AN ANALYSIS OF BIS REPORT 2009

The Bank for International Settlements (BIS) is an international financial institution owned by central
banks which "fosters international monetary and financial cooperation and serves as a bank for central
banks". The BIS carries out its work through its meetings, programs and through the Basel Process
hosting international groups pursuing global financial stability and facilitating their interaction. It also
provides banking services, but only to central banks and other international organizations. It is based in
Basel, Switzerland, with representative offices in Hong Kong and Mexico City.

AN OVERVIEW ON BIS REPORT:

The mission of formulating a BIS Report is to serve central banks in their pursuit of monetary
and financial stability, to foster international cooperation in those areas and to act as a bank for
central banks.

Established in 1930, the BIS is owned by 60 central banks, representing countries from around
the world that together account for about 95% of world GDP. Its head office is in Basel,
Switzerland and it has two representative offices: in Hong Kong SAR and in Mexico City.

The BIS pursue its mission by:

 fostering discussion and facilitating collaboration among central banks

 supporting dialogue with other authorities that are responsible for promoting financial
stability
 carrying out research and policy analysis on issues of relevance for monetary and
financial stability
 acting as a prime counterparty for central banks in their financial transactions
 serving as an agent or trustee in connection with international financial operations

GOVERNANCE OF BIS:

The governance of the Bank is exercised at three levels - the Board of Directors, the General
Meetings of member central banks and BIS Management - as determined by its Statutes.
Board of Directors
The Board is responsible for determining the strategic and policy direction of the BIS,
supervising BIS Management, and fulfilling the specific tasks given to it by the Bank's Statutes.
It meets at least six times a year. 

Composition of the Board

The Board may have up to 18 members, including six ex officio Directors, comprising the
central bank Governors of Belgium, France, Germany, Italy, the United Kingdom and the United
States. They may jointly appoint one other member of the nationality of one of their central
banks. Eleven Governors of other member central banks may be elected to the Board.

The Board elects a Chairman and may elect a Vice-Chairman from among its members, each for
a three-year term who are Jens Weidman and Frankfurt am Main.

Management of the BIS

BIS Management is under the overall direction of the General Manager, who is responsible to
the Board of Directors for the conduct of the Bank.

In accordance with the Bank's Statutes, the General Manager is assisted by the Deputy General
Manager.
Advisory committees

The key committees advising the General Manager and Deputy General Manager are the
Executive Committee, the Finance Committee and the Compliance and Operational Risk
Committee. The first two committees are chaired by the General Manager and the third by the
Deputy General Manager, and all include other senior members of the Bank's Management.

The Executive Committee advises the General Manager primarily on the Bank's strategic
planning and the allocation of resources, as well as on decisions related to the broad financial
objectives for the banking activities and operational risk management.

The Finance Committee advises the General Manager on the financial management and policy
issues related to the banking business, including the allocation of economic capital to risk
categories.

The Compliance and Operational Risk Committee acts as an advisory committee to the
Deputy General Manager and ensures the coordination of compliance matters and operational
risk management throughout the Bank. The Committee also advises the Executive Committee on
material compliance and operational risk matters.

Financial information
Financial statements

The financial statements are prepared in accordance with the Statutes and accounting policies of
the Bank. The accounting policies are based on International Financial Reporting Standards
(IFRS) and are implemented in accordance with the decisions of the Board of Directors.

The BIS publishes audited annual financial statements  as at 31 March each year in its Annual
Report, which provides a comprehensive overview and analysis of the Bank's balance sheet and
profit and loss account, together with other financial, capital adequacy and risk management
disclosures in line with international accounting frameworks. It also publishes unaudited
semiannual financial statements as at 30 September each year.

The BIS balance sheet total was SDR 291.1 billion at 31 March 2019.

Liabilities

Currency deposits, primarily from central banks, constitute the largest share of the Bank's
liabilities. 
Compliance and risk management
In conducting its business, the BIS takes account of international standards and good business
practices, particularly in the areas of:

 Compliance
 Risk management
 Internal Audit

Annual Economic Report

The Annual Economic Report is the BIS's main economic review of the year. It presents
commentary on the global economy and outlines policy challenges.

80th Annual Report, 2009/10

In its 80th Annual Report the BIS notes that the steps taken by governments and central banks
prevented a financial system meltdown and helped bring to an end the great contraction in global
economic activity. The policy tasks that lie ahead, which are no less daunting than they were a
year ago, are analyzed in the Annual Report.

Overview of the economic chapters

Chapter I

The financial crisis has left policymakers with a daunting legacy, especially in industrial
countries. In setting policies, they must adopt a medium- to long term perspective while they
cope with the still fragile and uneven recovery. Households have only just begun to reduce their
indebtedness and therefore continue to curb spending. Extraordinary support measures helped to
contain contagion across markets, preventing the worst. But some measures have delayed the
needed adjustments in the real economy and financial sector, where the reduction of leverage and
balance sheet repair are far from complete. All this continues to weigh on confidence. The
combination of remaining vulnerabilities in the financial system and the side effects of ongoing
intensive care threaten to send the patient into relapse and to undermine reform efforts.

Macroeconomic support has its limits. Recent market reactions demonstrate that the limits to
fiscal stimulus have been reached in a number of countries. Immediate, front-loaded fiscal
consolidation is required in several industrial countries. Such policies need to be accompanied by
structural reforms to facilitate growth and ensure long-term fiscal sustainability. In monetary
policy, despite the fragility of the macro-economy and low core inflation in the major advanced
economies, it is important to bear in mind that keeping interest rates near zero for too long, with
abundant liquidity, leads to distortions and creates risks for financial and monetary stability.

