The Bank for International Settlements (BIS), founded in 1930, is the oldest international organization in the field of international monetary cooperation. Its creation represented the materialization of various plans dating from the period prior to the First World War. At that time, the former Italian Finance Minister, Luzzati, and a German professor named Wolf proposed setting up a multilateral body whose task would be to promote cooperation between central banks on a permanent basis. Prior to this, there had been some history of cooperation between central banks, although on an ad hoc, and usually only a bilateral, footing. The earliest case of support between central banks seems in fact to have occurred in 1825, when a loan was granted to the Bank of England by the Bank of France and the Netherlands Bank. The international economic conference held in Genoa in 1922 took up the ideas of Luzzati and Wolf, and recommended developing the practice of permanent cooperation between the central banks or banks entrusted with the monitoring of credit policy in the various countries. Ultimately, however, it was the deadlock reached on the question of German reparations in 1930 which proved the catalyst for the realization of these long-standing plans. It was thought that one institution, whose principal and permanent role would be to promote cooperation between central banks, might also—as its first, temporary mission—channel the international settlements connected with the German reparations. Hence the name by which our Basle institution is known—a name which scarcely conveys the range of its activities.

I. The Specific Role of the BIS in International Monetary Cooperation

The Bank for International Settlements (BIS), founded in 1930, is the oldest international organization in the field of international monetary cooperation. Its creation represented the materialization of various plans dating from the period prior to the First World War. At that time, the former Italian Finance Minister, Luzzati, and a German professor named Wolf proposed setting up a multilateral body whose task would be to promote cooperation between central banks on a permanent basis. Prior to this, there had been some history of cooperation between central banks, although on an ad hoc, and usually only a bilateral, footing. The earliest case of support between central banks seems in fact to have occurred in 1825, when a loan was granted to the Bank of England by the Bank of France and the Netherlands Bank. The international economic conference held in Genoa in 1922 took up the ideas of Luzzati and Wolf, and recommended developing the practice of permanent cooperation between the central banks or banks entrusted with the monitoring of credit policy in the various countries. Ultimately, however, it was the deadlock reached on the question of German reparations in 1930 which proved the catalyst for the realization of these long-standing plans. It was thought that one institution, whose principal and permanent role would be to promote cooperation between central banks, might also—as its first, temporary mission—channel the international settlements connected with the German reparations. Hence the name by which our Basle institution is known—a name which scarcely conveys the range of its activities.

Today, however, the BIS is by no means the only international institution in the field of monetary cooperation: I need only mention the International Monetary Fund, the World Bank, and organizations like the European Monetary Cooperation Fund (EMCF). So what, today, is the specific role of the BIS? The question is all the more pertinent, since, in 1944, on the occasion of the Bretton Woods Conference, the decision was taken to liquidate the BIS following the founding of the International Monetary Fund.1 In fact, things turned out rather differently, with the BIS experiencing a great expansion after the Second World War. Far from disappearing from the scene, the BIS today cooperates with the International Monetary Fund at various levels. In 1974, for example, the BIS became the first institution that was not a member of the Fund to be granted the status of holder of SDRs and, since 1978, it has received deposits denominated in SDRs from the International Monetary Fund. In 1981 and 1984, the BIS, with the backing of various central banks, granted the Fund credit facilities of SDR 675 million and SDR 2,505 million, respectively. Furthermore, the BIS has participated as an observer for many years in the work of the Interim Committee of the Board of Governors of the Fund on the International Monetary System. In short, it seems that while the two institutions are very different, they are complementary.

Let me therefore try to pinpoint the main differences between the BIS and the International Monetary Fund in order to illustrate the particular nature of the BIS’s contribution to international monetary cooperation. Five important aspects are worth highlighting.

(1) The members of the International Monetary Fund are governments, and the financial assistance granted by the Fund in connection with balance of payments disequilibria goes to governments. The members and principal shareholders of the BIS are central banks. This is why the Basle organization has more of a technical and banking orientation than a political one. In particular, membership in the BIS does not imply any restriction or delegation of sovereignty; on the contrary, by virtue of Article 19 of its Statutes, the operations of the BIS must be in conformity with the monetary policies of the central banks concerned.

(2) It is hardly surprising, then, that the Bank’s approach in carrying out its tasks is pragmatic, rather than institutional. The BIS is not concerned with establishing either a set of rules to govern the international monetary system or a code of conduct for the management of member central banks’ monetary policies.

(3) Likewise, the financial assistance extended by the BIS is granted in accordance with banking principles. Unlike financial aid from the International Monetary Fund, the credit provided by the BIS under its facilities is not tied to conditions regarding economic and monetary policy. And unlike loans from the World Bank or other comparable institutions, the BIS advances are purely short term. This simply reflects the nature of the financial resources available to the BIS: more than 95 percent of all deposits placed with the Bank are, in fact, redeemable at sight or within not more than three months. Consequently, the financial assistance provided by the BIS, which can be arranged with notable speed, has often taken the form of bridging facilities extended until such time as longer-term advances from the International Monetary Fund or some other source have become available.

(4) The BIS is also a bank, and it holds between 10 and 15 percent of the central banks’ global monetary reserves in the form of deposits. The funds received in this way are reinvested on the financial markets. The BIS thus turns to account its vast experience of the international financial markets.

(5) And finally, as regards its membership, the BIS—unlike the International Monetary Fund—is not a global or quasi-global institution. Its member central banks are those of the Group of Ten, together with all the other countries of Europe (with the exceptions of Albania and the Union of Soviet Socialist Republics, but including Turkey) plus Australia and South Africa. The BIS thus groups together the central banks of all the major industrialized western countries, with the qualifier that the participation of the United States is subject to particular arrangements.2

On the basis of its membership, one might be tempted to see the BIS as a “regional” institution—in the sense used by the United Nations—like the European Monetary Cooperation Fund (EMCF), the monetary institution set up by the European Economic Community in 1973. In fact, the EMCF is very different from the BIS, whose membership spans five continents, whereas the EMCF is a Community agency. More important though, in this context, is the fact that the objectives of the EMCF are all part of the process of bringing about European economic and monetary union, which, in due course, will involve the creation of a single currency and a European central bank. Such objectives are completely alien to the BIS, which has no role in institutionalizing a monetary order, whether on a global or a European or any other regional basis. This fundamental difference does not stop the BIS from fulfilling important functions relating to the EMCF—for which the BIS acts as agent—and thus to the official European currency unit (ECU), as well as in connection with the private use of the ECU.

Before I go on to speak about the functions of the BIS in connection with the official and the private ECUs (functions which constitute only one of its numerous activities), I should like to look, first, at its dual nature as an international organization and a banking institution and, second, at its threefold role as banker to the central banks, promoter of international monetary cooperation, and agent for international settlements.

II. What Kind of Entity the BIS Is

The legal character of the BIS has always intrigued legal experts and has caused controversy ever since the foundation of the Bank, although the issue seems largely academic today. The origin of those debates is not difficult to trace and lies in the two very different—though complementary—facets of the BIS. On the one hand, the Bank is unquestionably an international organization, possessing the international legal personality and the privileges and immunities customarily conferred on intergovernmental organizations. On the other hand, the BIS is a banking institution established in the form of a company limited by shares, although it deviates in many respects from ordinary company law and, above all, is de facto and de jure controlled by its member central banks.

