Dr. Raghuram Rajan, the Governor of the Reserve Bank of India, has been elected as Vice-Chairman of the Board of Directors of the Bank for International Settlements (BIS). This is yet another indication of the respect monetary authorities all over the world have for Dr. Rajan.
Winner of many international awards for his outstanding contribution to Financial Economics, he is the author of the cautionary treatise, Fault Lines – How Hidden Fractures Still Threaten the World Economy.
His exceptional prediction of the 2008 global economic crisis (called the Great Recession) was a true feather in his cap, though, at that time, many leading economists dubbed his views obscurantist. Lawrence Summers, a noteworthy economist cum administrator criticized: "the basic, slightly dead-eyed premise of the paper to be misguided." Others called him an “anti-market Luddite, wistful for old days of regulation.” Subsequent events proved Dr. Rajan’s clairvoyance and his detractors looked foolish.
Of late, he has been pleading for better coordination among central banks to ensure that we don’t easily slip into some unintended economic crisis. In particular, he is advocating early withdrawal from unconventional policy measures like quantitative easing. He is not against such measures per se, but cautions that continuation of these for a longer time than necessary is fraught with grave risk to the financial system. No economist would dare to question him now.
This is the first time that an Indian is elected as either Chairman or Vice-Chairman of the Board of BIS. This is an occasion for us to get to know some details about BIS.
Chairman of the Board is Dr. Jens Weidmann, who is also the President of the Deutsche Bundesbank, the central bank of Germany. Interestingly, Weidmann is only 47 years old and even younger than Rajan, who is 52. The Board consists of 21 Directors whereas 60 central banks are members of BIS.
BIS was established in the year 1930 at Basel, Switzerland under the Hague Agreement. The signatories to this Agreement were the central banks of Belgium, France, Germany, Italy, Japan and the United Kingdom and a financial institution representing the United States.
There was a threat to the existence of BIS in 1944. The United Nations Conference in Bretton Woods, which agreed to the creation of International Monetary Fund (IMF) and the World Bank, also adopted a resolution calling for the liquidation of the BIS! Fortunately, the resolution was put aside in 1948.
Earlier, during the World War II, BIS temporarily moved from Basel to Chateau-d’Oex following the outbreak of hostilities between Germany and France.
What does BIS do?
BIS undertakes research and analysis on policy issues for central banks and renders consultancy services to central banks in the management of foreign exchange and gold reserves.
It played a significant role in the formulation of Basel documents II and III, which seek to regulate the risk appetite of commercial banks through capital requirements, liquidity and leverage guidelines.
Earlier in the year 1998, BIS along with the Basel Committee on Banking Supervision (BCBS) set up the Financial Stability Institute (FSI), which provides practical training for financial sector supervisors worldwide.