Saturday, September 26, 2009

The Financial Stability Board and Global Financial Governance After the September 2009 G20 Conclave

The Financial Stability Board, a little known inter governmental amalgamation of economic regulatory authorities from G20 states has come into it own with the release of three significant reports at the end of the September meeting of the G-20 recently concluded in Pittsburgh, Pennsylvania. These three reports include: (1) Policy measures for improving financial regulation; (2) Progress in implementing the London Summit recommendations for strengthening financial stability; and (3) Implementation Standards for the FSB Principles for Sound Compensation Practices.

These three reports suggest both the increased importance of this less well known entity and the likely regulatory influence that this entity will assert in the coming years on behalf of the G20 states. It also suggests the new face of global governance--one in which transnational constructs representing the governments of participating states, like the FSB, develop what appear to be soft law standards and guidelines that are then treated as transposed into national legal orders as a sort of mandatory requirement. The result is a separation between political power and accountability--as the source of legislation is transnational and collective, and accountability remains national. While this separation might be viewed as suspect within the American constitutional order, at least as it affects distribution of power between the federal government and states, New York v. United States, 505 U.S. 144 (1992), the American state apparatus has been eager to embrace it at the national and supra-national level. It is possible, as a result, to understand the rise of these soft and indirect regulatory systems as grounded on the success of the model of the European Union, rather than on traditional inter-governmentalism at the international level. See Larry Catá Backer, The Extra-National State: American Confederate Federalism and the European Union, 7 Columbia Journal of European Law 173 (2001). They are by no means the same--but the echo is clear enough--the construction of a supra-national institutional structure where harmonization of rules can be developed, and then transposed into the national legal orders of the participating states.

The "Group of Twenty (G-20) Finance Ministers and Central Bank Governors was established in 1999 to bring together systemically important industrialized and developing economies to discuss key issues in the global economy. The inaugural meeting of the G-20 took place in Berlin, on December 1516, 1999, hosted by German and Canadian finance ministers." G20, What is the G20? It's mandate has been appropriately vague and comfortably inter-governmental--suggesting no regulatory power. "The G-20 is an informal forum that promotes open and constructive discussion between industrial and emerging-market countries on key issues related to global economic stability. By contributing to the strengthening of the international financial architecture and providing opportunities for dialogue on national policies, international co-operation, and international financial institutions, the G-20 helps to support growth and development across the globe." G20, About G20, Mandate. Indeed, the G20 takes pains to distinguish itself as a conclave of states without supra-national institutional aspirations. "Unlike international institutions such as the Organization for Economic Co-operation and Development (OECD), IMF or World Bank, the G-20 (like the G-7) has no permanent staff of its own. The G-20 chair rotates between members, and is selected from a different regional grouping of countries each year. . . . The incumbent chair establishes a temporary secretariat for the duration of its term, which coordinates the group's work and organizes its meetings. The role of the Troika is to ensure continuity in the G-20's work and management across host years." G20, About G20, Chair.

Yet, this is deceiving. First, the G20 has acknowledged its role as a vehicle through which its members might work through regulatory matters for transposition within their respective national legal orders through a commitment to "deepen cooperation to improve the regulation, supervision and the overall functioning of the worlds financial markets." G20, About G20, Achievements. More importantly, the G20 has begun to move toward the construction of an institutional framework through which this cooperation can be institutionalized for the production of harmonized regulatory frameworks to be adopted by the member states. Among the most important efforts at institutionalization of a global framework for economic regulation was the endorsement of the establishment of the Financial Stability Board. G20 Leaders at the Pittsburgh Summit endorsed the Charter formally establishing the Financial Stability Board. The Charter sets out the FSB’s objectives, mandate, membership and organizational processes.

What is the FSB? In its own words, the FSB is the institutionalized and administratively more bureaucratized and formally organized vessel for the coordination of a large network of national and supra-national regulatory actors that emerged from out of the Financial Stability Forum (FSF). FSF had been established by the G20 predecessor, the G7 in response to the Asian financial crisis of 1999.