To what is this dual organizational basis attributable? It would appear that, when the BIS was established, most of the founder central banks, though they had performed functions of public interest since their inceptions and were controlled by the State, were themselves in the form of limited companies. Certainly, since then, a number of central banks have been nationalized or have become public institutions, but a duality similar to that of the BIS, in terms of the form of organization, still exists, notably for the National Bank of Belgium and the Swiss National Bank. Moreover, the choice of that form of organization reflects a concern to secure for the institution a certain degree of independence from governments, both at the institutional and the financial levels.

Doubtless owing to this duality, legal doctrine was long divided as to the legal character of the BIS. Pointing to its form as a limited company, one school of thought, which gained credence mainly during the Bank’s early years, when its future appeared uncertain, held that the BIS was essentially comparable to a limited company incorporated under Swiss law, though this school accepted that it enjoyed certain special, but limited, rights.3 Other writers took the view that the BIS, as an association of central banks, was so exceptional that it could not be classed in any known legal category and was thus an organization sui generis.4 But the opinion which clearly predominates today and which, since the conclusion of the Headquarters Agreement with the Swiss Government in 1987,5 now seems difficult to dispute is that the BIS is an international organization possessing international legal personality in the same way as an intergovernmental organization, even though its members are not actually governments but central banks.6

The BIS as an International Organization

Turning to the first characteristic of the BIS—its status as an international organization—it should be noted that the international legal status of the Bank rests on the Convention respecting the Bank for International Settlements, signed at The Hague on January 20, 1930 by the Government of the Swiss Confederation, on the one hand, and the Governments of Germany, Belgium, the United Kingdom, France, Italy, and Japan, on the other (although Japan subsequently renounced the prerogatives it acquired through its participation in the founding of the Bank). By virtue of the Convention, Switzerland undertook to grant to the BIS the Constituent Charter (the text of which was annexed to the Convention) and neither to modify this Charter nor to authorize any amendment of the most important provisions—the so-called “protected” articles—of the Statutes of the Bank (likewise appended to the Convention), except with the agreement of the other signatory governments. The actual foundation occurred somewhat later, with the signing of the instrument of foundation in Rome on February 27, 1930 by the founder central banks and an American banking group acting in the absence of the U.S. monetary authorities. While the texts of 1930 do not specifically mention that the Bank possesses international legal personality, Article 1 of the Headquarters Agreement concluded on February 10, 1987 between the Swiss Government and the Bank, which, in fact, simply clarifies and confirms the legal position obtaining hitherto, does contain a specific provision to this effect, namely that: “The Swiss Federal Council acknowledges the international legal personality and the legal capacity within Switzerland of the Bank for International Settlements.”7

Moreover, after the Second World War, the BIS concluded, on a number of occasions, international treaties which unquestionably fell under public international law, in particular with France, the United Kingdom, and the United States in 1948; with the Federal Republic of Germany in 1953 and in 1966; and with Switzerland (the above-mentioned Headquarters Agreement) in 1987. In this same context, one might also mention the credit agreements concluded in 1981 and 1984 with the International Monetary Fund.

Furthermore, the texts of 1930 establishing the Bank themselves made provision for considerable normative and jurisdictional independence, which has been further clarified and extended since. For example, from the outset, Paragraph 5 of the Constituent Charter stated that the Bank’s Statutes and any duly adopted amendments thereto “shall be valid and operative notwithstanding any inconsistency therewith in the provisions of any present or future Swiss law.” As a consequence, while the structure of the BIS is modeled in many ways—particularly as regards its share capital—on that of a company limited by shares, its Statutes are, in numerous respects, inconsistent with prevailing domestic company law in Switzerland or, indeed, in other countries. This is notably the case as regards the status and the prerogatives of the Board of Directors. Similarly, the BIS is wholly exempt from the scope of Swiss banking legislation, which was introduced in 1934 and has evolved substantially since.

At the jurisdictional level, it will be noted that any dispute relating to the interpretation of the basic texts governing the legal status of the BIS is subject to the jurisdiction of the international Arbitral Tribunal set up under the Hague Agreements of January 20, 1930.8 It is thus placed outside the competence of national courts and, in particular, of Swiss courts. Furthermore, any disputes arising in matters of employment relations or pension rights between the Bank and its officials or former officials, or persons claiming through them, are to be settled by the Administrative Tribunal of the Bank, which is referred to in Article 4, Paragraph 2 of the Headquarters Agreement. It will be noted that the Agreement expressly provides that the various Swiss legal or regulatory texts in the sphere of social security or staff welfare arrangements shall not apply to the Bank.

The status of the BIS as an international organization also derives from the very extensive immunities it enjoys in Switzerland and in many other countries.9 For example, Paragraph 10 of the Constituent Charter stipulates that “The Bank, its property and assets and all deposits and other funds entrusted to it shall be immune in time of peace and in time of war from any measure such as expropriation, requisition, seizure, confiscation, prohibition or restriction of gold or currency export or import, and any other similar measures.” This provision, the scope of which was defined more fully in the Brussels Protocol of 1936, is supplemented at the jurisdictional level by the provisions of the second paragraph of Article 55 of the Statutes and Article 4, Paragraph 4 of the Headquarters Agreement, which states that “all deposits entrusted to the Bank, all claims against the Bank and the shares issued by the Bank shall, without the prior agreement of the Bank, be immune from seizure or other measures of compulsory execution and sequestration, particularly of attachment within the meaning of Swiss law.” In addition, the Bank enjoys fiscal immunities in Switzerland, together with the other privileges and immunities customarily conferred on intergovernmental organizations, as defined in the Headquarters Agreement of February 10, 1987. It will be noted that a number of other countries have also granted the BIS some of the immunities in question, notably with respect to the protection of both the Bank’s own assets and of the assets entrusted to it, which is the subject of the Brussels Protocol of 1936 mentioned earlier.

The Bank’s status as an institution subject to international law is also reflected in various basic regulations contained in its Statutes, deriving from “protected” articles which can be amended only with the consent of all the governments that are parties to the Convention respecting the BIS. In this context, I might mention first the regulation under Article 19, which stipulates that “the operations of the Bank shall be in conformity with the monetary policy of the central banks of the countries concerned. Before any financial operation is carried out by or on behalf of the Bank on a given market or in a given currency, the Board shall afford to the central bank or central banks directly concerned an opportunity to dissent.” Second, Article 27 gives the status of ex officio members of the Board of Directors of the BIS to the governors in office of the central banks of Belgium, France, Germany, Great Britain, Italy, and the United States, who may each appoint a second Director of the same nationality; the Board may also elect further Directors from among the governors of other member central banks, traditionally including the presidents of the Netherlands Bank and the Swiss National Bank and the Governor of the Bank of Sweden. And, finally, Article 14 of the Statutes restricts to member central banks the voting rights deriving from the shares subscribed in their respective countries, even if these shares have been resold among the public (which is true of approximately 16 percent of the share capital of the BIS, representing the whole of the U.S. issue and almost half of the Belgian and French issues).

