Bank for International Settlements (BIS)

The Bank for International Settlements (BIS) is an international financial institution that serves as a central bank for central banks. Established to foster monetary and financial cooperation at the global level, the BIS plays a crucial role in shaping international banking standards, financial stability mechanisms, and policy coordination. Its relevance has grown significantly in the context of modern banking and finance, particularly for emerging economies such as India, which are increasingly integrated into the global financial system.

Background and Establishment

The BIS was established in 1930, making it the world’s oldest international financial organisation. It was initially created to facilitate reparations payments after the First World War, but its mandate soon evolved. Headquartered in Basel, Switzerland, the BIS operates as a forum where central banks and monetary authorities collaborate to promote global monetary and financial stability.
The BIS is owned by its member central banks, which currently number over 60, representing countries that account for the majority of global GDP. India, through the Reserve Bank of India (RBI), has been a member since 1930, underscoring the long-standing association between India’s monetary authority and the BIS.

Objectives and Functions of the BIS

The core objective of the BIS is to promote international monetary and financial stability. It does not deal directly with individuals or private entities; instead, it acts exclusively as a banker and advisor to central banks.
The principal functions of the BIS include:

• Acting as a forum for international cooperation among central banks.
• Serving as a bank for central banks, providing financial services such as reserve management.
• Acting as a centre for economic and monetary research.
• Functioning as an agent or trustee in international financial operations.

Through these functions, the BIS helps harmonise monetary policies and strengthen the global financial architecture.

Role in International Banking Regulation

One of the most significant contributions of the BIS to global banking is its role in developing international banking regulations. This is primarily carried out through the Basel Committee on Banking Supervision (BCBS), which operates under the aegis of the BIS.
The Basel Committee has introduced globally accepted frameworks known as:

• Basel I (1988): Focused on minimum capital requirements for banks.
• Basel II (2004): Introduced risk-sensitive capital adequacy norms and supervisory review.
• Basel III (2010 onwards): Strengthened bank capital, liquidity, and leverage standards in response to the global financial crisis.

These frameworks aim to ensure that banks maintain sufficient capital buffers, manage risks effectively, and enhance resilience against financial shocks.

BIS and Global Financial Stability

The BIS plays a vital role in identifying systemic risks and vulnerabilities in the global financial system. It regularly publishes reports such as the Annual Economic Report and Quarterly Review, which analyse global economic trends, capital flows, debt levels, and financial market developments.
By providing early warnings about financial imbalances, excessive credit growth, and asset price bubbles, the BIS assists central banks in taking preventive policy measures. This surveillance function became particularly important after the 2008 global financial crisis, when coordinated policy responses were required to stabilise financial markets.

Structure and Governance

The BIS is governed by:

• The Board of Directors, comprising governors of major central banks.
• The General Meeting of member central banks.
• Various committees, including the Basel Committee, Committee on Payments and Market Infrastructures (CPMI), and Financial Stability Institute (FSI).

Decisions are typically consensus-driven, reflecting the cooperative nature of the institution.

BIS and the Indian Banking System

India’s engagement with the BIS is primarily through the Reserve Bank of India. The RBI actively participates in BIS meetings, research initiatives, and regulatory discussions. This engagement has had a significant influence on the evolution of India’s banking and financial sector.
The adoption of Basel norms in India is a direct outcome of BIS-led regulatory coordination. Indian banks have implemented Basel III capital adequacy requirements, including:

• Minimum Capital to Risk-weighted Assets Ratio (CRAR).
• Capital conservation buffers.
• Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).

These measures have strengthened the resilience of Indian banks, improved risk management practices, and enhanced depositor confidence.

Impact on Banking Regulation in India

The BIS framework has shaped Indian banking regulation in several ways:

• Enhanced focus on capital adequacy and solvency.
• Improved supervisory mechanisms and disclosure standards.
• Strengthening of stress testing and risk-based supervision.

Although compliance with Basel norms has increased costs for banks, particularly public sector banks, it has contributed to long-term financial stability and alignment with global best practices.

BIS and Monetary Policy Coordination

While the BIS does not directly dictate monetary policy, it provides a platform for policy dialogue and coordination. For India, this is particularly important in managing challenges such as capital flow volatility, exchange rate pressures, and global interest rate cycles.
Through BIS forums, the RBI gains insights into international monetary trends, enabling better calibration of domestic policies. This is crucial for an open economy like India, which is sensitive to global financial developments.

BIS and Financial Inclusion and Innovation

In recent years, the BIS has expanded its focus to include financial innovation, digital currencies, and payment systems. The establishment of the BIS Innovation Hub reflects its commitment to understanding and shaping the future of finance.
For India, this aligns with initiatives such as:

• Digital payments infrastructure.
• Exploration of Central Bank Digital Currency (CBDC).
• Strengthening payment and settlement systems.

The RBI’s pilot projects on digital currency and real-time payment systems draw upon research and international experiences shared through the BIS.

Criticism and Limitations

Despite its importance, the BIS has faced criticism on several grounds:

• Perceived dominance of advanced economies in decision-making.
• Uniform global standards may not always suit the specific needs of developing economies.
• Implementation of Basel norms can constrain credit growth in emerging markets.