Activities of the Bank: the year 2004-05 in review
Speech delivered by Malcolm D Knight, General Manager of the BIS, on the occasion of the Bank's Annual General Meeting in Basel, 27 June 2005.
Ladies and Gentlemen
On behalf of the Management and staff of the Bank, I would like to welcome you to the 75th Annual General Meeting of the Bank for International Settlements.
The 75th anniversary of the foundation of the Bank - which actually occurred on 17 May this year - provides a very special and fitting occasion for reviewing the activities of the BIS not only over the past year, but also in a broader historical context.
Half a century of the activities of the BIS are covered in Professor Toniolo's incisive book - of which all of you would have received a copy by now. An academic conference on the "Past and future of central bank cooperation" takes place later this week. Finally, the origins of the BIS and its development also feature prominently in the Bank's first ever public exhibition, entitled "this is the biz" - a play on the German abbreviation for BIS. I hope that you will have the time to visit the exhibition, which is located in this building.
These events remind us how the BIS as an institution has over the years adapted to a changing world and to the changing needs of central banks. Our central mission "to promote the co-operation of central banks and to provide additional facilities for international financial operations" - stated in Article 3 of our Statutes - is still as relevant today as it was 75 years ago. However, the character of central bank cooperation, the process, and, of course, the particular topics have changed.
Let me illustrate this evolution by exploring more recent developments in the three core areas in which the BIS serves central banks: first, the BIS as a forum of discussion for central banks; second, the BIS as "knowledge centre" for central banks; and third, the BIS as provider of banking services for central banks.
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The bimonthly meetings among the Governors of BIS member central banks form the heart of what is often referred to as "the BIS process". These bimonthly meetings now comprise four regular meetings of Governors: the Global Economy Meeting, the meeting of Governors of the G10 countries, the All Governors Meeting, and the Review Meeting for Governors. In addition, the Governors of key emerging market economies earlier this year initiated a regular meeting to discuss issues of mutual interest. This initiative underlines the open and central bank-driven character of the BIS process.
These meetings allow Governors to review current economic and financial developments, to debate issues of particular interest to central banks, and to review the work of various BIS committees and other groupings. Topics have included Basel II, payment system issues, assessing vulnerabilities in the financial system, and, yesterday, policy issues raised by recent oil market developments. Discussions on central bank governance, under the guidance of Joseph Yam, have often been an important part of these weekends.
On average, about 40 central banks were represented at each bimonthly meeting in the past 12 months or so. This figure is an indication of how highly central banks regard these meetings. The BIS offers Governors and others a unique opportunity to discuss among peers and away from the glare of publicity. The combination of meetings and events that leave room for informal conversations and the deepening of personal relationships is another ingredient for promoting open dialogue. Serving central banks by providing the infrastructure for this kind of networking is of increasing value in a globalising world.
One important initiative of the past few years has been to invite senior representatives of the financial sector to exchange views with Governors and other senior central bankers. The aim is to deepen our understanding of the rapid evolution of the financial system. Another example is our annual special Governors' meeting in Asia, which reflects the growing economic importance of the region. Next year, on this occasion, I hope to be able to report on a special meeting on Africa.
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The main instruments for BIS central banks to develop views, to analyse issues and to form recommendations are the permanent committees. Central banks, aware of the increasing globalisation of financial markets, need to coordinate their activities. Over the past decades, however, the committees have also developed into forums where central banks can pool their expertise on financial issues in order to better understand an ever more complex financial system. Regular meetings at either the committee or working group level form the main mechanism that drives the process.
It is now almost a year to the day since the Governors and Heads of Supervision of the G10 countries gave their support to the proposal of the Basel Committee on Banking Supervision for a new international capital standard - better known as Basel II. Jaime Caruana, the Chairman of the Basel Committee, deserves our gratitude for steering this complex project to completion. Since then, the Committee has worked on various aspects of implementing the new capital adequacy framework, carefully maintaining its active dialogue with the industry in order to keep pace with ongoing developments in the financial services sector.
Consistent implementation of Basel II across various jurisdictions through enhanced supervisory cooperation will become a critical challenge in the years ahead. The debate, the design, and now the implementation of Basel II have contributed to a professional focus on risk management that was virtually absent from many countries even a decade ago.
The promotion of financial stability has also been at the forefront of the activities of the Committee on the Global Financial System, which is chaired by Roger Ferguson. In addition to the monitoring of financial market activities over the year, the Committee has investigated structural changes that affect how the financial system worldwide really works. One example is a study on the rapidly growing market for structured finance products. The Committee has explored in some depth foreign direct investment in the financial sector of emerging market economies with several regional workshops organised to further the debate. The challenges for supervisors and central banks of an increasingly global banking industry were given particular attention.
The Committee on Payment and Settlement Systems has made further significant contributions to strengthening the financial market infrastructure. For instance, the Committee recently published a report on General guidance for payment system development. The Committee's previous Chairman, Tommaso Padoa-Schioppa, had guided these efforts with skill and energy over several years, before handing over to the current Chairman, Tim Geithner, at the beginning of this month.
In addition to its standing committees, the BIS hosts the secretariats of the International Association of Insurance Supervisors, the International Association of Deposit Insurers, and the Financial Stability Forum.