These various provisions—which deviate significantly from those governing ordinary limited companies incorporated under commercial law—all have to do with the Bank’s principal object—promoting cooperation among central banks—which unquestionably falls under international public law.

I might take this opportunity to point out that the U.S. monetary authorities have never formally exercised the prerogatives arising from the status of founder central bank conferred on them by the Statutes of the BIS, despite the ties of close cooperation which have long existed between them and the Bank. The shares of the American issue were, in fact, subscribed by a consortium of U.S. banks, one of which—Citibank—exercises the rights of voting and representation at the General Meeting of the BIS on behalf, and in the absence, of the U.S. monetary authorities, as provided for in Article 14 of the Statutes of the BIS. Similarly, the U.S. monetary authorities have never taken up the two seats reserved for them on the BIS Board of Directors.

To come back to the international character of the BIS, it is also highlighted by the Bank’s special unit of account, the gold franc, which is equivalent to 0.29032258… gram of fine gold. In fact, the gold franc used by the BIS is identical to the old “franc germinal” of 1803, to the franc of the now-defunct Latin Monetary Union (which existed from 1865 to 1926), and to the pre-1936 Swiss franc, and it enjoyed a golden age as a unit of account in numerous international convention treaties—a role it has now ceded, by and large, to the International Monetary Fund’s special drawing right. In the case of the BIS, the gold franc defines its share capital and the nominal value of its shares, and serves as an accounting unit.10 The Bank’s assets and liabilities in currencies are valued on the basis of a price of US$208 per fine ounce of gold, after conversion of the other currencies into U.S. dollars at market rates. The adoption of this method of conversion puts the gold franc at just under US$2.

The BIS as a Banking Institution

These remarks on the capital, shares, and unit of account of the BIS bring us to the other facet of the Bank, which is also a banking institution with the structure of a company limited by shares: this, at first sight, would appear to contrast sharply with its character as an international organization. The BIS has a share capital and the classical administrative organs of a limited company: a general meeting of shareholders; a board of directors; and, of course, a management. I need not go into detail here about the organization of the Bank, since all the information can be found in its Statutes.

Of greater interest to us today are three general features which derive from the structure adopted by the BIS as a bank in the form of a limited company: namely, its autonomy of action, its financial independence, and its character as a bank.

(a) The constitution of the BIS in the form of a limited company, which the majority of the founder central banks themselves were in 1930, is clearly connected with the fact that the BIS is primarily an association of central banks, and not directly one of governmental authorities. Hence, it is central banks which take part in the Basle meetings—central banks which are formally the principal shareholders of the Bank and which are represented on its Board of Directors. Of course, the degree of independence enjoyed by the member central banks vis-à-vis their respective governments varies from country to country. Nonetheless, the participation of central banks rather than governmental authorities—a feature which sets the BIS apart from most, if not all, international intergovernmental organizations—endows the BIS with a character that is more technical and bank-oriented than political and institutional. Moreover, various provisions in the Bank’s Statutes clearly illustrate that this autonomy had been envisaged from the start: for example, Article 30 stipulates that no person who is a member or an official of a government shall be appointed or hold office as a Director of the BIS unless he is the governor of a central bank; the same applies to any member of a legislative body unless he is either the governor in office or a former governor of a central bank. Even more important are the regulations contained in Article 24, clauses (c) and (d), which forbid the Bank to make advances to governments or to open current accounts in the names of governments.

(b) Another fundamental reason for the adoption of the form of a company limited by shares was undoubtedly the concern to ensure the Bank’s financial independence. The BIS has an authorized capital of 600,000 shares, whose nominal value is 2,500 gold francs each; 473,125 of these shares, paid up to the extent of 25 percent, have been issued, yielding a paid-up capital of almost 300 million gold francs. In addition, the Bank currently has reserves amounting to close on one billion gold francs. Furthermore, the BIS is required to operate according to banking criteria and to distribute profits in conformity with the regulations contained in Article 51 of the Statutes, which include the payment of a dividend. For the most part this dividend is paid to the shareholding central banks, with the remainder going to the Bank’s private shareholders, who do not, however, enjoy rights of voting or representation at the General Meeting. The effect of this structure is to give the BIS considerable financial independence, enabling it to perform its functions and, in particular, to intervene rapidly in order to assist central banks without having to depend on governmental contributions.

(c) Benefiting, as it does, from a high degree of independence at both organizational and financial levels, the BIS is first and foremost a bank at the service of, and fostering cooperation between, central banks. It is thus authorized, under Article 22 of its Statutes, to conclude with banks, bankers, corporations or individuals of any country any of the operations it is authorized to carry out with central banks; it is this provision which enables the BIS to be active in the markets. Moreover, in the interest of its credit standing as a bank, the BIS is subject, in respect of its own operations, to the jurisdiction of ordinary courts. Under Article 55 of the Statutes, the Bank may be proceeded against in any court of competent jurisdiction, and its own assets (as distinct from the deposits and assets entrusted to the Bank, which benefit from immunity in this regard) may be subject to measures of compulsory execution. The position of the BIS in this respect is similar to that of the World Bank, which, for the same reason—to ensure its credit standing on the financial markets—may, under Article VII, Section 3 of its Articles of Agreement, be proceeded against by creditors in any court of competent jurisdiction.11

III. What the BIS Does

Having described what the animal looks like—at least in the eyes of a lawyer—I will now turn to the more practical question of what the animal does. In fact, the activities of the BIS may be grouped under three headings: the BIS as central banks’ bank, as promoter of international monetary cooperation, and as agent for international settlements.

Central Banks’ Bank

The BIS carries out a wide range of banking operations, which derive in the main from its ability to assist central banks in managing and investing some of their monetary reserves. At present, more than eighty central banks from all over the world have deposits with the BIS. As I have already mentioned, between 10 and 15 percent of world foreign exchange reserves are currently invested with the BIS in this way (about US$60 billion at the end of March 1988).

The continuing expansion of the Bank’s functions as banker to the central banks is reflected in the sharp increase which has been recorded in its balance-sheet total over the last few years in line with the growth of international monetary reserves, especially official holdings of foreign exchange.

The major part of the funds deposited with the BIS—in other words, those which are not required for lending to central banks—are placed in the market. Here the BIS draws largely on the services of first-class commercial banks. The main forms of investment include deposits with commercial banks and purchases of short-term negotiable paper, including treasury bills. These operations today constitute a major segment of the Bank’s activities on the banking side. Because most of the reserve assets which central banks hold in the form of deposits with the BIS need to be available to them at rather short notice, the Bank’s employment of these resources emphasizes the maintenance of a high degree of liquidity.

In addition to placing surplus funds in the international markets, the BIS sometimes has occasion to make liquid resources available to central banks.12 Such facilities may take the form of swaps against gold; covered credits secured by means of pledges of gold or marketable short-term securities; credits against gold or currency deposits held with the BIS in the same amount for the same durations; unsecured credits in the form of advances or deposits; or standby credits, which in individual instances are backed by guarantees given by the member central banks. In addition, the Bank undertakes operations in foreign exchange and in gold, both with central banks and with the markets.

