Activities of the Bank: the year in review
Speech by Andrew Crockett, General Manager of the BIS, on the occasion of the Bank's Annual General Meeting in Basel on 8 July 2002
As many of you know, the Bank is a complex institution, involved not only in the intermediation of central bank reserves, but also acting as an umbrella organisation for central banks and other financial authorities with a stake in the promotion of financial and monetary stability. Against this backdrop, the Bank's activities over the past financial year were again marked by their diversity. Before reviewing these many activities, I would like to take this opportunity to thank the staff of the BIS, who through commitment, flexibility and dedication to high-quality work have enabled the Bank to accomplish the important mission with which you have entrusted us. In particular, I should mention here those staff members who work in business areas which are not seen by our customers and therefore do not enjoy immediate recognition, but who contribute greatly to the success of our institution.
In my remarks today I will try to cover the Bank's activities under three distinct headings: those involving banking operations; those related to the provision of analytical support to the central bank community; and those in support of a number of committees and groupings hosted by the Bank.
As an intermediator of central bank funds, the guiding principles of the Bank in serving its customers have always been liquidity, security, confidentiality and return. To achieve these goals, the Bank has applied a strategy of offering to central bank customers liquid instruments that provide a yield pickup over qualitatively comparable alternatives for central bank portfolio investments, and of rigorously monitoring and managing credit and market risk.
Within the framework of this strategy, the Bank witnessed an increase in its balance sheet over the past decade from just below USD 90 billion in the 1990/91 financial year to nearly USD 175 billion at the end of financial year 2001/02, with over USD 20 billion of this increase coming in the past year.
In terms of market share, the Bank intermediates about 6.5% of world international reserves, serving almost 120 central bank customers. The growth in Asian deposits has been especially buoyant. This region accounted for less than one quarter of total currency deposits at the end of 1998. Right now, the region claims a share of about 45%.
Medium-Term Instruments have been a major attraction for central bank funds in recent years. Created in late 1998 to accommodate customers' requests for longer-dated tradable instruments, purchases of MTIs grew to a record USD 48 billion at the end of 2001. However, expectations of rising interest rates in early 2002 led many central banks to shorten the duration of their portfolios, also at the BIS. As a result, the MTI book declined slightly.
In addition to intermediating central banks' reserves, the Bank is offering its customers a number of other financial services. These include short-term credits to central banks, usually on a collateralised basis, as well as foreign exchange and gold services. More recently, the Bank has been marketing actively asset management services, which constitute an area of significant potential. Several central bank portfolios are currently under BIS management.
If the Bank is to safeguard its position in the intermediation of central bank reserves, it will need to remain responsive to the changing needs of its customers. This will involve a continued emphasis on providing investment instruments with an attractive blend of yield, flexibility and security. This will also call for the exchange of technical know-how. Last but not least, the commitment to excellence will have to remain buttressed by the rigorous monitoring of credit exposures, liquidity, market and operational risks. In accordance with best practice, this is currently done by a separate risk control unit directly reporting to the Deputy General Manager, and through him to me.
Analytical and statistical contributions of the Bank
The second main area into which the Bank's energy and resources are channelled is the provision of analytical and statistical services. Two features of the Bank's activities in this domain deserve particular mention. The first one is the increasingly global character of participation in the meetings supported by the Bank. The other one, which I will comment on in a minute, is the thrust of the analysis done in support of international cooperation.
Whereas 15 years ago the meetings under the auspices of the BIS brought together the central banks of the most important industrial countries, today's meetings are almost uniformly marked by the geographical diversity of participants. In addition, the number of meetings taking place in all regions of the world has expanded greatly.
This broadening of representation can be witnessed during the regular bimonthly meetings of member central banks. It is also a feature of other meetings that the BIS organises. For instance, annual working parties on monetary policy are no longer held solely with central bank representatives of mature economies. Separate meetings are now organised for senior central bank officials from Africa, Asia, central and eastern Europe and Latin America. Another fertile area for global cooperation has proved to be the issue of central bank governance. Eight central bank Governors from a diversified group of countries steer a central bank governance network which now spans 40 central banks around the world. I should stress again that most of these efforts are not limited to BIS shareholders, but encompass other central banks as well, either through direct participation or, if that is not feasible, through the communication of the substance of the deliberations via a variety of publications.