The FSF was founded in 1999 by the G7 Finance Ministers and Central Bank Governors following recommendations by Hans Tietmeyer, President of the Deutsche Bundesbank. . . . The FSF would bring together:
  • national authorities responsible for financial stability in significant international financial centres, namely treasuries, central banks, and supervisory agencies;
  • sector-specific international groupings of regulators and supervisors engaged in developing standards and codes of good practice; international financial institutions charged with surveillance of domestic and international financial systems and monitoring and fostering implementation of standard;
  • committees of central bank experts concerned with market infrastructure and functioning. Financial Stability Board. About FSB, History.

By 2008, this anemic form of intergovernmentalism as an adjunct to the greater work of the G7 (now reconstituted as the G20) was proving inadequate to what appeared to be the need to show a greater willingness to coordinate responses to the economic crisis, and especially the need to produce something tangible to demonstrate public sector responses. That requires a willingness to begin to abandon the passive intergovernmentalism that marked the traditional understanding of G20 operation and move toward a more openly regulatory supra-national framework. For that purpose, the FSF was reconstituted as the Financial Stability Board.

In November 2008, the Leaders of the G20 countries called for a larger membership of the FSF. A broad consensus emerged in the following months towards placing the FSF on stronger institutional ground with an expanded membership - to strengthen its effectiveness as a mechanism for national authorities, standard setting bodies and international financial institutions to address vulnerabilities and to develop and implement strong regulatory, supervisory and other policies in the interest of financial stability. As announced in the G20 Leaders Summit of April 2009, the expanded FSF was re-established as the Financial Stability Board (FSB) with a broadened mandate to promote financial stability. Financial Stability Board. About FSB, History.

The FSB was created in April, 2009, but its Charter became effective only at the conclusion of the G20 meeting, on September 25, 2009. The Financial Stability Board Charter, Art. 17.

As a consequence, a new institutionally autonomous supra-national entity was created that serves two broad purposes. The first is to serve as a nexus point for the large group of economic regulatory agencies that exist at the national and international level. The second was to generate information and data with respect to problems and policy approaches to national action. The third was to generate guidelines and other proto-regulation that could then serve as a legislative template for transposition into national legal orders. As reconstituted, the FSB was given a broad mandate, suitable for the overall coordination of economic policy and the generation of regulatory policy and frameworks.

(1) As part of its mandate, the FSB will:
(a) assess vulnerabilities affecting the global financial system and identify and review on a timely and ongoing basis the regulatory, supervisory and related actions needed to address them, and their outcomes;
(b) promote coordination and information exchange among authorities responsible for financial stability;
(c) monitor and advise on market developments and their implications for regulatory policy;
(d) advise on and monitor best practice in meeting regulatory standards;
(e) undertake joint strategic reviews of the policy development work of the international standard setting bodies to ensure their work is timely, coordinated, focused on priorities and addressing gaps;
(f) set guidelines for and support the establishment of supervisory colleges;
(g) support contingency planning for cross-border crisis management, particularly with respect to systemically important firms;
(h) collaborate with the International Monetary Fund (IMF) to conduct Early Warning Exercises; and
(i) undertake any other tasks agreed by its Members in the course of its activities and within the framework of this Charter.
(2) The FSB will promote and help coordinate the alignment of the activities of the SSBs to address any overlaps or gaps and clarify demarcations in light of changes in national and regional regulatory structures relating to prudential and systemic risk, market integrity and investor and consumer protection, infrastructure, as well as accounting and auditing. The Financial Stability Board Charter, Art. 2.

The consequence, of course, is the organization of a supra-national entity that would serve as a clearinghouse for legislation and as a forum for the harmonization and coordination of national measures. The value to national governments was great--no longer solely accountable to their respective electorates for the difficult economic and regulatory choices that they might have to make, states could now lean on the work of this organization as both the excuse for and the source of blame for measures they might now appear to have to implement. A voluntary organization, it provides another face to modern transnational governance--a soft structure producing soft regulation that is then absorbed at the national level. And perhaps more importantly, a nexus point for the organization and dissemination of knowledge about economics and economic regulation that will seek to control and serve as the foundation for discussions of these issues at level level of governance. The FSB is meant to set the terms of discussion as well as to frame regulatory responses and private behavior norms.