In late 1982, a further dimension was added to the Bank’s role as a source of credit for central banks. Faced with the increasingly critical debt situation of some Latin American and Eastern European countries, and the resultant threat to the viability of the international financial system, the BIS responded to the desires expressed by the leading central banks by granting fairly large-scale loans to central banks, some of which were outside its traditional European area of operation: the central banks of Mexico, Brazil, and Argentina were granted bridging loans pending the disbursement of balance of payments credits extended by the International Monetary Fund conditional on certain economic policy requirements being met in those countries. Guarantees for these loans were provided by a number of BIS member central banks. The BIS has more recently made some similar bridging loans to central banks in a number of countries, both in Latin America and elsewhere, but with decreasing frequency.

Promoter of International Monetary Cooperation

Meetings of Central Bank Governors

Nowadays it seems hardly believable that before the foundation of the BIS, the governors of the leading central banks rarely had any opportunity to meet together. This fact underlines the useful role, as a forum for central bank cooperation, of the BIS since 1930.

The Bank’s offices in Basle are the regular meeting place for central bank governors from the major industrialized countries: the purpose of these meetings is to achieve a high degree of mutual understanding and, when practicable, to coordinate monetary policy internationally and thus help to ensure orderly conditions on the international financial markets. The central bank governors of the Group of Ten play a crucial role in this process, but the Basle meetings also offer a regular opportunity for exchanges of view with and among most central banks of the Organization for Economic Cooperation and Development (OECD) countries, as well as occasions for contacts with other central banks, including several central banks of Eastern European countries with centrally planned economies.

The precise functions of the BIS in the field of international monetary cooperation depend on the current requirements of the continually evolving international monetary system. Following the Second World War, the immediate need to restore currency convertibility and subsequently the laying of secure foundations for the Bretton Woods system of fixed exchange rates presented the central banks with difficult problems calling for joint solution. In addition to providing a regular forum for discussion among central banks, the BIS played an important role in the establishment and operation of the various intra-European payments arrangements between 1947 and 1958. Then, between 1960 and 1971, which was marked by recurrent waves of speculation against a number of different currencies, the Basle meetings resulted, on many occasions, in important monetary policy moves being undertaken by the central banks. In addition, the gold pool, which existed from 1961 to 1968 to ensure that gold prices on the private markets corresponded to the official gold price, operated on the basis of directives formulated and issued in Basle by the central bank governors of the Group of Ten. The network of swap arrangements between the U.S. monetary authorities and a number of central banks to reinforce confidence in the dollar and to provide emergency short-term liquidity to the system generally also had its origins in 1962 within the framework of the BIS.

The general changeover to floating exchange rates in March 1973 brought a new need for coordination in connection with the central banks’ desire to avoid potentially damaging fluctuations in exchange rates. However, fixed but adjustable exchange rates apply between those countries participating in the Exchange Rate Mechanism of the European Monetary System (EMS).

Permanent Secretariats

In fulfilling its role as a center for cooperation among central banks, the BIS has been called upon to provide the permanent secretariats in two particular fields, both of which have acquired great significance.

In connection with the EMS, since 1964 the Bank has provided the secretariat for the Committee of Governors of the European Community (EC) central banks and for the Board of Governors of the European Monetary Cooperation Fund (EMCF),13 both of which are official organs of the European Communities. The importance of the Committee of Governors has grown since the implementation of the EMS in March 1979, given the need for closer convergence of the monetary policies pursued in the System’s individual member countries, and the continuing efforts to improve the working of the EMS.

In December 1974, in the light of contemporary banking problems, the central bank governors of the Group of Ten countries set up a new committee to examine the scope for improving international cooperation between bank supervisors; from this initiative emerged the Committee on Banking Regulations and Supervisory Practices, the secretariat of which is provided by the Bank. This Committee, better known as the Cooke Committee—after Peter Cooke of the Bank of England, who was its chairman for a number of years—pools information on banking supervisory regulations and surveillance systems in the individual countries, including the supervision of banks’ foreign-currency business, identifies possible danger areas, and proposes measures to safeguard the banks’ solvency and liquidity. In this last respect, the Committee has recently issued proposals designed to achieve international convergence in the measurement of the adequacy of banks’ capital and to set agreed standards which all major banks would be expected to observe.

Meetings of Central Bank Experts

The Eurocurrency Standing Committee was set up at the BIS in 1971 to provide the central bank governors of the Group of Ten countries with information concerning the monetary policy aspects of the Eurocurrency market. Circumstances have, from time to time, prompted the central banks concerned to deal with specific aspects of the Eurocurrency market, such as the placement of central banks’ reserves in the market (1971) and the apparent lack of a lender of last resort in the Euromarket (1974). More recently, the Eurocurrency Standing Committee has focused on the implications of the debt problem not solely for the Euromarket but for the entire international credit system. In April 1986, the Bank was able to publish a comprehensive report on recent innovations in international banking which had been prepared by a study group working in the context of the Eurocurrency Standing Committee. This report, perhaps better known as the Cross Report—after Sam Cross of the Federal Reserve Bank of New York, who was the chairman of the study group—became an immediate best-seller in the financial world.14

The Bank also organizes regular meetings of central bank experts on matters of mutual interest, such as the gold and foreign exchange markets and other economic, monetary, technical, and legal questions of interest to central banks. Mention may be made, for instance, of the Group of Computer Experts and the Group of Experts on Payment Systems established by the central banks of the Group of Ten countries, and also of the central bank Group of Experts on Monetary and Economic Data Bank Questions, which is in charge of developing the Data Bank set up at the BIS. The BIS provides the secretariat for all these groups.

Publications and Statistical Research

In its various executive and coordinating tasks, the BIS receives strong support and stimulus from the research, particularly in the monetary field, conducted by its Monetary and Economic Department. The part of the Department’s work which attracts the widest public attention is the Bank’s Annual Report, whose analysis of monetary and economic developments and independent views has won it a widespread reputation.

Since 1963, the Bank has acted as the reporting center for statistics on international banking, the purpose of which is to bring greater transparency to the Eurocurrency markets; the main results of this work (external positions in domestic and foreign currencies of banks in 18 industrial countries and 6 offshore centers—the Cayman Islands, the Netherlands Antilles, Bahrain, The Bahamas, Singapore, and Hong Kong—and of the branches of U.S. banks in Panama vis-à-vis all third countries) have been published at quarterly intervals since the end of 1974; since 1985 these quarterly reports have also included information on other questions of current interest, such as the ECU market or the total financing facilities arranged on the international financial markets. Since 1978, the Bank has, in addition, published more comprehensive half-yearly statistics on the maturity distribution of international bank lending in an endeavor to offer a clearer picture of credit risks in individual countries; these statistics have included the liabilities, claims, and undisbursed credit commitments of commercial banks in 15 industrial countries vis-à-vis third countries; the third-country coverage is worldwide, with each country being listed individually and claims shown on both a consolidated basis and broken down according to maturity and sector (banks, public sector nonbanks, and private sector nonbanks). Furthermore, since 1983, the Bank has published, at irregular intervals, statistics on the nationality structure of the international banking market and the role of interbank operations for 15 countries and the branches of U.S. banks in 5 offshore centers. Since 1982, the Bank has also jointly published with the OECD half-yearly reports on foreign indebtedness that include trade-related nonbank credits, as well as bank lending.

