The Investment Professional - International Financial Agreements

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Major Historical International Financial Agreements

During the twentieth century, a number of international financial agreements were reached that created the regulations, standards, and institutions that exist today.

International Banking Standards Agreements

1988: Basel I Accord
2004: Basel II Accord

Illustrations by Mark Andresen

Central bank governors of the Group of Ten established the Basel Committee in 1974. The committee was tasked with formulating bank supervisory standards and guidelines and issuing recommendations for central banks to implement.

In 1988 the committee issued a capital measurement system known as the Basel Capital Accord, which consisted of a credit risk measurement framework that introduced a minimum capital standard. That framework was fully implemented in 1992.

In 2004 the committee issued risk and capital management requirement recommendations designed to stabilize the banking system. It was based on three pillars: minimum capital requirements, supervisory review, and disclosure requirements.

The Basel Committee, housed at the Bank for International Settlements in Basel, Switzerland, continues to work on amendments to the Basel II framework, particularly in the areas of risk management, off-balance-sheet vehicles, and securitization. It has also issued revisions to the Basel II market risk framework.

International Trade Agreements

1947 to 1994: General Agreement on Tariffs and Trade (GATT)
1995 to present: World Trade Organization (WTO)

After World War II, industrialized nations sought to bring an end to the protectionism that had run rampant in the prewar period. GATT significantly reduced trade barriers, which helped spark a trade boom in the postwar years. Participating nations met periodically to negotiate different issues, and in 1995 they formed the WTO, which currently has more than 150 member countries.

Recent negotiations, which began with the Doha Development Round in 2001, ground to a halt over a number of contentious issues. Strife between developed and developing nations over agricultural subsidies, industrial tariffs, and nontariff barriers has led to the repeated breakdown of these talks.

In the absence of progress in multilateral talks, many countries are forging regional and bilateral trade agreements. However, the global financial crisis sparked a new protectionist sentiment in many countries, presenting a challenge to multilateral and bilateral trade negotiators.

International Currency Agreements

1944: Bretton Woods Agreement
1971: Smithsonian Agreement

At the Bretton Woods meeting that created the IMF (International Monetary Fund) and the World Bank, participating countries negotiated a historic international currency agreement. Under this agreement, each participating nation was required to set a peg for their national currency. If a currency’s value deviated too far from the peg, central banks were obliged to intervene in currency markets. Participating countries were also required to hold monetary reserves, either in the form of gold or currencies convertible into gold.

In subsequent years the IMF did not take on the role initially envisioned in the accord, and the US gradually assumed the role of global monetary hegemon. In the late 1950s and 1960s, the agreement began to unravel and finally fell apart in August 1971, when President Nixon decided to devalue the dollar, effectively ending the gold standard.

Several months later the Group of Ten signed the Smithsonian Agreement under which currencies appreciated or depreciated against the dollar. In 1973 a subsequent agreement was signed, under which currencies were allowed to float freely.