Bank for International Settlements (BIS)
What it is:
Based in Basel, Switzerland, the Bank for International Settlements (BIS) acts as a bank for central banks around the world.
How it works (Example):
The BIS's main role is setting capital adequacy requirements and ensuring capital adequacy, which is one of the biggest challenges among central banks. As the world learned during the Great Recession of 2008-2009, speculative lending based on insufficient underlying capital and widely varying liability rules tends to cause economic crises and crashes.
The BIS operates according to a variety of international financial laws, such as the Treaty of Versailles and the Bretton Woods Agreement. The BIS has several responsibilities for creating stability among the world’s banks, including: acting as a counterparty to certain central bank transactions; collecting, administering and distributing war reparations; making international loans; providing emergency funding to troubled nations (though the International Monetary Fund typically does this); offering trustee services; making gold and foreign exchange transactions with and for central banks; and promoting global financial stability through central bank cooperation.
The BIS is owned by its participating central banks, and is presided over by three groups: the central banks themselves, the board of directors and the BIS managers. Each group may vote on certain decisions, and their votes have different weights. Member banks and their executives participate in meetings organized by the BIS throughout the year. BIS's Financial Stability Institute offers a variety of seminars, workshops and research for its members, as well.
Why it Matters:
The Bank for International Settlements does not provide services to individuals or companies; its mission, instead, is to foster "international monetary and financial cooperation." As such, the BIS is designed to be independent and is not accountable to any national government.
As the bank to the central banks, the BIS is a major force in global economic stability and a major developer of global financial markets. Its reports are widely followed by investors and hold great credibility with the markets because of their independence and objectivity. Similar to analyses from objective entities such as the Congressional Budget Office, the BIS issues statements that investors closely follow. Often called the "central banks' central bank," the BIS will sometimes validate market sentiment -- or correct erroneous assumptions popularly held by investors.