The G20 foreshadows the planetary governance of the 21st century. It symbolises the return of politics whose legitimacy was denied by unregulated globalisation.
In just one year, we have seen a genuine revolution in mentalities. For the first time in history, the Heads of State and government of the world's 20 largest economic powers decided together on the measures that must be taken to combat a world crisis. They committed themselves, together, to adopting common rules that will radically change the way the world economy operates.
Without the G20, trust could not have been restored. Without the G20, we would have had the triumph of "every man for himself." Without the G20, it would not have been possible to envisage regulating bonuses, closing down tax havens and changing the rules of accounting and prudential standards.
These decisions will not solve every problem, but just one year ago, would anyone have thought they were possible? Now, however, they must be implemented!
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.
1) We are committed to take action at the national and international level to raise standards together so that our national authorities implement global standards consistently in a way that ensures a level playing field and avoids fragmentation of markets, protectionism, and regulatory arbitrage. We call on the FSB to report on progress to the G20 Finance Ministers and Central Bank Governors in advance of the next Leaders summit.
¬ Progress: The IMF, FSB and other international organizations have provided G20 Finance Ministers and Central Bank Governors with a progress report describing the measures that have been taken and other progress made since the London Summit to implement the London Summit and relevant FSF recommendations. FSB has set up the internal structures needed to address its mandate. These new structures include a Steering Committee and three Standing Committees – for Assessment of Vulnerabilities; Supervisory and Regulatory Cooperation; and Standards Implementation. The FSB also established a Cross-border Crisis Management Working Group, and an Expert Group on non-cooperative jurisdictions. These groupings have all begun their work.
2) FSB members commit to pursue the maintenance of financial stability, enhance the openness and transparency of the financial sector, implement international financial standards and agree to undergo periodic peer reviews, using among other evidence IMF / World Bank FSAP (Financial Sector Assessment Program) reports. The FSB will elaborate and report on these commitments and the evaluation process.
¬ Progress: Peer reviews will take the form of both single-country and thematic reviews, where single-country reviews will examine the adherence to standards and other regulatory initiatives and progress in addressing shortcomings; thematic reviews will focus on the implementation of FSB policy recommendations or G20 action items or on the implementation of a specific standard across all FSB member countries. Work is progressing on the development of a mechanism for peer reviews, drawing on the experiences of other organizations and bodies, as well as the identification of priority themes and countries. The FSB expects to put in place a framework to strengthen adherence to international regulatory and prudential standards by the end of 2009. The FSB will report on the development of this framework at the November 2009 meeting of G20 Finance Ministers and Central Bank Governors. Actual member peer reviews will start by end-2009 with a thematic peer review on the implementation of FSB compensation principles.
3) The FSB should collaborate with the IMF to conduct early warning exercises (EWE) to identify and report to the IMFC and the G20 Finance Ministers and Central Bank Governors on the build up of macroeconomic and financial risks and the actions needed to address them. The FSB and IMF should launch the EWE together at the 2009 Spring Meetings.
¬ Progress: The initial, “dry run” Early Warning Exercise (EWE) was presented to the International Monetary and Financial Committee (IMFC) meeting in Washington on 25 April 2009. The next iteration of the EWE will be jointly presented to the IMFC meeting in October.
4) Implement immediately the FSF principles for cross-border crisis management and that home authorities of each major financial institution should ensure that the group of authorities with a common interest in that financial institution meets at least annually.
¬ Progress: Work is ongoing to implement the FSF Principles for Cross-border Cooperation on Crisis Management. Schedules for firm-specific cross-border contingency planning discussions have been set out and will take place in 2009 and first half of 2010. The FSB Cross-border Crisis Management Working Group is preparing a list of the main elements to be included in contingency planning discussions, including a template for “de-risking” plans to be prepared by the firms. De-risking plans will cover options the firms would need to consider to exit risky positions and scale back their activities, in an orderly fashion and without government intervention.
5) Establishment of the remaining supervisory colleges for significant cross-border firms by June 2009.
¬ Progress: Supervisory colleges have now been established for more than thirty large complex financial institutions identified by the FSF as needing college arrangements. The FSB Standing Committee on Supervisory and Regulatory Cooperation, working with standard setters to set out good practices among supervisory colleges, will report to the G-20 ahead of the Finance Ministers and Governors meeting (November 7-8, 2009).
6) Support continued efforts by the IMF, FSB, World Bank, and BCBS to develop an international framework for cross-border bank resolution arrangements. We should develop resolution tools and frameworks for the effective resolution of financial groups to help mitigate the disruption of financial institution failures and reduce moral hazard in the future.
