relevant domestic regulation.

OTHER GLOBAL DEVELOPMENT FINANCE INSTITUTIONS

Other global development finance institutions are made up of multilateral development banks (MDBs), multilateral financial institutions (MFIs), and regional development banks.

Multilateral Development Banks (MDBs) and Multilateral Financial Institutions (MFIs)

MDBs are financial institutions that are established by various countries in order to support development activities through long-term loans and grants. They mostly provide lending at low or no interest and sometimes grants to finance projects in areas that promote development. In more specific terms, the financing provided by MDBs takes the following forms:

• 1 Long-term loans usually have up to 20 years' maturity, and their interest rates are based on market rates. MDBs typically acquire funds from the global capital markets and in turn on-lend them to developing countries' governments.
• 2 Very-long-term loans are also termed 'credits', and they usually have maturity between 30 and 40 years with interest rates pegged below market interest rates. Funding for such loans are from direct contributions made by the governments of donor countries.
• 3 Grant financing is typically for technical assistance, advisory services, and project preparation.

MDBs have huge memberships, which contain both developed countries (which serve as donors) and developing countries (which are the borrowers). They are global in their scope, and examples include European Bank for Reconstruction and Development (EBRD), European Investment Bank (EIB), Inter-American Bank Group (IDB, IADB), Development Bank of Latin America (CAF), Asian Development Bank (ADB), African Development Bank (AfDB), Islamic Development Bank (IsDB), Asian Infrastructure Investment Bank (AIIB), and International Fund for Agricultural Development (IFAD).

There are also subregional MDBs with membership comprising only borrowing countries. MDBs tend to raise finance from the global capital markets at lower costs and on-lend to their members. Examples include the Central American Bank for Economic Integration (CABEI), Caribbean Development Bank (CDB), Black Sea Trade and Development Bank (BSTDB), Development Bank of Southern Africa (DBSA), West African Development

Bank (BOAD), East African Development Bank (EADB), Eurasian Development Bank (EDB), Economic Cooperation Organisation Trade and Development Bank (ETDB), and New Development Bank (NDB) (formerly BRICS Development Bank).

MDBs are generally similar to MFIs except that MFIs have more- limited memberships and mostly concentrate on financing specific activities. Some examples are the International Fund for Agricultural Development (IFAD), International Investment Bank (IIB), International Finance Facility for Immunisation (IFFI), European Commission (EC), OPEC Fund for International Development (OFID), Nordic Investment Bank (NIB), and Arab Bank for Bank for Economic Development in Africa (BADEA).

Regional development banks

Regional development banks (RDBs) are regional DFIs that focus on financing development activities in particular geographical areas. They are also regarded as part of MDBs and MFIs, but they operate in specific regions of the world. The shareholders of these institutions are mainly the regional countries and other major donor countries. RDBs are considered 'clones' of the World Bank in terms of their structure, functions, and operations, but they tend to have a specific focus. The main regional development banks are the Inter-American Development Bank (IDB), African Development Bank (AfDB), Asian Development Bank (ADB), Central American Bank for Economic Integration, and the European Bank for Reconstruction and Development (EBRD). Other regional development banks include the Central American Bank for Economic Integration, Islamic Development Bank (CABEI), Islamic Development Bank (IsDB), Development Bank for Latin America (CAF), Council of Europe Development Bank (CEB), West African Development Bank (BOAD), East African Development Bank (EADB), and Development Bank of Central African States.

Among the five main RDBs, the IDB for Latin America was the first to be established in 1959. This was followed by the setting up of the Central American Bank for Economic Integration in 1960, the African Development Bank in 1964, the Asian Development Bank in 1966, and then the European Bank for Reconstruction and Development in 1991.

As mentioned earlier, the RDBs have similar structures and functions to those of the World Bank, though they are different in some other respects. For instance, both the RDBs and the World Bank have 'hard' and 'soft' lending facilities, where the terms under the hard lending facility are similar in all the institutions and the soft lending is funded directly by donors. As mentioned earlier, the World Bank's soft lending is provided through the IDA. Soft lending programmes by IDB, AfDB, and ADB, for instance, are conducted through the Fund for Special Operation (FSO), African Development Fund (ADF), and Asian Development Fund (AsDF) respectively. Hard lending takes the form of loans on market-based terms, while soft lending takes the form of grants and concessional loans, which are associated with longer repayment periods and lower interest rates. Most loans typically have a maturity of between 25 and 40 years. In terms of their governance structure, both the World Bank and the RDBs are governed by boards of governors, of which every member country is supposed to have a representation of one governor and one alternate governor. The boards of governors, which are the highest authority of the institutions, in turn appoint and delegate the exercise of most of their powers to the boards of directors, which provide general direction to the entities.

One major challenge faced by regional development banks is that donor governments prefer to channel resources through the World Bank rather than through the regional development banks. This also means that borrowing countries tend to place more importance on their relationship with the World Bank than with their specific RDBs.

We next provide an overview of the main RDBs in Table 7.1.

TABLE 7.1 Overview of RDBs