The Bank for International Settlements was established in 1930. It acts as the bank for the world’s central banks. It promotes international monetary corporation. It acts as an agent for international settlement. The BIS holds between 10 and 15 per cent of the world’s monetary reserves. It is incorporated under Swiss Law.
Since 2001, ownership of shares in the BIS has been limited to central banks. Historically, a greater number were held by private owners. Over fifty central banks are represented in the BIS. Shareholders’ general meetings are held yearly.
A board of directors is appointed, largely made up of European and U.S. central banks. Additional directors are elected from governors of other central banks. The board meets monthly and takes decisions by majority. A president is selected. A full-time executive general manager is appointed by the board, who is responsible for the day-to-day operations of the bank.
Role of BIS
The BIS acts as a bank to central banks. It assists central banks in managing and investing monetary reserves. The funds are placed in world money markets in the form of commercial bank deposits and short-term negotiable instruments.
The BIS may make liquid resources available to central banks. The facilities may take the form of swaps of currency for credits, other instruments and short-term securities. The bank provides short-term bridging loans to assist central banks of countries with balance of payments difficulties.
The BIS encourages cooperation between central banks. It provides staff and secretariats to enable cooperation between central banks, governors of the European Monetary Cooperation Fund, the Committee on banking regulations and supervisory practices of the group of ten countries.
They collect data on National Banking Regulations identify difficulties and offer solutions in order to ensure banking liquidity and solvency. They collect and publish statistics.
There are a number of regional monetary systems and organisations. Their objective may range from currency exchange and support for the balance of payments obligations at one end to actual monetary unions at the other end of the spectrum.
The Central American Monetary Union and Arab Monetary Fund seek to maintain the value of the currencies of members, stabilise exchange rates and manage foreign exchange reserves. There is an objective of promoting the monetary union.
There is number of monetary unions, each with the central bank currency and a single pool of reserves. They include the West African Economic and Monetary Union, the Eastern Caribbean Currency Authority and the Economic and Monetary Community of Central Africa.
The best-known monetary union is that established in the European Union and administered by the European Central Bank. European System of Central banks defines and implements the monetary policy of the EU. It also manages the official reserves of the state. It conducts foreign exchange operations and promotes smooth payments and the operation of the payment system.
The European system of Central banks has a governing council, executive board and general council. The central council consists of the executive board and the governors of the 17 EMU states. There are six members of the executive board. The governing council determines the euro monetary policy. It sets interests rate.
The ECB is independent of the European organs, including the Commission, Council, Parliament as well as national parliaments.
The general council of the ECB consists of a president and vice president of the executive board for the governors of all EU National Central banks. It provides common accounting and reporting provisions for the EU. It collects and publishes statistical information.
The Euro was established on 1st January 1999 as the common currency of the members of the European monetary union area. Euro coins and notes commenced circulation on 1st January 2002. The existing national currencies were gradually withdrawn in early 2002.
States have different degrees of separation of the national government and fiscal policy institutions and their central banks. The national fiscal policy is generally set by a treasury or department of finance.
The central bank is independent of government to varying extents. The modern trend has been to provide greater independence for the central bank. The degree of independence is provided for by long appointments, formal independence and provisions for governance.
The principal functions of Central banks are to issue money, notes and coins, regulate the quantity of money and maintain and invest currency reserves. They also as lent as the lender of last resort to the domestic banks.
Financial institutions come in a broad variety of forms. Some banks are owned by state authorities and others are owned by shareholders.
Commercial banks accept deposits, make loans and offer a variety of other services.
A euro currency deposit refers to an account maintained in a foreign currency relative to that of the institution holding the deposit. The deposits are free of the control of the monetary authority which issued them. American dollars are commonly referred to as eurodollars or eurocurrency.
Equally, other currencies could be held as euro currency. The expression “euro” is confusing as it evolved many years before the euro was instituted by the European Monetary Union.
Post-war expansion meant that commercial banks were unable to serve loan demand from their domestic deposits. U.S. Banks are more tightly controlled and restricted than many banks internationally and were not permitted to open branches abroad or, indeed much outside immediate geographical areas, in many cases.
For this reason, many such banks commenced borrowing from other banks and corporations. The interbank market became international, with the financial centres of New York, London, Tokyo and others assuming particular importance. The market operates through the day and night, largely in an unregulated fashion.
Certificaes of Deposit
The most common form of short-term liquidity instrument is the certificate of deposit. It is generally placed in multiples of $1 million dollars for maturity periods of one, three or six months. A certificate of deposit is a negotiable instrument.
It is effectively a transferrable deposit comprising an obligation on the part of the relevant bank to pay the sum of money at the maturity date. They are not usually transferred because of their short maturity.
CDs are purchased by market money funds and international corporations with excess cash, as well as by banks. They do not count as bank reserves. Trades in CDs may be made quickly without much formality. Large-value transactions may be undertaken by relatively informal means.
Foreign exchange market involves a range of international players, including banks, central banks, importers, exporters, multinational firms and a range of intermediaries. They are largely unregulated.
In some countries, exchange control provisions are imposed, particularly in developing countries which seek to protect the value of their currency.
Banks may act as intermediaries and as correspondent banks for their counterparties.
Central banks may provide funds for transactions when no other funds are readily available. They act as lenders of last reserve. They maintain orderly trading conditions.
The U.S. dollar is commonly used as an intermediate currency in exchanging currencies worldwide.
Exchange rates are published on an ongoing basis and change constantly. Foreign exchange contracts can be made for immediate delivery for delivery at future date. Spot transactions involve an immediate sale and delivery of a currency or commodity.
A future contract is one for the sale of a commodity or currency at a specified date in the future. Delivery and payment are made at that date. Future contracts are traded on exchanges and are in standard form and quantity.
Trades for completion in the future need not and rarely will involve actual settlement. The obligations are commonly and usually settled by offset and netting of the profit or loss between the parties..
Futures may be used to hedge against risks based on the opposite position. They may be used to speculate on movements in the value of a commodity or currency. In this context, they may be referred to as hedging contracts.
Forwards & Options
A forward contract is a contract for the purchase or sale of a commodity at a future date. In contrast with the future, it is not traded on an exchange is not transferrable. They are individually negotiated and are usually settled by the delivery and settlement of the goods or commodity concerned.
An option contract is a right but not an obligation to buy or sell a specific amount of a commodity or a currency at a fixed price on a certain date or within a certain time. If the right is to purchase a contract, a commodity or a currency, it is a call option. If it is a right to sell, it is a put option. There is no requirement to actually complete the transaction. It will only be completed if it has a positive value.
The participators in markets may engage in arbitrage to exploit small differences in the market as it adjusts Where currency A changes relative to currency B, the relative value of currency C may not immediately adjust so that there is an opportunity for arbitrage in the adjustment process, which itself helps the markets to move towards equilibrium.
International bank transfers usually take place through a domestic bank and its correspondent bank abroad. The domestic bank accepts monies for transfer and arranges for its correspondent bank to transfer the funds in a foreign currency. This may be done directly by way of immediate direction for payment. It may be done by a bill of exchange.
The bill of exchange is drawn on the domestic bank’s account with the foreign bank. The bill of exchange is given to the customer, who sends it to his correspondent seller in the other country. This is then cashed at the correspondent bank on whom the bill of exchange is drawn.
Currency is not physically delivered. Multiple accounts are usually netted out. When transfers are required, this is done by the central bank and may be managed by the Bank for International Settlement.