¬ Progress: Progress is being made in the two major international initiatives now underway on bank resolution frameworks, namely the Cross-Border Bank Resolution Group (CBRG) of the Basel Committee on Banking Supervision (BCBS) and the initiative by the IMF and the World Bank on the legal, institutional and regulatory framework for national bank insolvency regimes. In September, the CBRG published for consultation a report, which includes recommendations for authorities on effective crisis management and resolution processes for large cross-border institutions. The IMF is producing papers on a Framework for the Cross-Border Resolution of Insolvent Financial Institutions. The first paper will examine key legal and policy issues, and will be completed by end-2009. Following Executive Board discussion, a second paper will set out recommendations for the resolution of these issues, which is scheduled for completion in the spring of 2010.
7) Advanced economies, the IMF, and other international organizations should provide capacity-building programs for emerging market economies and developing countries on the formulation and the implementation of new major regulations, consistent with international standards.
¬ Progress: The IFIs will play a key role in both the FSB’s assessment processes and the provision of advice to countries so that they may meet international standards in line with country-specific needs.
8) The FSB, BCBS and Committee on the Global Financial System (CGFS), working with accounting standard setters should take forward implementation of the recommendations published to mitigate procyclicality, by the end of 2009, including a requirement for banks to build buffers of resources in good times that they can draw down when conditions deteriorate.
¬ Progress: The Group of Central Bank Governors and Heads of Supervision, the oversight body of the BCBS, reached agreement in September to introduce a framework for countercyclical capital buffers above the minimum requirement. The framework will include capital conservation measures such as constraints on capital distributions. The Basel Committee will review an appropriate set of indicators, such as earnings and credit-based variables, as a way to condition the build up and release of capital buffers.
9) Financial institutions should provide enhanced risk disclosures in their reporting and disclose all losses on an ongoing basis, consistent with international best practice, as appropriate.
¬ Progress: National authorities have taken, and are continuing to take, steps to encourage firms to provide disclosures consistent with international best practice developed by the Senior Supervisors Group and the FSB, as appropriate. Firms have continued to enhance their risk disclosures in their published annual reports.
10) All firms whose failure could pose a risk to financial stability must be subject to consistent, consolidated supervision and regulation with high standards. Our prudential standards for systemically important institutions should be commensurate with the costs of their failure. The FSB should consider possible measures including more intensive supervision and specific additional capital, liquidity and other prudential requirements
¬ Progress: To implement these commitments, the FSB is developing in the 12 months to September 2010 proposals to reduce the systemic risks posed by large and complex financial institutions.
11) We call on the FSB to work with the BIS (Bank for International Settlements) and international standard setters to develop macro-prudential tools and provide a report by autumn 2009.
¬ Progress: Aside from the work to address procyclicality noted elsewhere, the FSB and its members are developing quantitative tools to monitor and assess the build-up of macro-prudential risks in the financial system. These tools aim to improve the identification and assessment of systemically important components of the financial sector and the assessment of how risks evolve over time.
12) Ensure that national regulators possess the powers for gathering relevant information on all material financial institutions, markets and instruments in order to assess the potential for failure or severe stress to contribute to systemic risk. This will be done in close coordination at international level in order to achieve as much consistency as possible across jurisdictions.
¬ Progress: The use of macro-prudential tools will require that authorities expand data collection on the financial system. The IMF and FSB have launched a joint initiative to identify and address data gaps and will submit a report outlining priorities and work plans to G20 Finance Ministers and Central Bank Governors in November.
13) The IMF and FSB will produce guidelines for national authorities to assess whether a financial institution, market or an instrument is systematically important by the next meeting of Finance Ministers and Central Bank Governors.
¬ Progress: The IMF, BIS and FSB have been working jointly to this end. The objective is to ensure that all systemically-important institutions, markets and instruments are subject to an appropriate degree of oversight and regulation. A report will be delivered to G20 Finance Ministers and Central Bank Governors in November 2009. It will outline conceptual and analytical approaches to the assessment of systemic importance, and discuss a possible form for high-level principles that support consistent implementation across countries.
14) We ask the FSB to develop mechanisms for cooperation and information sharing between relevant authorities in order to ensure effective oversight is maintained when a fund is located in a different jurisdiction from the manager. We will, cooperating through the FSB, develop measures that implement these principles by the end of 2009. We call on the FSB to report to the next meeting of Finance Ministers and Central Bank Governors.