Fundamental reform of the financial system must be completed to put it on more stable
foundations that would support high sustainable growth for the future. Above all, reform should
produce more effective regulatory and supervisory policies as part of an integrated policy
framework. A new global framework for financial stability should bring together contributions
from regulatory, supervisory and macroeconomic policies. Supported by strong governance
arrangements and international cooperation, such a framework would promote the combined
goals of financial and macroeconomic stability.

Chapter II

While some emerging market economies are in danger of overheating, GDP in most advanced
economies is still well below pre-crisis levels despite strong monetary and fiscal stimulus. The
rapid increase of government debt raises urgent questions about the sustainability of public
finances.

Banks have increased their capital buffers, and profits have been boosted by a number of
temporary factors. But banks still remain vulnerable to further loan losses. As recent disruptions
in funding markets have shown, banks can face significant refinancing pressures when sentiment
turns adverse. Although banks in the crisis countries have made some progress in repairing their
balance sheets, this process is far from complete. Efforts to restructure and strengthen the
financial system should continue.

Chapter III

Central banks cut policy rates sharply during the crisis in order to stabilize the financial system
and the real economy. Those essential cuts, reinforced by unconventional policy measures to
address financial market malfunctioning, helped to forestall an economic meltdown. But there
are limits to how long monetary policy can remain expansionary. Low interest rates can distort
investment decisions. The financial stability risks that could arise from a prolonged period of
extremely low policy rates also need to be very carefully weighed. An extended period of such
low policy rates can encourage borrowers to shorten the duration of their debts, facilitate the
increased leverage of risky positions and delay necessary balance sheet adjustments. While
policymakers can and should address such risks with other tools, they may still need to tighten
monetary policy sooner than consideration of macroeconomic prospects alone might suggest.
Chapter IV

Emerging market economies (EMEs) are recovering strongly and inflation pressures there are
rising. Given low policy rates in the major financial centers, many EMEs are concerned that their
stronger growth prospects could attract destabilizing capital inflows, leading to currency
appreciation. Some continue to keep policy rates low and resist exchange rate appreciation by
conducting large-scale intervention in foreign exchange markets. Such policies tend to be
associated with a sizeable expansion in bank balance sheets, rapid credit growth and asset price
overshooting. The risks of domestic overheating thus increase. To promote more balanced
domestic and global growth, some EMEs could rely more on exchange rate flexibility and on
monetary policy tightening. In addition, prudential tools have an important role to play in
enhancing the resilience of the financial system to domestic and external financial shocks. In
contrast, while capital controls may have a limited and temporary role, they are unlikely to be
effective over the medium term.

Chapter V

The level of public debt in many industrial countries is on an unsustainable path. Current budget
deficits, partly cyclical but also swollen by policy responses to the crisis, are large in relation to
GDP. And expenditures related to ageing populations are set to increase considerably over the
next few decades. Recent events in Greece and other southern European countries have shown
how quickly investors' doubts about the sustainability of public finances in one country can spill
over to others. In addition, high levels of public debt may lower long-term economic growth and
ultimately endanger monetary stability.

These risks underscore the urgent need for credible measures to reduce current fiscal deficits in
several industrial countries. Tackling the long-term fiscal imbalances requires structural reforms
aimed at boosting the growth of potential output and containing the future increase in age-related
expenditures. Such measures may have adverse effects on output growth in the short term, but
the alternative of having to cope with a sudden loss in market confidence would be much worse.
A program of fiscal consolidation - cutting deficits by several percentage points of GDP over a
number of years - would offer significant benefits of low and stable long-term interest rates, a
less fragile financial system and, ultimately, better prospects for investment and long-term
growth.

Chapter VI

The crisis revealed that some business models of financial firms were seriously flawed. For a
long time, financial firms earned comparatively low returns on assets but used high leverage to
meet targets for returns on equity. They also took full advantage of cheap short-term funding.
This strategy made their profits more volatile, especially during periods of market stress. Since
the crisis, investors have become more discriminating in their treatment of financial firms,
rewarding those with more prudent and resilient models. The priority of policymakers now is to
incorporate in the regulatory framework the stronger standards being imposed by the
marketplace. Higher-quality capital, lower leverage and more stable funding should buttress the
sector's future resilience. This need not undermine medium-term profitability, particularly if
restructuring continues and excess capacity is progressively eliminated. In addition, more sound
business models should restrain funding costs, thus contributing to strong, stable and sustainable
performance in the sector.

Chapter VII

The stability of the financial system is undermined by distorted incentives and procyclical
feedback effects. Macro-prudential policy, which broadens the perspective of traditional
prudential policy, can readily strengthen the resilience of the financial system to procyclicality
by adapting conventional prudential tools. Countercyclical capital buffers, for example, can be
built up when credit growth rises above trend during a boom, and released during the downturn.
Other measures such as ceilings on loan-to-value (LTV) ratios for mortgage lending can act as
automatic stabilizers because they will bind more during a boom when banks typically seek to
expand property loans by accepting high LTV ratios. Such approaches could help to restrain
credit and asset price excesses and thus mitigate the build-up of systemic financial
vulnerabilities.

Addressing procyclicality is closely linked to traditional macroeconomic stabilisation policy. A

more resilient financial system complements countercyclical monetary and fiscal policy, helping
address threats to financial stability in the downturn. That said, monetary policy does need to
lean more against the build-up of systemic financial vulnerabilities during the boom. That can be
done by lengthening the policy horizon, thereby promoting long-term price stability more
effectively.