The Global Financial Crisis and the Financial Stability Forum: The Awakening and Transformation of an International Body

AuthorEnrique R. Carrasco
PositionProfessor of Law, University of Iowa College of Law
Pages04

Professor of Law, University of Iowa College of Law. Many thanks to Judith Faucette's excellent assistance with this Article. Portions of this Article are taken from: Enrique Carrasco, The Global Financial Crisis, Emerging Economies, and Governance: Transformation of the Financial Stability Forum, in International Law, Economic Globalization and Developing Countries (Edward Elgar Press, forthcoming 2010).

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I Introduction

On November 15, 2008, leaders of the Group of Twenty ("G-20")1 met in Washington, D.C. to address the worst global financial and economic crisis Page 204 since the Great Depression.2 One of the primary purposes of the summit, dubbed by some as "Bretton Woods II," was to begin discussions on reforms of the global financial architecture that would prevent a recurrence of another devastating global crisis. 3 There was some initial anticipation that Bretton Woods II would produce a framework of fundamental reforms of the global financial system that was created in July 1944 during a three-week conference in Bretton Woods, New Hampshire. However, during the weekend summit, the most G-20 leaders could agree upon was a set of principles that would guide future reform of the financial markets. 4

One of the principles addressed reforming international financial institutions ("IFIs"), with a focus on giving developing and emerging countries greater voice and representation in such institutions.5 The G-20 leaders predictably pointed the finger of reform at the International Monetary Fund ("IMF"), which has been struggling with governance issues for a number of years.6 They also named another body that has not received the type of high-profile attention devoted to the IMF-the Financial Stability Forum ("FSF")-calling upon it to expand its emerging-country membership.7

Formed in the wake of the Asian financial crisis, the FSF is an intergovernmental forum whose purpose is to promote the stability of the international financial system, with an eye towards reducing the type of financial contagion that marked the Asian crisis.8 In particular, its mandate is to "identify and oversee actions needed to address" the "vulnerabilities affecting the [international] financial system."9 Comprised of representatives of national financial authorities, IFIs, international regulatory and supervisory groups, committees of central bank experts, and the European Central Bank, the FSF has established a number of working groups to pursue its mandate, producing reports setting forth observations, guidance, and Page 205 recommendations relating to the stability of domestic financial systems and the international financial system as a whole.10

Thus, in a world lacking a global financial regulator, the FSF's function is to promote the development and adoption of standards and codes that, when adopted into domestic regulatory frameworks, will reduce vulnerabilities in the international financial system that may lead to global crises. 11 prior to the current global financial crisis, the FSF's work had few, if any, concrete results.12 Indeed, given the occurrence of the crisis, the FSF arguably failed its mandate to the extent it failed to identify, ex ante, the vulnerabilities that have led to the greatest global financial and economic crisis since the Great Depression. However, once it focused on the developing crisis in the fall of 2007, the FSF played a major role in addressing the causes of the crisis, recommending measures that should be taken to resolve it, and preventing future financial crises with global repercussions. Having demonstrated its relevance throughout 2008, the FSF was transformed into the Financial Stability Board ("FSB") with a broader mandate in April 2009. 13

This Article chronicles the awakening of the FSF and its transformation into the FSB. Part II describes the origins of the FSF and its relatively obscure work prior to the current crisis. Part III chronicles the FSF's significant rise in visibility throughout the crisis via its reports analyzing the crisis and setting forth recommendations relating to reforms of law and regulation of the financial markets. Part IV explains the FSF's transformation into the FSB, a move to give the FSF a more robust institutional grounding capable of coordinating its work with the IMF. Part V concludes that while the global financial crisis brought the FSF out of obscurity and resulted in its transformation into the FSB, it is still too early to tell whether the FSB will have a significant impact on global governance of international finance, especially with respect to the needs and interests of emerging economies.

II The FSF'S Creation And Its Work Prior To The Global Financial Crisis

The FSF was created in 1999 to address vulnerabilities in the international financial system, identify and oversee action needed to address these vulnerabilities, and improve cooperation and information exchange Page 206 among authorities responsible for financial stability.14 The FSF's mandate and its organizational structure grew out of a report commissioned by the G-7 in 1998 and written by Bundesbank President Dr. Hans Tietmeyer.15Tietmeyer presented his report to the G-7 finance ministers and central bank governors in February 1999, and the FSF convened for the first time in April 1999 under Chairman Andrew Crockett.16

The FSF's initial members consisted of the finance minister, central bank governor, and a supervisory authority from each of the G-7 countries, as well as representatives from the IMF, World Bank, Bank for International Settlements ("BIS"), Organization for Economic Cooperation and Development ("OECD"), Basel Committee on Banking Supervision ("BCBS"), International Accounting Standards Board ("IASB"), International Association of Insurance Supervisors ("IAIS"), International Organization of Securities Commissions ("IOSCO"), Committee on Payment and Settlements Systems ("CPSS"), and Committee on the Global Financial System ("CGFS"). 17 After its creation, the FSF added the European Central Bank, and additional national members Australia, Hong Kong, the Netherlands, and Switzerland.18

A persistent criticism of the FSF was that it excluded developing or emerging economies.19 Chairman Crockett's explanation for this lack of representation was that the FSF could be more effective if it was "homogenous."20 The representatives met biannually or as needed in a plenary session, as well as convened in regional meetings and working groups.21 There were three initial working groups, focusing on Highly-Leveraged Institutions, Offshore Financial Centers, and Capital Flows, along with two additional groups, the Implementation Task Force and the Deposit Insurance Study Group.22 Though the FSF invited additional participants Page 207 from developing and developed countries to join in the work of the additional groups, these were not considered formal working groups and participants were not members of the FSF. 23

The FSF initially convened to respond to failures in the financial regulatory system. In the wake of the financial crises of the 1990s, there was a push to create a New International Financial Architecture that would better address problems as they arose and better coordinate financial supervision and regulation on an international scale.24 The FSF was part of this push, with the particular goal of promoting the harmonization of standards among international financial organizations and institutions. 25

The FSF's work prior to the current crisis was underwhelming, despite the existence of an Implementation Task Force. The most ambitious project was the adoption of a Compendium of Standards, intended to harmonize and make the many sets of standards published by standard-setting bodies more workable. 26 The Compendium was comprised of sixty-four standards that sought to harmonize the work of the FSF's institutional members.27 Because the FSF recognized that implementing so many standards would be an arduous task for most countries, the FSF flagged "Twelve Key Standards" for priority in implementation, such as the IMF's Code of Good Practices on Fiscal Transparency, the IASB's International Accounting Standards, and IOSCO's Objectives and Principles of Securities Regulation.28 The standards take a sectoral (e.g., banking) as well as functional (e.g., regulation and supervision) approach, and differ between principles (e.g., Basel Committee's Core Principles for Effective Banking Supervision), practices (e.g., Basel Committee's Sound Practices for Loan Accounting), and methodologies or guidelines (e.g., implementation guidance).29

Though the standards are available online, they have not been regularly updated, are not entirely transparent, and contain inconsistencies. 30 There is Page 208 also no means of ensuring adherence to the standards. 31 Though it is unlikely that a single international body will ever close the "control gap" that divergent institutions have created, an effective Compendium could ensure informal coordination between institutions to make activities more coherent and effective.32 The present problem is that the national economies, which are ultimately responsible for implementation, have not implemented the standards or have not done so sufficiently.33

The three working groups have also published reports on more limited areas, but difficulty coming to agreement on tough issues-always a major hurdle in international harmonization of law-means that the reports are similarly toothless. 34 They include recommendations that...

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