CASE STUDY

T.

I. EXECUTIVE SUMMARY OF THE CASE

The Bank for International Settlements (BIS) “fosters international monetary and financial cooperation
and functions as a bank for central banks” As an international organization, it is not liable to any national
government.

Through subcommittees, the secretariats it hosts, and an annual general meeting of all member banks,
the BIS carries out its duties. It also offers banking services, but only to international organizations and
central banks. Its headquarters are in Basel, Switzerland, and it also have a representative offices in
Hong Kong and Mexico City.

As an organization of central banks, the BIS aims to increase the predictability and transparency of
monetary policy among its 58 member central banks. Despite the fact that monetary policy is
established by each nation’s sovereign government, it is subject to central and private banking scrutiny
as well as the possibility of speculation that influences foreign currency rates and the fate of export
economies in particular. Historically, failures to keep monetary policy in line with reality and make
timely monetary reforms, preferably as a simultaneous policy among all 58 member banks and also
involving the International Monetary Fund, have resulted in billions of dollars in losses as banks attempt
to maintain a policy using open market methods that have proven to be based on unrealistic
assumptions.

Central banks do not unilaterally “set” interest rates; rather, they establish monetary objectives and
intervene using their vast financial resources and regulatory authority to attain those objectives. One
reason for thorough policy coordination is to ensure that this does not become too costly and that
opportunities for private arbitrage exploiting policy shifts or policy differences are Infrequent and rapidly
eliminated.

Due to the sensitivity of two facets of monetary policy, the BIS has two distinct objectives: to regulate
capital adequacy and to make reserve needs clear.

II. FINDINGS
In the immediate post WWII era, the BIS emerged as a major international institution in increasing the
efficiency of the international banking system. The BIS established itself as a world leader in ensuring the
stability of the global financial system. The BIS’ many financial-system endeavors over the next several
decades would further solidify its role in the global economy. “Fundamentally, the most important belief
of the BIS’ inner club is its conviction that when the bell tolls for any central bank, it tolls for them all”
(Wood, 2005). A prime example of how collaboration is key among central banks is the MEXICAN DEBT
CRISIS OF 1982. Mexico’s debt problem began to snowball after continually borrowing fed funds from
the interbank network in New York to cover its interest on $80 billion in loans. Mexico finally advised the
Federal Reserve that it could no longer cover the loan, and that default and the exhaustion of the
Mexico’s reserves were eminent.

Another problem in the case is the FAILURE OF HERSTATT BANK, which ultimately caused a chain of
defaults in the foreign exchange markets (Forex). The Herstatt Bank was a major German bank that went
bankrupt in 1974 because of mismanagement of its foreign exchange accounts and subsequent default.
German banking regulators forced it into liquidation.

III. ALTERNATIVE SOLUTIONS

As a result of the MEXICAN DEBT CRISIS of 1982, the BIS provided Mexico a bridge loan of $1.85 billion
to assist in getting Mexico out of the interbank market (RaboResearch, 2013). While public accounts of
the loan would show that the funds came directly from BIS, “almost all of the funds came from central
bank members, including the Fed, Bundesbank, Swiss National Bank, Bank of England, Bank of Italy, and
Bank of Japan. The BIS undertook NO RISK in this rescue operation but rather coordinated this assistance
among central banks” (Wood, 2005). This collaboration among central banks helped prevent a growing
crisis from spreading to other regions. The Mexican crisis is only one example how BIS has repeatedly
played a role as a crisis manager to help promote international financial stability.

In addition to promoting cooperation among central banks, the BIS has also made great efforts to
promote monetary and financial stability through various committees that develop and recommend
suggested procedures and regulations.While there is a long list of BIS committees, the three permanent
and more influential are the Basel Committee on Bank Supervision (BCBS), the Committee on Payment
and Settlement Systems, and the Committee on the Global Financial System. The oldest and most active
of the committees is the BCBS. Many observers believe that the BCBS “is the most likely of the existing
BIS bodies to metamorphose into a supreme international bank regulator” (Suter, 2004). However, it is
important to note that the BIS nor the BCBS possess any formal authority or legal force to implement
any of their suggestions, but in the real-world workings of international finance, it is usually in a bank’s
best interest to adopt or mimic the practices suggested by the BIS through the BCBS. The ADVANTAGE of
this event leads to the creation of BCBS which is to help preclude a repeat of this event somewhere else
in the world. In collaboration with the G10 countries, the

BCBS was charged with implementing a committee that was responsible for setting standards for bank
regulation and establishing a forum for the discussion of bank supervisory matters. The BCBS operates
under two principles; first, all international banking establishments are subject to regulation and second,
supervision of these institutions should be adequate to ensure compliance with those regulations.