The FASB is now organized with four internal administrative organs: the Plenary, the Steering Committee, the Chair, and the Secretariat. The Financial Stability Board Charter, Art. 6. The Plenary is the decision making body of the FSB, as is the organ responsible for adopting reports, appointing the Chair, controlling membership and the like. Id., art. 7. Its members are selected from among the FSB's organizational members. Like other organs of this kind, it can also create sub-groups for various purposes. Id., art. 11. The Steering Committee, like the Politburo in other systems, is the working organ of the Plenary, providing "operational guidance between Plenary Meetings to carry forward the directions of the FSB." Id., art. 13(4). At least four meeting of the Steering Committee must be convened by the Chair. Id., art. 13(2). The Chair is appointed by the Plenary and serves as the "principle spokesman" of the FSB. Id., art. 14(4). Most of the real work of the FSB, of course, will be undertaken by the Secretariat. Id., art. 15(6). Overseen by a Secretary General appointed by the Chair with the approval of the Plenary (id., art 15(2), the Secretary General runs the Secretariat under the direction of the Chair. Id., art. 15(3). The Secretariat is located in Basel, Switzerland. Id., art. 15(7). The FSB, of course, remains legally opaque. Its Charter does not create any legal rights or obligations or give birth, formally, to a formally constituted legal personality. Id., art. 16. But for purposes of its work, that may make little difference. The FSB has already moved quickly to deepen its informal organizational structure. For example, at "its inaugural meeting on 26-27 June, the FSB set up the internal structures needed to address its mandate, including a Steering Committee and three Standing Committees: for Assessment of Vulnerabilities; for Supervisory and Regulatory Cooperation; and for Standards Implementation. The FSB also established a Cross-border Crisis Management Working Group, and an Experts Group on non-cooperative jurisdictions. " FSB Report, Overview of Progress in Implementing the London Summit Recommendations for Strengthening Financial Stability: Report of the Financial Stability Board to G20 Leaders, 25 Sept. 2009, at 1.

The extent and range of the FSB's muscle is already apparent in the range of its work. Thus, it was reported that in its first report to the G20, the FSB's covered a substantial amount of ground as coordinator, information control point and potential regulation generator:

The following are highlights from the FSB progress report:

* Supervisory colleges have been set up for more than 30 large, complex cross-border financial institutions. Membership of some colleges may be too broad to be effective.

* Work continues to get big banks to draw up contingency and resolution plans. FSB preparing list of main elements that must be included.

* National authorities should encourage simplification of group structures to make resolution easier.

* The Basel Committee on Banking Supervision to issue concrete proposals by year end on a capital surcharge at systemically important banks.

* FSB says new bank capital rules will require a clear step up in the amount and quality of capital. New rules set out by end of 2009, actual levels determined by end of 2010 which implementation phased in after then.

* Basel Committee to complete proposals by year end on new liquidity requirements for banks, with actual levels of liquidity agreed by end of 2010. It will "substantially" raise the bar on global liquidity risk regulation.

* A study by supervisors on how margining practices in securities financing and over-the-counter derivatives transactions evolved during the crisis will be used to consider policy options by January 2010.

* A report will be presented to G20 finance ministers in November on what methods could be used to determine if a financial institution is of systemic importance.

* Basel Committee will assess the need for a capital surcharge on systemically important banks.

* Basel Committee working on revisions to make sure that capital requirements on OTC derivatives adequately reflect the risks. New standards will be issued by end June 2010.

* Reviews will start by the end of 2009 on whether all members of the FSB -- made up of the G20 countries -- are applying agreed FSB principles and recommendations.

* G20 leaders want convergence of accounting standards, which involves meshing U.S. Financial Accounting Standards Board rules with those of the International Accounting Standards Board. FSB says the two have yet to take action to include its recommendations on alternatives to valuing assets.

* IASB and FSAB approaches could "possibly lead to divergences" and urgent additional work is needed to meet goals of convergence, transparency and reduce crisis amplifying effects.

* The G20 has agreed that credit rating agencies should be made to register. Work needed to avoid national initiatives fragmenting the global ratings market.

* Basel Committee will present proposals in December on how to deal with "inappropriate incentives" from the use of credit ratings to determine levels of bank capital.