¬ Progress: IOSCO, which is a member body of the FSB, published in June 2009 a set of high-level principles for hedge fund regulation. The six principles include requirements on mandatory registration, regulation and provision of information for systemic risk assessment purposes. They also state that regulators should cooperate and share information to facilitate efficient and effective oversight of globally active hedge fund managers/hedge funds. IOSCO will continue its work in this area. National and regional initiatives are also underway in key jurisdictions.
15) We have agreed that national supervisors should ensure significant progress in the implementation of FSF sound practice principles for compensation arrangements by financial institution by the 2009 remuneration round. We fully endorse the implementation standards of the Financial Stability Board aimed at aligning compensation with long-term value creation, not excessive risk-taking. We task the FSB to monitor the implementation of the FSB standards and propose additional measures as required by March 2010.
¬ Progress: Many national and regional initiatives are underway to implement the FSB Principles for Sound Compensation Practices. Because the FSB Principles were often the driver for change, these initiatives are broadly consistent in substance and have affected both regulatory frameworks and supervisory actions and practices. The BCBS, IAIS and IOSCO are working to support consistent implementation of the FSB Principles across jurisdictions. The BCBS incorporated the Principles in Pillar 2 of Basel II in July 2009, with an expectation that banks and supervisors begin implementing the new Pillar 2 guidance immediately. IOSCO is considering incorporating the FSB Principles into its Principles for Periodic Disclosure, published in July as a consultation paper planned to be finalized this fall. The IAIS has initiated work on the development of a standard and guidance paper on remuneration that will take into account the FSB Principles for cross-sectoral consistency purposes. The BCBS is now assessing how the FSB Principles are being implemented in practice and has created a task force that will promote a consistent and effective implementation of the FSB principles. In this context, a survey on the implementation of the FSB principles was conducted in July-August 2009 by the BCBS in coordination with the FSB, as a basis for more detailed work on actual bank and supervisory practices. The FSB has developed specific standards for implementing its Principles, which could be incorporated into supervisory measures, and will complete a review of actions by national authorities to implement the principles by end-March 2010.
16) We are committed to strengthened adherence to international prudential regulatory and supervisory standards. The IMF and the FSB in cooperation with international standard-setters will provide an assessment of implementation by relevant jurisdictions, building on existing FSAPs.
¬ Progress: Progress is also being made towards promoting adherence to cooperation and information sharing standards in the financial regulatory and supervisory area. The FSB has established an Experts Group under the Standing Committee for Standards Implementation that will develop criteria for identifying jurisdictions of concern due to a combination of their weakness and systemic importance; develop an approach and a toolkit of progressive and proportionate measures to engage non-compliant jurisdictions; identify jurisdictions of concern based on the criteria approved by the Committee; develop an evaluation process to complement FSAP and ROSC assessments; assess compliance for jurisdictions of concern, using FSAP/ROSC information and mutual evaluations; and engage non-compliant jurisdictions as appropriate.
17) We call on the FSB to develop a toolbox of measures to promote adherence to prudential standards and cooperation with jurisdictions. We call on the FSB to report progress to address NCJs with regards to international cooperation and information exchange in November 2009 and to initiate a peer review process by February 2010.
¬ Progress: The FSB, in response to the G20 Finance Ministers and Central Bank Governors’ call for reporting on criteria and compliance against regulatory standards, is working to develop:
• a global compliance “snapshot” for the relevant standards building on FSAP assessments where available and any other information related to cooperation and information exchange, by the G20 Finance Ministers meeting in November 2009; • criteria for identifying jurisdictions of concern, by the G20 Finance Ministers meeting in November 2009; • procedures for a peer review process to build on and complement FSAP assessments, to be developed by February 2010 at the latest; and • a toolbox of measures (both positive and negative incentives) to promote adherence and cooperation among jurisdictions, by February 2010 at the latest.
18) We call on the FSB and FATF to report to next Finance Ministers and Central Bank Governors meeting on adoption and implementation by countries.
¬ Progress: The FSB and FATF have provided interim progress reports describing the measures that have been taken and other progress made since the London Summit to implement the London Summit and relevant FSF recommendations.
19) The IASB’s institutional framework should further enhance the involvement of various stakeholders.
¬ Progress: The IASB is working together with supervisors in key areas, including provisioning and valuation, and has had a number of meetings with the BCBS on these issues. In addition, supported by the FSB, the IASB held a meeting with senior officials and technical experts of prudential authorities, market regulators and their international organizations to discuss financial institution reporting issues on 27 August 2009. This meeting included senior representatives from a number of emerging market economies that are FSB members.