One of the most recent examples of economic and statistical publications in which the BIS has been involved is a work that was jointly compiled by the BIS with the International Monetary Fund, the World Bank, and the OECD and consisted of a report by an international working group on external debt statistics; as befitted such an international effort, the publication, entitled External Debt: Definition, Statistical Coverage and Methodology, appeared in both English and French in early 1988, and has since appeared in Spanish as well.

Cooperation with Other International Organizations

The Bank participates as an observer both in the work of the Interim Committee of the Board of Governors of the International Monetary Fund on the International Monetary System and at meetings of both the finance ministers and central bank governors of the Group of Ten countries, as well as their deputies. Furthermore, the Bank performs the functions, entrusted to it in August 1964 by the ministers and governors of the Group of Ten, of collecting and distributing to all the participants in the Group and to Working Party No. 3 of the Organization for Economic Cooperation and Development statistical data concerning the financing of external surpluses and deficits of the Group of Ten countries.

In this connection, it should be recalled that the BIS provides the secretariat for the governors of the EC central banks and for the EMCF. The agency role performed for the latter is mentioned below.

Agent for International Settlements

The third object of the BIS under its Statutes is to act as trustee or agent in regard to international financial settlements entrusted to it under agreements with the parties concerned. Indeed, various agency functions have accompanied all stages of the history of the Bank.

As already mentioned, the functions of the BIS under the Young Plan for the settlement of the German reparations problem, and under the related Young loan of 1930, were the immediate reason for activating the plans for creation of the Bank as a permanent forum for central bank cooperation. At the same time, the BIS took over analogous functions with respect to the Dawes loan to Germany of 1924 and the Austrian Government International Loan of 1930 (“IBARÖ”). While the functions under the Young Plan—owing to the political and economic circumstances of the early thirties—were performed for only a short period, the BIS had to deal with the Young and Dawes loans again after the London Debt Agreement of 1953, when the servicing of these loans was resumed under new terms. It may be recalled in this connection that the interpretation of the exchange guarantee clause (which in 1953 replaced the gold clause) of the Young loan gave rise to a dispute, which led to an arbitral award in 1980.

New agency functions also marked the Bank’s rapid development after the period of very reduced activity during World War II. A function which has now lapsed, but whose influence survives in various forms of monetary cooperation, is that which the BIS fulfilled in the context of the European Payments Union (1950–58) and its forerunners, the multilateral payments agreements of 1947–50. At the end of 1958, after the European currencies had become fully convertible, the European Payments Union was replaced by the European Monetary Agreement (EMA), a multilateral system of settlements, and the Bank assumed responsibility for the execution of all financial operations connected with the Agreement until it was terminated in 1972. It then lent its services as agent for the application of the OECD Exchange Guarantee Agreement, which was concluded in place of the EMA and continued in force until the end of 1978. Until recently, the BIS also performed the functions of depositary under an act of pledge for the secured loans which were issued by the European Coal and Steel Community between 1954 and 1961.15

At the time most of these tasks were approaching their end, two related, and yet separate, agency functions were entrusted to the Bank in connection with the European currency unit, or ECU. Thus, the BIS has acted as agent for the EMCF since its inception in 1973. In this capacity, the Bank carries out various operations associated with the creation, utilization, and remuneration of the official ECU. In addition, the Bank recently—in October 1986—accepted separate agency functions in connection with the operation of the private ECU clearing and settlement system. I shall now deal, in rather more detail, with this twofold function of the BIS in connection with the ECU.

IV. The BIS and the ECU

Before giving a brief description of the respective tasks of the BIS relating to the official and private ECU, it may be appropriate to outline some of the common features and of the differences between the ECU created by and within the EMCF16—which has come to be called the “official” ECU—and the “private” ECU circulating elsewhere.

The only link at present between the official ECU and the private ECU is their common definition. The definition of the official ECU as a basket of fixed, but adjustable currency amounts is laid down in Council Regulations (EC Regulation Nos. 3180/78 of December 18,1978 and 2026/84 of September 15, 1984). Transactions in private ECUs are based on the definition of the official ECU (“open-basket approach”)—that is, the private ECU follows any changes in the definition of the official ECU. This link, however, originates from a spontaneous decision by the markets and not—as in the case of a national currency—from legal rules.

In respect of all other characteristics, the two types of ECU are quite separate. It should be stressed, in particular, that the conditions of their creation and circulation are very different and that assets denominated in private ECUs, even if held by official authorities, cannot be turned into holdings of official ECUs.

The official (reserve) ECU is created against gold and dollars through swap operations between EC central banks and the EMCF. The volume of official ECUs thus fluctuates in accordance with changes in the gold price and the dollar exchange rate, on the one hand, and volume movements in EC central banks’ gold and dollar reserves, on the other. In contrast, private ECUs are created by commercial banks on demand of their customers against national currencies, independently of the supply of official ECUs.

The BIS and the Official ECU

Definition of the ECU

In March 1979, the EC established the European Monetary System (EMS) to stabilize its members’ exchange rates and create a zone of monetary stability in Europe. The exchange rate mechanism of the EMS provides for intervention in the foreign exchange markets to maintain the bilateral rates of the member currencies within a band of agreed-upon central rates.

The ECU was placed at the center of this system. It is defined as a basket containing a fixed amount of each member’s currency. At present, the ECU basket includes the currencies of all the EC members except the two newest ones, Spain and Portugal. The weight of each currency in the basket—which is subject to periodic change—is determined on the basis of criteria reflecting the relative economic weight of the various member currencies. The EC has changed the composition of the ECU once—in September 1984, at the time of the prescribed 5-year review.

Creation of the Official ECU

As previously indicated, official ECUs are created by the EMCF in exchange for three-month swaps by the EMS central banks of 20 percent of their gold and dollar reserves. The amounts of these swaps change every three months, in line with changes in the quantity and value of the central banks’ gold and dollar reserves. The value of the official ECU is defined to equal the value of the basket of component currencies. Thus, the stock of official ECUs held by central banks fluctuates with changes in the ECU values of their dollar and gold reserves.

Use of the Official ECU

The official ECU—created by and within the EMS—serves different purposes.17 It functions as the numeraire for the expression of the central rates for members’ currencies and as the reference point for the EMS “divergence indicator,” which acts as a signal of the presumptive need for corrective policy action by a participant. The ECU is the unit of value in which EMS intervention credits and other credit facilities of the EC are denominated. It is also the unit of account for EC institutions. As the common unit for the European Community and the EMS, the ECU is intended to reflect the values of, and in the view of some could ultimately replace, under a new definition, European national currencies.

Since July 1, 1985, ECUs may also be used for limited periods by members of the EMS as collateral, in the form of swaps, to acquire currency for intervention purposes.

The measures adopted in 1985 to strengthen the ECU’s attractiveness and usability also provide, among other things, that central banks of non-EEC countries with particularly close economic and financial links to the EEC and certain international monetary institutions—such as the BIS—may now hold official ECUs.