Closely related is the work of the Financial Stability Institute in the dissemination of supervisory and regulatory standards and sound practices. Banking and insurance sector supervisors have been supported in a variety of ways. Over the course of the past year, for instance, the FSI organised some 56 seminars and high-level meetings with close to 2,000 central bankers and other supervisors from around the world. In addition, last year saw the launch of FSI Connect, an online information and learning resource tool for banking supervisors. More than 94 central banks and supervisory authorities from 81 jurisdictions are currently using FSI Connect.
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The BIS also serves as a hub for information and for analysis of policy issues of relevance to central banks. These activities underline the growing importance of analytical work for the proper understanding of monetary policy and of an increasingly complex financial system. The Bank has, for some years, been organising, in Asia, in Latin America and in central Europe, annual meetings of senior officials responsible for monetary policy.
Some of the work by BIS staff finds its way into the Bank's regular publications. The Annual Report remains our flagship publication - and gives you our view about the world economy. In addition, the Quarterly Review reports on recent trends in financial markets, and addresses research topics that are particularly relevant for central banks. Hedge funds, the pricing of credit risk, the behaviour of property prices and many other topics are covered. In addition, the BIS publishes papers by its own staff and by central bank staff in its BIS Papers and Working Papersseries. Special conferences strengthen the contacts with the academic community.
Over the course of last year, the dialogue on financial and monetary stability was also significantly supported by various initiatives on cooperation in the statistical area. The release of the final report of the fifth triennial survey of foreign exchange and derivatives market activity in March this year represents a major effort in this area. We are constantly on the lookout for ways of adapting the BIS international financial statistics to changes in financial markets.
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The adaptability of the BIS is also visible in the banking area. With global reserves growing rapidly, the Bank's balance sheet reached another record. On 31 March 2005, our balance sheet totalled SDR 180.5 billion, or nearly 260 billion US dollars. This represents a year-on-year increase of SDR 12.6 billion or 7.5%.
As you all know, the BIS offers a wide range of financial services to assist central banks and other international financial institutions in the management of their services. The guiding principles of these services have always been liquidity, security, confidentiality and return. Some 130 central banks and international financial institutions currently make use of these services and, in doing so, entrust us with approximately 6% of the world's total foreign exchange reserves.
We are aware that central banks are becoming more demanding in the investment of their reserves. Providing banking services to central banks today is much more than just placing funds in term deposits in the money market. If the Bank is to respond successfully to the diverse and constantly changing needs of its central bank customers, it needs to keep placing the emphasis on providing financial products that offer a balanced blend of yield, flexibility and security. New products require a continued further strengthening of our internal risk management framework. In accordance with best practice, our separate risk control unit reporting directly to the Deputy General Manager - and through him to me - monitors the Bank's exposure to credit, liquidity, market and operational risk.
Let me mention an example of banking activity that goes beyond managing reserves. As you may be aware, following the successful launch of the first Asian Bond Fund (ABF1) in 2003, the second Asian Bond Fund (ABF2) was created in December last year with the BIS being nominated as the administrator. ABF2 is expected to bring about significant benefits to the development of bond markets in Asia and should play a catalytic role in improving market infrastructure, with the ultimate aim of broadening and deepening domestic and regional bond markets. At a later stage, it might also provide an investment vehicle for central banks outside the region - thus combining our objective of reaching out globally, furthering financial stability and acting as a quality intermediary for central banks.
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The adjustment of the BIS to a changing global environment has also had a bearing on its organisation and governance structure.
The two BIS regional Representative Offices in Hong Kong for Asia and the Pacific and in Mexico for the Americas are probably the most concrete manifestation of the BIS's commitment to a global outreach to the community of central banks and other financial authorities. The Representative Offices foster the exchange of information and data, facilitate the organisation of meetings and seminars, and contribute to our financial and economic research on Asia and the Americas. We plan to ensure that the rapidly growing economic importance of Asia is better reflected in the resources the BIS devotes to this region.
Perhaps less visible, but equally important, we have undertaken a number of steps over the past few years to ensure that the Bank's function and performance are better understood, and that the Bank is governed in a sound and prudent way.
The first important step in this direction, taken back in 2002, was the Board's decision to restrict the right to hold shares in the BIS exclusively to central banks, and the ensuing withdrawal of shares held by private shareholders. During the past financial year, the Board decided to redistribute the repurchased shares by offering them for sale to member central banks. The final element of this operation, the redistribution of the shares of the American issue through an offer to member central banks, was successfully concluded last month.
In the past year, the BIS Board also examined our governance structure and identified some divergences between our existing Statutes and current best practice governance, which detracted from the transparency of the Bank's governance structure, and discrepancies in the allocation of responsibilities for decision-making at the Bank. As a result, the Board proposed some modifications to this structure which would streamline the governance of the BIS. A few moments ago, the Extraordinary General Meeting decided to accept the necessary amendments to the BIS Statues. These changes are a further step towards ensuring that the Bank is managed in a modern and transparent fashion according to sound principles and international best practice.
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Let me conclude. The legacy of 75 years of central bank cooperation is remarkably strong. Throughout that period, central banks and the BIS have had to face many difficult phases and to adapt to quite radical changes in the monetary and financial environment.
The spirit of professionalism, openness and mutual understanding that characterises the BIS process has promoted a deeper understanding of the global monetary and financial system. This has in turn enhanced the capacity of central banks and the BIS to adapt to a changing environment and to respond swiftly in difficult situations. Preserving and cultivating these strengths of central bank cooperation might be even more important in the coming years, as difficult economic and financial challenges may well lie ahead.