20) Regulators and accounting standard setters should enhance the required disclosure in relation to complex financial products by firms to market participants. (By end of 2009)
¬ Progress: National authorities have taken, and are continuing to take, steps to encourage firms to provide disclosures consistent with international best practice by the Senior Supervisors Group and the FSB, as appropriate. Firms have continued to enhance their risk disclosures in their published annual reports.
The 12 Key Standards for Sound Financial Systems
A key areafor governance is a set of coordinated regulations on the fundamentals of market operations. As explained by the FSB on its website: "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, 12 Key Standards For Sound Financial Systems.
Area: Macroeconomic Policy and Data Transparency
1. Monetary and financial policy transparency: Code of Good Practices on Transparency in Monetary and Financial Policies, Issuing body--IMF
2. Fiscal policy transparency: Code of Good Practices on Fiscal Transparency, Issuing body--IMF
3. Data dissemination : Special Data Dissemination Standard (SDDS), and General Data Dissemination Systems (GDDS), Issuing Body-- IMF
Area: Institutional and Market Infrastructure
1. Insolvency: Insolvency and Creditor Rights, Issuing body--World Bank
2. Corporate governance: Principles of Governance; Issuing body--OECD
3. Accounting: International Accounting Standards (IAS); Issuing Body--IASB
4. Auditing: International Standards on Auditing (ISA); Issuing body--IFAC
5. Payment and settlement: Core Principles for Systemically Important Payment Systems; Issuing body--CPSS; and Recommendations for Securities Settlement Systems; Issuing bodies--CPSS, CPSS/IOSCO.
6. Market integrity: The Forty Recommendations of the Financial Action Task Force, and 9 Special Recommendations Against Terrorist Financing; Issuing body--FATF
Financial Regulation and Supervision
1. Banking supervision: Core Principles for Effective Banking Supervision; Issuing body--BCBS
2. Securities regulation: Objectives and Principles of Securities Regulation; Issuing Body--IOSCO
3. Insurance: Insurance Core Principles; Issuing body--IAIS
The Standard-Setting BodiesAnd thus a face to the template offered by Mr. Zarkozy for the coming system of global governance. There is something old fashioned about this governance model--it is still built on the will of the most powerful actors on the globe. But the assertion of power is completely modern (and by modern I mean adopting the patterns of multi-lateral governance forged after 1945) in its form. It is soft and indirect. One no longer tends to see power marching through the streets of an occupied place (though that happens now and again, though not so much for governance purposes as for the management of populations whose governments resist global governance norms). One understands power in the form of principles, benchmarks, standards, objectives, and rules. One feels the effects of these forms of governance through the regulatory power of surveillance. The rules themselves are both bureaucratized and juridified. They are formulated through mandarinates of experts and interpreted through global networks of judges. Rules are not imposed. They are transposed and adopted through a long and amorphous process of consultation, construction, adoption and management. And they are complex--both each in their own field and together as a network of governance over economic and related activities of states and others. In a world that is grounded politically on theories of mass democracy, the new governance suggested by Mr. Sarkozy, and constructed through FSB, is grounded in an aristocracy of experts. That reality colors Mr. Sarkozy's Davos efforts at "populism" with both irony and perversity.
Basel Committee on Banking Supervision (BCBS): The BCBS, established by the G10 Central Banks, provides a forum for regular co-operation among its member countries on banking supervisory matters. The BCBS formulates broad supervisory standards and guidelines and recommends statements of best practice in banking in the expectation that bank supervisory authorities will take steps to implement them.
Committee on the Global Financial System (CGFS): The CGFS, established by the G10 Central Banks, undertakes systematic short-term monitoring of global financial system conditions, longer-term analysis of the functioning of financial markets, and the articulation of policy recommendations aimed at improving market functioning and promoting stability. As part of its work on longer-term structural issues relating to financial markets, the CGFS has developed a list of general principles and more specific policy recommendations for the creation of deep and liquid government securities markets.
Committee on Payment and Settlement Systems (CPSS): The CPSS, established by the G10 Central Banks, provides a forum for regular co-operation among its member central banks on issues related to payment and settlement systems. It monitors and analyses developments in domestic payment, settlement and clearing systems as well as in cross-border and multi-currency netting schemes. It also provides a means of co-ordinating the oversight functions to be assumed by the G10 Central Banks with respect to these netting schemes. The CPSS formulates broad supervisory standards and guidelines and recommends statements of best practice in banking in the expectation that bank supervisory authorities will take steps to implement them. In addition to addressing general concerns regarding the efficiency and stability of payment, clearing, settlement and related arrangements, the Committee pays attention to the relationships between payment and settlement arrangements, central bank payment and settlement services and the major financial markets which are relevant for the conduct of monetary policy.
