CIGI G20 Papers | No. 1, June 2010 The Financial Stability Board and International Standards Eric Helleiner Addressing International Governance Challenges The Centre for International Governance Innovation Table of Contents Summary Summary 2 Established in April 2009 by the Group of 20 (G20) leaders, the Financial Stability Board (FSB) has been described by US Treasury About the Author 3 Secretary Tim Geithner in very ambitious terms as a new “fourth pillar” of the architecture of global economic governance alongside Introduction 3 the International Monetary Fund (IMF), World Bank and World Membership and Legitimacy 2 Trade Organization (WTO). Its basic structure and mandate build directly on those of its predecessor, the Financial Stability Forum Widening Membership and New Challenges 5 (FSF), an institution that did not live up to the hopes of many of its founders. Will the FSB meet the same fate in its efforts to strengthen Enduring Legitimacy Problems vis-à-vis Non- 7 international prudential standards? members Mechanisms for Promoting Compliance 8 Three features of the FSB will help it overcome some of the FSF’s weaknesses: its larger membership addresses some of the Strengthening Compliance in Four Ways 9 FSF’s legitimacy problems; it has been assigned more effective mechanisms to encourage compliance with international New Challenges and Priorities 11 standards; and the FSB has been given a stronger capacity to The Importance of Macroprudential Regulation 12 tackle macroprudential issues. Each of these features also raises new challenges and priorities to be addressed: A Stronger Capacity to Address 13 Macroprudential Issues • With the FSB’s larger membership, the following should be encouraged: more focus on principles-based international The Challenges of Macroprudential Regulation 15 standards rather than detailed rule-based ones; the Addressing Private Capture 16 strengthening of the voice of new developing country members within the institution; and further efforts to Conclusion 17 address its lack of accountability to non-members. Appendix: Comparing the Financial Stability 20 Forum and the Financial Stability Board • Each of the FSB’s four new mechanisms to strengthen compliance with international standards could be Works Cited 22 improved: the mandatory regular Financial Sector Assessment Programs (FSAPs) and publication of the Acronyms and Abbreviations 25 detailed IMF/WB assessments related to the ROCSs About CIGI 26 for members; the new membership obligations to implement international standards; the new peer- review process for FSB members; and the new FSB-led process to tackle non-cooperating jurisdictions. This paper was originally prepared for the conference on • The FSB’s capacity to tackle macroprudential issues could “International Governance Innovation: Issues for the 2010 be strengthened by: clarifying the standard setting bodies’ Summits,” May 3–5, 2010, Waterloo, Canada. (SSBs) accountability to the FSB; continuing to prioritize the creation of international standards for counter-cyclical regulation and the treatment of systematically important institutions, markets and instruments; and devoting more attention to the task of minimizing the risk of private sector capture of financial regulatory policy making. The opinions expressed in this paper are those of the author and do not necessarily reflect the views of The Centre for International Governance Innovation or its Board of Directors and/ If these challenges and priorities are met successfully, the FSB will or Board of Governors. strengthen the institutional foundation of international regulatory cooperation. Rather than becoming a powerful international body, however, its role would remain primarily focused on facilitating Copyright © 2010, The Centre for International Governance Innovation. This work was carried out with the support of The Centre for International Governance Innovation (CIGI), transgovernmental networks, with ultimate responsibility for Waterloo, Ontario, Canada (www.cigionline.org). This work is licensed under a Creative financial regulation and supervision still resting firmly at the Commons Attribution — Non-commercial — No Derivatives License. To view this license, visit (www.creativecommons.org/licenses/ by-nc-nd/3.0/). For re-use or distribution, please include national level (or perhaps at the regional level in the case of Europe). this copyright notice. 