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The Bank for International Settlements (BIS) is effectively the international bank of banks. It carries out a role loosely similar to that of the United Nations in politics. Its main duties are coordinating international banking policies, regulating capital levels among banks, and providing bank services to national central banks.
The origins of the Bank for International Settlements lie in the period between World Wars I and II when it was formed to handle the administration of reparation payments made by Germany. At one stage, part of the BIS was owned by private investors and traded on stock markets. As of 2010, the bank is solely owned by national central banks.
One major role of the Bank for International Settlements is to encourage different countries to work together to coordinate the regulations that affect banks in their countries. One of the main examples is reserve regulations. These determine how much of the deposits kept by savers at a bank must be held by the bank in cash at any one time. This is designed to limit the risk of the bank running out of cash if there is a run on the bank, which is when a lot of savers try to withdraw funds at the same time.
The Bank for International Settlements oversaw the creation of the Basel accords. These were agreements by major nations to require each bank to have a minimum ratio between their core equity capital, which is the money they have from selling shares to the public, and their assets. Though it may seem odd to think of assets as a problem, the accords take account of the fact that many assets have some degree of risk, most notably that money the bank has lent to borrowers may not be repaid.
The accord covers two types of capital, known as Tier 1 and Tier 2. Tier 1 mainly consists of the face value of the bank's stock plus the actual cash it has on hand in the form of reserves. Tier 2 covers capital that is judged less reliable, such as preferred stocks, or increases in value to assets such as the market value of buildings increasing over time.
The Basel accords require the bank's Tier 1 capital to be worth at least 4% of its risk-weighted assets, and for the combination of its Tier 1 and Tier 2 capital to be worth at least 8% of its risk-weighted assets. Risk-weighted means that the raw numbers are adjusted to account for how likely the bank is to get the money back. For a safe asset such as a government bond, the entire value of the asset may be included in the total. For a riskier asset, such as an unsecured loan to a customer, only a small proportion of the asset's value will be included in the total.
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