Created in April 2009, the Financial Stability Board represents the G20 leaders’ first – and so far only – big shift in the institutional structure of international financial diplomacy in an increasingly multipolar world. The FSB’s 24 members include leading emerging economies and the body is the only multilateral forum that brings together officials from the monetary, fiscal and regulatory community.
Before the eurozone crisis raged, critics of the Anglo-American laissez-faire regulatory model saw in the FSB a way to reduce the risk that global financial markets will once again be held under siege by lax regulation and its creation was touted as a reflection of the Obama administrations multilateral credentials. As former French president Nicolas Sarkozy said in a speech to the UN in 2008: "Let us rebuild together a regulated capitalism in which whole swathes of financial activity are not left to the sole judgment of market operators." In 2008, Peer Steinbrück, the outspoken former German finance minister, said the "weak, divided financial oversight" of US investment banks was to blame for the crisis. German proposals for tighter regulation "elicited mockery at best or were seen as a typical example of Germans penchant for over-regulation," he noted.
The creation of the FSB was also designed to side-step the political challenge of increasing the IMFs powers, a fact that, on the face of it, elevates the FSBs status as an additional pillar of global financial governance. However, although the FSB has assumed new mechanisms for encouraging compliance and surveillance via a peer review process, it has no legal authority and, consequently, no power of sanction.
Mark Carney, Bank of Canada governor
As a former Canadian sherpa at the G7 which failed to resolve global financial and exchange rate imbalances pre-Lehman Carney has practical experience of the constraints of talking shops, with only speeches, reports, communiqués and moral suasion at their disposal.
But he is bullish. Although the FSB imposes no binding laws, its structure and provenance as a product of the crisis breed a constructive buy-in, he says. However, theres no political will to give the FSB the power of World Trade Organization-style sanctions against noncompliant jurisdictions via treaty-based legislation, Carney admits.
"I am a realist, I dont see much appetite for that," he says. "Even the IMFs power is principally from direct lending, reputation, intellectual leadership and moral suasion. What reinforces the FSBs power is that it has support at the highest political levels and the agenda is set and endorsed by G20 leaders. These are not individuals who are shy of financial reform; they are always pushing us to do more and do it faster."
Although the global financial crisis triggered a bout of international cooperation of historic proportions, global bank deleveraging and the rupture in the cross-border banking model in the eurozone highlight the growing problem of financial protectionism, an affront to the FSBs ethos. In recent years, regulators have encouraged banks to match-fund the financing of liabilities within national boundaries and bankers tell Euromoney that supervisors in the US, the UK and elsewhere are increasingly mandating banks to restrict the fungibility of capital across borders. The ring-fencing of liquidity and capital buffers conducted in a beggar-thy-neighbour fashion reflects the fractures in the eurozones financial system.
However, Carney says there is light at the end of the tunnel: "There has been a supervisory re-inforcement of a home bias given a lack of cross-border financing and the drying up of the interbank market. And so the challenge is, as Europe walks back from that extreme, how to rebuild that trust and restart the single financial market. One element of this is that the ECB, as the central supervisor for the euro area, will help encourage more of a pan-financial market. Its not the whole answer, though."