The Bank's outreach effort relies to an important extent on the activities of our two Representative Offices. The Representative Office for Asia and the Pacific was established four years ago in Hong Kong SAR. The Asian Office now includes a Regional Treasury dealing room providing banking services to central banks during trading hours in the Asian time zone. Moreover, an Asian Consultative Council, comprising the Governors of the Asian BIS member central banks, was created in early 2001 to give guidance regarding the Bank's activities in the region. This Council had its third official meeting here in Basel just two days ago. The Representative Office for the Americas in Mexico City started operations only in June and will be opened formally in November. This office will focus on serving the interests of the central banking community in the western hemisphere. The office will initially be small, with four staff members. Nevertheless, the Bank hopes that the office will be as successful as the Asian Office in involving the regional central banks in the international cooperative effort.
Next to their increasingly global character, a second key feature of the Bank's activities in the area of analytical and statistical services has been the sharpening focus on issues of financial stability. This has reflected the nature of the vulnerabilities we have witnessed in financial markets in recent years. It is also a recognition of the prime responsibility which financial authorities worldwide have in establishing and maintaining financial stability. This includes in the first instance the central banks. But it also encompasses other interested parties - supervisors, financial authorities and the private sector - which the Bank has sought to involve more closely in the debate on financial stability.
Against this background, research conducted at the BIS and themes selected for meetings supported by the Bank have dealt extensively with issues of financial stability. This has included the regular monitoring of potential vulnerabilities in financial markets. It has also encompassed extensive analysis of topics such as risk management in complex financial institutions; the measurement of changes in risk through time; financial market functioning and development; and fair value accounting. Attention to financial stability has not meant the neglect of issues of monetary stability. Topics addressed in this second area of central bank concern have included operating procedures and tactics of monetary policy implementation; instruments and objectives of exchange rate management; and implications of capital flows for central bank policies.
Everybody, I believe, will agree that availability of accurate and timely information plays a key role in the sound functioning of financial markets. The collection, compilation and dissemination of comprehensive financial and macroeconomic statistics has therefore remained a prime area of activity in the Monetary and Economic Department, often in active cooperation with central banks and other international institutions. Noteworthy developments over the reporting period have been the improvement of the measurement of commercial banks' consolidated country risk exposures (on a so-called ultimate risk basis), the coordination of another survey of foreign exchange and derivatives market activity and a broadening of the geographical and topical coverage of the BIS Data Bank.
Finally, an important and growing aspect of the Bank's activities in the analytical area has been the dissemination of the outcome of the Bank's cooperative efforts and research, and of the initiatives undertaken by the various committees hosted by the BIS.
The Financial Stability Institute, which was created three years ago to promote sound supervisory standards and practices globally, and to support their full implementation in all countries, has been at the centre of the Bank's efforts to disseminate the latest information on supervisory issues and promote understanding among supervisors worldwide. Through the design and delivery of focused seminars and regional workshops, some 1,400 supervisors from almost 150 countries have been able to gain in-depth knowledge over the past year on a broad range of key supervisory topics. In the course of the current financial year, the FSI will increase the number of events as it takes charge of several training events for insurance supervisors in cooperation with the International Association of Insurance Supervisors.
In addition, the Bank is sharing its knowledge in monetary, financial and legal issues with various regional central bank associations through participation in meetings of these groups, or the organisation of joint events. BIS support to transition economies has been forthcoming via the Bank's maintenance of a database on the technical assistance and training provided to these economies and the staging of a number of seminars at the Joint Vienna Institute.
In disseminating the work undertaken at the BIS, a key role is played by the BIS website. Links to the websites of many of the central banks represented here at this meeting help to disseminate the work done elsewhere within the community of central banks. In recent months, the role of the internet as a communication tool has been boosted by a web-based infrastructure, called e-BIS, which allows participants in BIS activities and events to access and exchange information through the internet in a secure and convenient way.