The BIS as Agent for the European Monetary Cooperation Fund

The Bank has been performing the functions of agent for the EMCF since the creation of this institution in 1973 by the member states of the European Economic Community. The EMCF was originally set up to administer the Community exchange rate, or “snake,” arrangement introduced in April 1972 and the reciprocal credit facilities already in existence or established in connection with the “snake.” These activities were extended with the conclusion, in March and April 1976, of the first Community loan operations, the administration of which was entrusted to the EMCF, in particular, with the introduction of the EMS, which superseded the “snake” mechanism on March 13, 1979.

As the EMCF’s agent, the Bank performs two main sets of functions: on the one hand, those connected with the operation of the EMS and, on the other, those relating to the execution of financial operations in connection with Community borrowing and lending to provide balance of payments support for EC member countries.

In the first case, the Bank’s role consists principally in the following:

  • (a) It records in ECUs in the EMCF’s books:

  • debts and claims vis-à-vis the EMCF of the EEC central banks participating in the EMS exchange rate mechanism which arise from interventions carried out by those central banks in other member countries’ currencies and reported to the Agent; and

  • settlement of these very short-term debts and claims.

  • (b) The Bank carries out operations associated with the creation, utilization, and remuneration of ECUs, namely:

  • concluding—in the name, and for the account, of the EMCF—swap operations with each of the EC central banks involving the transfer of ECUs to the institutions in question against their contributions of 20 percent of their gold holdings and 20 percent of their U.S. dollar reserves. These swap operations are renewed every three months, when the necessary adjustments are made, first, to ensure that each central bank’s contribution to the EMCF continues to represent at least 20 percent of both its gold and U.S. dollar reserve holdings at the end of the month preceding the renewal date and, second, in order to take account of changes in the price of gold and in dollar rates vis-à-vis the ECU. As of March 31,1987, the EMCF had issued in this way a total of ECU 44.8 billion, corresponding to approximately US$51 billion at the rate of exchange prevailing on that date;

  • entrusting, in the name of the EMCF, the respective central banks with the management of the gold and U.S. dollar assets they have transferred to the EMCF; and

  • effecting transfers of ECUs between the central banks’ “ECU reserve” accounts—in particular in respect of the settlement of debts and claims arising from interventions under the EMS exchange rate mechanism, of voluntary transactions between the central banks participating in the EMS, and of the payment of interest calculated on these central banks’ net positions in ECUs. During the Bank’s 1986/87 financial year, the gross amount of such transfers totaled nearly ECU 3.9 billion.

  • (c) The Bank enters in the EMCF’s books the operations carried out in the context of the short-term monetary support arrangements set up in February 1970. This facility has, however, not been activated since 1974, when it was used by the Bank of Italy.

In its functions as agent of the EMCF for the administration of borrowing and lending operations concluded by the Community in accordance with the regulations adopted by the Council of the European Communities in February 1975 and March 1981, the Bank is responsible principally for the following tasks:

  • carrying out payments connected with these borrowing and lending operations through the accounts which the EMCF has opened in its name at the Bank. (The accounts in question are, however, merely transit accounts, since the sums received by the EMCF under borrowing arrangements entered into by the Community are transferred on the same value date to the final recipients of the payments.);

  • recording these financial operations in the EMCF’s books;

  • keeping a check on the due dates laid down in the borrowing and lending contracts for the payment of interest and repayment of the principal; and

  • informing the Commission of the European Communities of the operations carried out for the account of the EC.

The BIS and the Private ECU

As you know, certain problems arise from the private use of composite units—such as the ECU and the SDR—which do not occur when denominating contracts in national currencies.18 These problems include the need to adapt contracts for the possibilities that the composition of the basket of component currencies could be changed, that one of the constituent currencies might not be available, or that a currency’s value could not be determined. Another crucial problem is how to develop ways to make payments in the composite units themselves.

With the rapid growth in the use of the private ECU and the resulting increase in the number of ECU payments between financial institutions, it became necessary to develop a multilateral ECU clearing and settlement system, which entered into operation in October 1986. The functions of agent for the purpose of running this system were entrusted to the BIS.19

Prior to the introduction of this new system, a small group of banks in Belgium, France, Italy, Luxembourg, and the United Kingdom (known as the Mutual ECU Settlement Account, or MESA) had been operating a scheme whereby they settled between themselves balances expressed in ECUs. These are not the official ECUs created by EC central banks within the EMCF but rather private ECUs—that is, assets expressed in units of account having the same value as the official ECU but created and held—as was discussed earlier—under different conditions.

As you know, the private ECU has become quite a popular vehicle in international markets, both among borrowers and among investors. According to the latest available statistics, ECU claims of banks are in the region of US$95 billion equivalent. The private ECU is also used by some companies and institutions for commercial purposes. But the procedures for making settlements in ECUs under the MESA scheme were rather cumbersome, with the possibility of using them in settlements quite limited. In order to facilitate settlements, the banks concerned asked the BIS to accept the role of settlement bank for a daily clearing to be operated through the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network. After extensive discussions with the banks and the ECU Banking Association (EBA) that they had set up, and with the full agreement of the EC central banks, the BIS agreed to undertake this task.

The BIS decision to support the private sector’s initiative, which was seen by many monetary officials as contributing to the strengthening of European financial integration, was not unusual, considering the other agency functions of the Bank in European monetary cooperation. Furthermore, since the BIS also operated as a market institution and had the professional experience with the technical complexities of international settlements involving both the private and public sectors, it could usefully contribute to devising a workable clearing mechanism for the private ECU.

In March 1986, the BIS signed an agreement with the EBA under which it assumed the function of agent for the private ECU clearing and settlement system set up by the Association. Once the major technical details had been worked out, the clearing system went into operation on October 1, 1986 for a trial period of twelve months. The experience gained during the initial months of the trial period led the Bank and the EBA, as had been foreseen from the outset, to amend and supplement certain provisions relating to the technical operation of the clearing system. These amendments, aimed chiefly at facilitating the daily execution of the clearing operations, appear in a revised agreement which replaced, effective April 30, 1987, the agreement of March 21, 1986.

In addition, the clearing system was gradually opened to new clearing banks, with the number of participants increased in stages in the light of the technical possibilities and according to the procedures approved by the competent bodies of the EBA. At present, the number of clearing banks participating in the system totals 30, and the average turnover of ECU payments effected through the system is 12 to 14 billion ECUs per day.

Structure of the Private ECU Clearing System

The structure and operation of the clearing system are based on three institutions:

(1) an ECU Banking Association,20 which was set up with the broad aim of facilitating operations in private ECUs and the particular purpose of implementing an ECU clearing and settlement system; membership in this Association is open to banks which have their office or a branch in one of the EC countries and which demonstrate sufficient interest in the development of ECU transactions; member banks which meet certain criteria laid down by the BIS and the Association may be designated as clearing banks; however, these criteria, relating principally to the level of activity in the ECU market, allow every EC member country to be represented by at least one of its banks;

(2) a netting center, SWIFT, is used to do the clearing at the technical level, with each clearing bank linked directly to a central clearing computer; and

(3) the BIS, as agent of the clearing banks, acts as clearing and settlement bank; it receives deposits in ECUs from the clearing banks and the final clearing balances are settled over these accounts. The BIS ECU accounts can only be used for settlement operations; they may never show debit balances and do not bear interest.