IV: RECOMMENDATIONS
Among the alternative Solutions, the creation of BCBS ( Basel Committee on Bank Supervision )
specifically it’s function should be adopted in our country. Since BCBS was charged with implementing a
committee that was responsible for setting standards for bank regulation and establishing a forum for
the discussion of bank supervisory matters, it can preclude chain of defaults in foreign exchange market
(forex) that can lead to failure of a bank. Since our Central Bank, with it’s current problem with our
economy which is the inflation, it is important to ensure and preserve price stability. The BCBS has
produced TWOIMPORTANT DOCUMENTS AMD GUIDELINES FOR BANKING REGULATIONS; first the Basel
Concordat and second, the distinguished and highly regarded Basel Capital Accord. The Basel Concordat
is the “backbone of international bank regulation and sets out certain principles, which the Committee
believes should govern the supervision of banks’ foreign establishments by parent and host authorities”
(Lebor, 2013b). Similarly, The Basel Capital Accord was originally released in 1988, following the Mexico
financial crisis previously discussed. The purpose of the Basel Capital Accord is to bring about
international consensus on supervisory regulations addressing the capital adequacy of international
banks. The Basel Capital Accord has gone through several amendments and additions over the years
(BIS, 1999).

In 1995, the BCBS issued a document titled the “Core Principles of Effective Banking Supervision.” The
document defines twenty-five key areas of banking supervision and outlines the essential ingredients of
a regulatory banking structure that are intended to stimulate confidence in the international banking
market. According to the BCBS, they “intended the Core Principles to be applied in all countries…and is
the most important global standard for prudential regulation and supervision” (BIS, 1997). The
committeees and the documents the BIS create have been instrumental in the sustaining a collaborative
central bank network and in ensuring a stable international banking system.

V. IMPLEMENTATION

BIS plays a very important role in today’s world. Operations are the most obscure aspect of monetary
policy. A lot of academic and public attention is always focused on the discussion of policy goals and
strategic aspects. Questions such as “Should price stability be the only end goal?” or “Should a central
bank set a currency, exchange rate, or inflation target?” always steals thunder.

In contrast, issues related to the daily or monthly implementation of policies and corresponding
decisions about operational objectives, tactics, and specific tools are typically given less consideration.
While understandable to some extent, this relative neglect is disappointing for many reasons. First, it
creates a perception that operational procedures can be taken for granted. However, ensuring that
central banks have adequate control over financial conditions is not an easy task. Second, it fosters the
view that operating procedures are irrelevant. However, the strategic aspects of policy must be
supported by an appropriate framework for action. Moreover, policy implementation can have a
significant impact not only on asset price volatility, but also on the organization and functioning of
money and even capital markets. Third, there is the risk of potential misunderstandings among
segments of the academic community. A classic example is the popular view that the monetary base is a
key concept in setting interest rates. A reserve deposit for currency control is required or primarily used.
Marginal demand for reserves can be thought of as a function of the amount of deposits. Alternatively,
the central bank controls interest rates by automatically providing a fixed amount of money to meet the
generally polite demand for the monetary base and reserves. Finally, a proper understanding of
operational procedures reveals the ultimate forces that central banks exert on financial conditions, their
sources, their changing nature, and the extent of their impact as the profound changes taking place in
financial conditions. Can be

 Against this background, this volume revisits the question of operational procedures, a topic last
discussed at the 1985 Conference of Central Bank Economists. It provides an opportunity for central
bank officials to consider how operational procedures have evolved over the past decade, what
differences still exist, and what will shape future change. For academics, this contribution serves as a
guide for policymaking and provides pointers to deeper and more focused research in this area.