Activities of the committees
A number of committees have their secretariat here at the BIS. Next to banking operations and the provision of analytical services, the support to the activities of these committees represents the third pillar of the Bank's contribution to the work of central banks, supervisory and other financial authorities. A first group of committees which I would like to mention in this regard are those reporting to the G10 Governors. These include the Basel Committee on Banking Supervision, chaired by President McDonough of the Federal Reserve Bank of New York, the Committee on the Global Financial System, chaired by Deputy Governor Yamaguchi of the Bank of Japan, and the Committee on Payment and Settlement Systems, chaired by Mr Padoa-Schioppa, Member of the Executive Board of the European Central Bank. Each Committee focuses on a vital building block of a well-functioning financial system - the soundness of banking institutions, the efficient functioning of markets and the robustness of payment systems - and draws its members from national capitals.
Work on the revision of the Basel Capital Accord has dominated the activities of the Basel Committee over the past year and will no doubt continue to do so in the months to come. Allow me to focus on three important aspects of the development of this New Accord.
First, if banks are to be faced with the right incentives to measure and manage their risks, a comprehensive multifaceted framework, resting on the three mutually reinforcing pillars of minimum capital requirements, supervisory oversight and market discipline, is necessary. It cannot be denied that the most advanced approaches offered by the Committee are likely to be complex. However, arguing that simple solutions can be found for the prudential supervision of a sophisticated, complex and innovative industry would be rather naive. Moreover, banks in emerging markets need not be forced into adopting the more complex methodologies. To ensure the quality of the framework, the Committee will conduct a final, comprehensive survey of the impact of the New Accord over the coming months.
Second, in developing the New Capital Accord and ensuring its relevance and acceptance, the Committee has been careful to consult with a wide range of non-member countries and with the private sector. This is in addition to the outreach efforts which the Committee is making on a variety of other supervisory arrangements.
Third, the Committee is starting to focus on planning for the important phase of implementing the New Accord. To guide and support the efforts of supervisors in this stage, an Accord Implementation Group has been formed. Channels of communication and information exchange are being created to ensure that non-members also can provide input into the vital issue of implementation.
Promoting financial stability has also been at the forefront of the activities of the Committee on the Global Financial System. Much of its work focused on the analysis of the interaction between the real economy and the financial markets in the course of last year's downturn and on market reactions to a number of extraordinary events which occurred in the year under review. In performing these tasks, the Committee draws on the knowledge and experience of senior central bank officials from several major emerging market economies.
An important achievement of the Committee on Payment and Settlement Systems in the past year was the release, jointly with the Technical Committee of the International Organization of Securities Commissions, of the report on the recommendations for securities settlement systems. The recommendations are aimed at reducing risks, increasing efficiency and safeguarding investor interests of such systems. This Committee, too, regularly collaborates with central banks outside the G10.
Let me conclude this review by mentioning some of the salient features of the work of the groupings which have their secretariat at the Bank but do not report to the Governors of BIS member banks. The Financial Stability Forum, which I am honoured to chair in a personal capacity and whose secretariat enjoys significant support from the Bank, met on two occasions during the period under review. As you may know, the Forum is composed of senior officials from a broad range of financial authorities from the main financial centres, as well as international organisations and standard-setting committees. The analysis of the impact of an unprecedented confluence of shocks on the soundness of financial systems and institutions was high on the agenda of FSF members on both occasions. Large corporate failures also triggered intensive discussion and called for the FSF to try to coordinate the many efforts already undertaken by national authorities and international regulatory bodies to address the revealed vulnerabilities. Another noteworthy initiative was the development of a crisis management contact list identifying the relevant financial authorities in over 30 countries.
To promote discussion among FSF members and non-members and to enable non-members to inject their perspectives, the FSF organised several global outreach meetings: during the past year separate meetings for financial authorities were held in Asia, central and eastern Europe and Latin America.
Two other associations have their secretariat at the BIS: the International Association of Insurance Supervisors and, since May of this year, the International Association of Deposit Insurers. The physical proximity of these standard setters, the committees reporting to G10 Governors and the FSF enables synergies to be exploited and helps improve the understanding of the interlinkages existing between the various segments of financial market activity.
If this spirit of cooperation and cross-fertilisation can be fostered further, I am convinced that collectively we will come closer to our ultimate objective of promoting financial and monetary stability on a global scale. I hope that the BIS has been able to make an effective contribution to this effort either as a provider of financial services to you, or as a facilitator in your cooperative endeavours. I thank you for your continued support.