2 The Financial Stability Board and International Standards inter-governmental institution along the lines of the IMF, About the Author World Bank or WTO. Eric Helleiner is CIGI Chair in International Political Economy The FSB may look like an unusual institution, but its at the Balsillie School of International Affairs and Professor basic structure and mandate build directly on that of its of Political Science of the University of Waterloo. He received predecessor, the Financial Stability Forum (FSF). Created his PhD from the London School of Economics and is author in the wake of the last major global financial crisis in 1997- of States and the Reemergence of Global Finance (1994), 1998, the FSF also began its life with high hopes. But the The Making of National Money (2003), and Towards North organization came to play a more marginal role in global American Monetary Union? (2006). He is author of many financial governance than many of its founders had articles and chapters on issues relating to international money hoped. As Howard Davies and David Green (2008: 116) put it, “the FSF has not met some of the ambitious aims and finance, and is co-editor of a number of collections, foreseen for it when it was established in early 1999.” including most recently The Financial Stability Board: An Will the FSB meet the same fate? This paper addresses Effective Fourth Pillar of Global Economic Governance? (CIGI this question with a special focus on the FSB’s mandate to 2010), Global Finance in Crisis: The Politics of International strengthen international prudential standards.2 Regulatory Change (Routledge, 2010), The Future of the Dollar (Cornell, 2009), The Geopolitics of Sovereign Wealth Funds I argue that three features of the FSB will help it overcome (special section of Geopolitics, 2009), and At Home Abroad? some of the FSF’s weaknesses: its larger membership The Dollar’s Destiny as a World Currency (special issue of should help it address some of the legitimacy problems that Review of International Political Economy, 2008). He has been the FSF faced; it has been assigned stronger mechanisms a Canada Research Chair, and has won the Trudeau Foundation for encouraging compliance with international standards; Fellows Prize, the Donner Book Prize, and the Marvin Gelber and it has been given a stronger capacity to tackle Essay Prize in International Relations. He was also recently a macroprudential concerns. At the same time, each of these member of the Warwick Commission on International Financial changes raises new challenges and priorities, and I advance Reform (2009) and is presently co-editor of the book series suggestions to address them (which are summarized in the conclusion for readers wanting to go directly to the Cornell Studies in Money. punch line). If these challenges and priorities are met successfully, the FSB will strengthen the institutional foundation of international regulatory cooperation. Introduction Rather than becoming a powerful international body, however, its role would remain primarily focused on Established in April 2009 by the G20 leaders, the Financial facilitating transgovernmental networks, with ultimate Stability Board (FSB) has been described by US Treasury responsibility for financial regulation and supervision Secretary Tim Geithner in very ambitious terms as a new still resting firmly at the national level (or perhaps at the “fourth pillar” of the architecture of global economic regional level in the case of Europe). governance alongside the International Monetary Fund (IMF), World Bank (WB) and World Trade Organization WTO (US Treasury, 2009).1 But the FSB is a very different kind of pillar than these other institutions. It lacks any Membership and Legitimacy formal power and has only a tiny staff, and its creation has not been ratified by any national legislature. The Although the construction of international prudential FSB’s membership also includes an odd mix of central regulatory standards dates back to the 1988 Basel Accord bankers, finance ministry officials and supervisory and on bank capital standards, the process really accelerated regulatory authorities from a relatively narrow group of after the 1997-1998 global financial crisis when the Group countries alongside officials from international financial of Seven (G7) policy makers launched an ambitious effort institutions and standard-setting bodies. The FSB is to develop and promote international financial standards designed to act more as a loose network of these various in a wider range of sectors. The principal rationale for national and international officials than a substantial the construction of this “international standards regime” was that the 1997-1998 crisis had emanated primarily 1 For their helpful comments, I am grateful to Rolf Alter, Tom Bernes, Amar Bhattacharya, Jack Boorman, Colin Bradford, Ralph Bryant, Peter 2 The FSB’s mandate also includes tasks such as conducting (jointly Gakunu, Morris Goldstein, Jim Haley, Sungmin Kim, Rajiv Kumar, with the IMF) early warning exercises, setting guidelines for and Jacques Mistral, Avinash Persaud, Tony Porter,