It should be clear that the system is designated in such a way that the BIS does not serve as a lender of last resort; the rules which have been agreed upon by the BIS and the EBA, and which are to be respected during the actual clearing and settlement process, are also based on this principle. As with any other clearing system, a strict time schedule is adhered to, so as to allow the daily settlement to take place smoothly.

Functioning of the Private ECU Clearing System

In practice, the system functions as follows21:

  • the BIS, as agent of the clearing banks, opens and operates clearing accounts in their names;

  • each clearing bank also opens an ECU sight account on the books of the BIS;

  • every working day, the clearing banks are able to send each other payment orders in ECUs through the netting center. Since it is a closed system—that is, total credit operations must equal debit operations—clearing banks in a debtor position are able to obtain ECU funds from creditor banks; and

  • to square the residual balances, the BIS, having established that all debtor clearing balances are covered by credit balances in the respective banks’ ECU sight accounts, carries out the settlement operations.

Should any clearing bank have insufficient funds in its ECU sight account to cover its debtor clearing balance, the BIS would immediately inform the EBA and the netting center. Were no solution to be found, the entire clearing for that day would be canceled. All payments to and by the debtor bank in question would be withdrawn from the day’s clearing transactions, and new balances would be calculated and added to the clearing for the following settlement day.

V. Conclusions

The agency functions recently entrusted to the BIS in connection with both the official ECU and the private ECU are but two illustrations of the Bank’s capacity to adapt to a continually changing international monetary environment while remaining true to its origins and to its founders’ intention of making it a focal point for cooperation among central banks.

Other examples of the Bank’s flexibility and readiness to respond quickly to the needs of central banks abound. Let me simply recall the important role played by the BIS since the beginning of the 1980s in providing bridging finance to a number of central banks.

In the upheavals in the international monetary order that have occurred during the nearly sixty years since its foundation, the BIS has thus demonstrated a unique ability to adapt to—or even anticipate—the needs of central banks and, more generally, of the international financial community. The flexibility, the pragmatic character, and the responsiveness of the BIS enable it to play a very specific and useful role in international monetary cooperation which—rather than competing with—is complementary to that played by the Bretton Woods institutions.



At the outset I should mention two circumstances limiting my qualification to speak before this audience on a subject of close interest to the Fund. First, I am not a lawyer. I thus address this group with some trepidation, relying on what may have rubbed off on me from my contact with the Legal Department in the course of my career at the Fund. Second, I am no longer a staff member of the Fund, having completed my active duty in the Research Department last year. Consequently, I speak here as a visitor. I point to these circumstances especially in view of one of the subjects that I would like to address later in my remarks.

I shall make only a few observations on Professor Giovanoli’s excellent and informative paper. He has presented an interesting analysis of differences between the Bank for International Settlements (BIS) and the Fund. I found particularly revealing his remarks on the contrast between the two organizations brought about by the difference in their memberships. The members of the BIS are central banks, whereas the members of the Fund are states, as represented by their governments. As a result, technical deliberations in the BIS may be relatively unencumbered by considerations not immediately connected with the subject at hand and its political aspects. Questions of technical cooperation among the member central banks can, therefore, be more easily decided on their merits than can similar questions arising in the Fund. The comparatively small BIS membership of central banks of countries with similar economies also facilitates the decision-making process in that institution. Of course, political issues must everywhere be resolved through the give and take of the political process. It is a considerable advantage, however, to be able to settle primarily technical questions or issues of relatively narrow scope through substantive and technical discussions that are kept isolated, as much as possible, from their broader political contexts. These observations may be illustrated by the contrast between the active technical support given by the BIS to the European currency unit (ECU)—and even to the SDR—and the difficult deliberations faced by the International Monetary Fund in its endeavor to enhance the quality and usability of the SDR, particularly as a private asset. I shall come back to this question later.

The paper by Mr. Coats suggests a number of interesting questions, of which I would like to select three for comment. Two are of a general nature, and the third is more specific, technical, and legal in character.

The first question, which is implicit in any discussion of the SDR as an international reserve asset, is whether there is even a need for an asset that can serve, by itself or in combination with other assets, as an international medium of exchange and store of value—in brief, as international money. It used to be taken for granted that at least one such asset was needed to facilitate international trade and the accumulation of international purchasing power. Precious metals and national currencies have in turn—and sometimes in combination—served as international money. In the quarter century following World War II, gold and the U.S. dollar were the principal international monetary assets. Just before the convertibility of foreign-held U.S. dollars into gold was suspended in 1971, the SDR was brought into being to supplement existing reserves, if and when needed. The thought was that SDR allocations could provide additional non-currency reserves, thereby supplementing gold and preventing an undue, and perhaps destabilizing, reliance on a single reserve medium that was also the national currency of the world’s foremost producing and trading country.

At the beginning of the 1970s, suspension of the gold convertibility of the U.S. dollar, together with some pertinent monetary arrangements among major industrial countries, made the U.S. currency the principal international monetary asset. Nevertheless, the U.S. dollar, already overstrained by the challenge of providing sufficient international liquidity for a growing world economy while preserving its own strength and reliability, was further weakened by holders’ desires for gold conversion, against which the dollar’s value had to be protected. Before long, the dollar had to share its international monetary role with the currencies of a number of other industrial countries, with the values of these currencies linked in a volatile manner by floating exchange rates.

Could the future hold a more important role for the SDR as an international reserve medium, with gold phased out of the system and the international importance of the U.S. dollar—while still considerable—appearing to decline? There are those who say that in a world of floating exchange rates a central reserve asset is not needed. Market-induced changes in exchange rates will keep major currencies at equal strength. International reserves can then be kept in a number of these currencies, perhaps by selecting a basket of them that tends to minimize the risks associated with exchange rate fluctuations. There are, however, important advantages to having a single principal reserve asset for a regional economy or the whole world economy.

A single reserve asset can exert a unifying and integrating influence on the multinational economy it serves, just as a single national currency unifies and integrates a national economy. Moreover, the existence of a principal reserve asset allows, in my opinion, a greater range of options with respect to international monetary arrangements. The multicurrency reserve system can, in practice, function only in conjunction with a floating exchange rate regime. The existence of a principal reserve asset is compatible with floating but also with other exchange rate regimes, including a system of fixed par values. A reserve system with a principal reserve asset is, therefore, a more versatile reserve system. Finally, I believe that a widely accepted and used principal reserve asset can provide an anchor for currencies orienting themselves on its central value and can thus be a source of international economic and financial stability.

In a world where economic power is becoming less concentrated, no single national currency may be in a position to play the role of the principal reserve asset. If a return to the gold standard can be excluded, these reflections point to the possibility of an enhanced role for the SDR (or a similar medium) as a principal reserve asset in the world economy of the future.