* Supervisors will identify by the end of 2009 other key areas where the regulatory "perimeter" needs expanding. FactBox: FSB Report on G20 Financial Rules Progress, Reuters, Sept. 25, 2009.

The details may be found in the FSB Report, Overview of Progress in Implementing the London Summit Recommendations for Strengthening Financial Stability: Report of the Financial Stability Board to G20 Leaders, 25 Sept. 2009. The coordination work of the FSB is also clear from its work on creating unifying structures for building on the work of the increasing number of agencies responsible for aspects of economic regulation and policy production. Telling here is the development of the "12 key standards for sound financial systems." The FSB describes these in coordinating and regulatory terms: "The 12 standard areas highlighted here have been designated by the FSF as key for sound financial systems and deserving of priority implementation depending on country circumstances. While the key standards vary in terms of their degree of international endorsement, they are broadly accepted as representing minimum requirements for good practice. Some of the key standards are relevant for more than one policy area, e.g. sections of the Code of Good Practices on Transparency in Monetary and Financial Policies have relevance for aspects of payment and settlement as well as financial regulation and supervision." FSB, Compendium of Standards, About, 12 Key Standards for Sound Financial Systems. These represent efforts of, among others, the IMF, World Bank, ISAB, IOSCO and OECD.

But more significant evidence of the potential influence of this organization can be gleaned from the three reports submitted to the G20 at its Pittsburgh conclave.

Policy measures for improving financial regulation

This report identifies critical reforms underway in nine areas: strengthening the global capital framework for banks; making global liquidity more robust; reducing the moral hazard posed by systemically important institutions; strengthening accounting standards; improving compensation practices; expanding oversight of the financial system; strengthening the robustness of OTC derivatives markets; re-launching securitisation on a sound basis, and promoting adherence to international standards.

Progress in implementing the London Summit recommendations for strengthening financial stability

At the London Summit, G20 Leaders asked the FSB to monitor progress in implementing actions to strengthen transparency and accountability, enhance sound regulation, promote integrity in financial markets and reinforce international cooperation. This report provides an overview of progress since April 2009. Much has already been achieved, and much is underway that, when implemented, will create a more disciplined and less procyclical financial system that better supports balanced sustainable economic growth.

Implementation Standards for the FSB Principles for Sound Compensation Practices

These standards respond to a call by the G20 Finance Ministers and Governors for the FSB to set out for the Pittsburgh Summit detailed specific proposals on compensation governance, structure and disclosure to strengthen adherence to the FSB Principles, issued in April 2009. The FSB will periodically review actions taken by firms and by national authorities to implement the FSB Principles and these standards and propose additional measures as required no later than March 2010. Financial Stability Board, Latest FAS Publications (2009).

Together, they evidence the range and scope of transnational management of economic activity. But these, of course, are both aspirational and at the earliest stages of their development. Institutionalization, and coordination is both young and unsure within a G20 structure in which the BRIC states (Brazil, India, Russia and China) and Old Europe (now teetering between singularity as a European Union inching toward effective political union and the traditional authority of its Member States) continue to jockey for position within the hierarchies of global power (and thus of control of the framework for discussion and action). But the regulatory focus of these reports is not accidental. The FSB itself explained: "The FSB and its members are taking forward a major programme of financial reforms based on clear principles and timetables for implementation that are designed to ensure that a crisis on this scale never happens again. The FSB welcomes the support of G20 Leaders for this programme." Financial Stability Board, Press Release, Financial Stability Board Reports on Improving Financial Regulation, 25 Sept. 2009. But its authority remains "soft." "The FSB will periodically review actions taken by firms and by national authorities to implement the FSB Principles and these standards and assess the extent to which implementation has occurred and has had the intended effects. It will propose additional measures as required no later than March 2010." Financial Stability Board, FSB Principles for Sound Compensation Practices: Implementation Standards, 25, Sept. 2009. Still, there may be power even in soft regulatory approaches, where the states that are the objects of these regulatory proposals are also the members of the entity doing the proposing and control the nature and extent of its work. Within this closed circle of power diffusion, everything is ultimately a product of the work of the community of states that means to use the FSB as a sword and shield for the effectuation of policies and regulatory approaches neither politically palatable or effective if left to the traditional forum of less connected sovereign state governmental organs.


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