The second general question that I would like to mention has to do with the role of private transactions in the evolution of an international monetary asset. Both papers presented at this session (by Messrs. Coats and Giovanoli) suggest the importance in this evolution of the establishment of a broad private basis for generating and holding such an asset and for engaging in a wide range of useful transactions denominated in it. Only such a development can save an asset like the SDR from the fate of Esperanto as an international language. (The reason why it is not worthwhile to learn Esperanto is that very few other people have learned it. Learning English or Spanish provides access to many more conversation partners or news media, and to a vastly greater literature, than does learning Esperanto.) The SDR system can be expanded only if the demand for SDRs grows. And that demand will grow only if the usefulness of SDR holdings increases. I agree with Mr. Coats’s view that a healthy growth of private financial transactions based on the official denomination of an internationally created reserve asset is essential to its general acceptance as a principal reserve asset. To appreciate this connection between official role and private acceptance, one has only to reflect on the limited use made of “official” balances of a typical national currency—coins, bank notes, and deposits at the central bank—in comparison with the heavy use indicated by the vast fabric of private monetary claims and liabilities denominated in the national currency unit.

Both Mr. Giovanoli and Mr. Coats have referred to the comparative development of the private ECU and the private SDR. While the private ECU has flourished and continues to do so, the private SDR, after a promising start in the early 1980s, has not been able to sustain its momentum and has, indeed, shown a retrograde development in recent years. A number of reasons may account for the difference in the evolutions of these two assets, which are in many respects quite similar. Differences in currency composition—with the ECU being a more distinct alternative to the U.S. dollar than the SDR, which has a large dollar component—and perhaps certain exchange control and tax incentives for holding ECUs in countries that are members of the European Community (EC) may have contributed to the faster growth of the private ECU. But an important part of the explanation is likely to be the active support given to the development of the private ECU by the EC and its members, both directly and indirectly through financial institutions with which they are in close contact, particularly the BIS. By contrast, the Fund and its members have not gone out of their way to support the development of the private SDR—for instance, by providing a clearing mechanism—but have viewed such a development from a neutral vantage point, or perhaps even with some suspicion.

In fairness, it should be said that the lack of support at the Fund for more rapid progression of the SDR toward becoming the principal reserve asset in the international monetary system appears to indicate a failure at the political level, not an absence of vision and effort at the staff level. Indeed, staff work may be credited with maintaining pressure for the steady, if slow, progress that has been made in improving the quality and usability of the SDR. Further improvements may in time ensue. This brings me to the last issue discussed in Mr. Coats’s paper on which I would like to comment.

Modifications in the rules for use and transfer of SDRs and in the way the SDR interest rate is set have, over time, aimed at improving the competitiveness of the SDR vis-à-vis currency reserve assets. In this process the SDR started far behind, with many restrictions on its use and with a low interest rate—originally set at 1.5 percent, reflecting its initial gold value guarantee. Although many restrictions have already been removed and the SDR interest rate has been raised to the level of market interest rates on short-term assets denominated in the five currencies contained in the SDR valuation basket, there may still be some way to go to achieve full competitiveness. The apparent preference for currency reserves over SDRs observable in the reserve management of many countries provides evidence of the need to improve the quality of the SDR still further if it is to become the world’s principal reserve asset, as envisaged in the Fund’s Articles of Agreement.

Improvement in the SDR has, understandably, proceeded in small steps. In his paper, Mr. Coats describes recent progress and addresses two further steps that could be considered: first, removal of a present competitive disadvantage of the SDR in the event that payment of currency for SDRs in a transaction by agreement is delayed and, second, certain improvements in forward operations in SDRs. I shall comment on these two topics in turn.

Mr. Coats reports that for late payment of the currency portion of a sale of SDRs for currency agreed between two parties, it is intended to require compensation of the injured party in accordance with the straightforward method customary in foreign exchange transactions. This compensation is based on the thought that, for the duration of the delay in payment, the injured party would have to bear the cost of borrowing the currency it had failed to receive, but that it would still receive interest on the asset to be delivered by it and retained in its possession during the delay. For SDR transactions, this means that the party making the late payment of currency must compensate the injured party for the excess, if any, in the interest on the currency that should have been delivered over the interest on the equivalent SDR balance. It should be noted that in the calculation of a fair compensation for late payment, any change in the exchange rate between the SDR and the currency in question in the interval between the agreed value date and the date of actual consummation of the transaction is completely irrelevant.

By adjusting existing procedures to this standard market practice, the Fund would merely undo the effect of what appears to be a questionable interpretation of the rule (Rule P-6 of the Fund’s Rules and Regulations) for determining the exchange rate for a transaction by agreement in relation to the value date. The rule specifies the use of the exchange rate three (or two) business days prior to the value date. The intention behind this rule is clearly to select the exchange rate in effect on the day of the agreement, a rate of which the parties would have an approximate knowledge even though they might not know the last decimal places of the rate that would be used in the Fund’s calculation. When the agreed and actual value dates differ because of a late currency payment, the reference to the value date (without adjective) in Rule P-6 must be interpreted to mean agreed value date. Nothing in the language of this rule appears to stand in the way of such an interpretation. The use of an exchange rate related by Rule P-6 to a delayed actual value date would impose an arbitrary and unwanted exchange rate on the agreeing parties—an obvious absurdity in the context of a voluntary contract.1

With regard to forward operations in SDRs, two aspects are of particular interest. First, the parties are free to agree on a forward exchange rate for the agreed transaction. This freedom to negotiate a price, and through numerous such negotiations to establish a market price, for the SDR in forward operations may provide a useful vent for adjustment of the SDR to market pressures. At present, both the spot price of the SDR in terms of currencies and the SDR interest rate are calculated by fixed formulas. In general, market assets must be able to adjust by means of changes in either the price or the interest yield in order to remain marketable. The freely agreed forward price of the SDR may supply the needed flexibility. For this reason, I am less than enthusiastic about Mr. Coats’s suggestion that the Fund calculate SDR forward rates from a formula linking the forward exchange rates of the five basket currencies. It may not be harmful to publish such calculations as guidelines, provided it is clear that the transacting parties may agree on different forward rates.

The second issue arising in the context of forward operations in SDRs concerns the possibility of using the mechanism of forward operations for fixing SDR interest rates for periods longer than the present one-week span for which these rates are calculated. Here I come down on the side of greater Fund initiative. The Fund might well contribute to the usefulness of the SDR by accepting fixed-term SDRdeposits of various maturities at interest rates oriented on the yield curves of the five component currencies. I also agree with Mr. Coats on the desirability of the Fund helping to make a market for forward SDRs in the manner already implemented for spot transactions in SDRs.


These lecture notes have no official character and merely reflect the views of the author expressed in 1988. For a revised and more extensive version of the text, see Mario Giovanoli, “The Role of the Bank for International Settlements in International Monetary Cooperation and its Tasks Relating to the ECU,” The International Lawyer (1989), 841–64. In the meantime, a number of changes have occurred with regard to the functioning of the ECU clearing system; see Daniel Lefort, “Aspects juridiques de l’ecu privé,” Schweiz. Zs. f. Wirtschaftsrecht/Rev. suisse de dr. des affaires SWZ/RSDA, No. 2 (forthcoming).