Financial Action Task Force on Money Laundering (FATF): The FATF, established by the G7 Summit in Paris in 1989, has set out a programme of forty Recommendations to combat money laundering. The Recommendations were updated in 1996 and again in February 2002 in the wake of the 11 September 2001 terrorist attacks against the U.S., when 8 Special Recommendations were added to the original forty. Comprising 26 member countries, FATF monitors members' progress in implementing measures to counter money laundering through a two-fold process of annual self-assessment and a more detailed mutual evaluation, reviews money laundering trends, techniques, and counter-measures and their implications for the forty Recommendations, and promotes the adoption and implementation of the FATF Recommendations by non-member countries.
International Association of Insurance Supervisors (IAIS): The IAIS, established in 1994, is a forum for co-operation among insurance regulators and supervisors from more than 100 jurisdictions. It is charged with developing internationally endorsed principles and standards that are fundamental to effective insurance regulation and supervision. After having developed the IAIS Core principles, Insurance Concordat and several other standards, much of the IAIS's recent work on standard setting has focused on developing standards in the areas of solvency, insurance concordat to cover cross-border service provision, asset risk management, group co-ordination of financial conglomerates, reinsurance, market conduct and electronic commerce.
International Accounting Standards Board (IASB): The International Accounting Standards Board is an independent, privately-funded accounting standard setter based in London, UK. Board members come from nine countries and have a variety of functional backgrounds. The Board is committed to developing, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require transparent and comparable information in general purpose financial statements. In addition, the Board cooperates with national accounting standard setters to achieve convergence in accounting standards around the world. The IASB is responsible for developing and approving International Accounting Standards (IAS). To-date, a total of 40 IAS have been promulgated by the IASB and its predecessor, the International Accounting Standards Committee (IASC).
International Auditing and Assurance Standards Board (IAASB): The International Auditing and Assurance Standards Board (IAASB) is a committee of the International Federation of Accountants (IFAC) that works to improve the uniformity of auditing practices and related services throughout the world by issuing pronouncements on a variety of audit and assurance functions and by promoting their acceptance. IAASB pronouncements are developed following a due process that includes input from the general public, IFAC member bodies and their members, and a Consultative Advisory Group that represents regulators, preparers, and users of financial statements.
International Monetary Fund (IMF): The IMF develops and monitors international standards in areas of direct operational relevance to its mandate to carry out surveillance over the international monetary system. In collaboration with other standard-setting bodies, it has developed international standards for data dissemination and transparency practices in fiscal, monetary and financial policies, and has contributed to the development of international standards for banking supervision. The IMF has prepared on an experimental basis several country reports on implementation of standards and codes of best practices.
International Organisation of Securities Commissions (IOSCO): IOSCO is an organisation for co-operation among national regulators of securities and futures markets. IOSCO develops and promotes standards of securities regulation in order to maintain efficient and sound markets. It draws on its international membership to establish standards for effective surveillance of international securities markets and provides mutual assistance to promote the integrity of markets by a rigorous application of the standards and effective enforcement against offences.
Organisation for Economic Cooperation and Development (OECD): The OECD aims to promote policies designed to achieve sustained economic growth and employment in its member countries. In the area of promoting efficient functioning of markets, the OECD encourages the convergence of policies, laws and regulations covering financial markets and enterprises.
CPSS-IOSCO Task Force on Securities Settlement Systems: Building on the previous work, the CPSS and the Technical Committee of IOSCO set up this task force to jointly issue recommendations for securities settlement systems.
BCBS Transparency Group and IOSCO TC Working Party on the Regulation of Financial Intermediaries: The recommendations for public disclosure of trading and derivatives activities of banks and securities firms complement the two Committee's survey of trading and derivatives disclosures of banks and securities firms, which has been published annually since 1995. Both initiatives form part of a continued effort to encourage banks and securities firms to provide market participants with sufficient information to understand the risks inherent in their trading and derivatives activities.
The face of the new governance in all of these respects is quite visible in the managerialism inherent in the FSB framework of monitoring. See, Joseph Heaven, Spain, Italy Said to Be First for FSB Peer Reviews (Update1), Bloomberg/Business Week, Jan. 20, 2010.
Spain, Italy and Mexico will be the first countries to undergo the Financial Stability Board’s reviews of how effectively they implemented rules to prevent financial crises, three people familiar with the matter said. The so-called peer reviews will take place this year as part of the FSB’s effort to make sure member nations are complying with its rules. . . . As markets recover from the worst financial crisis since the Great Depression, the FSB will use the reviews to measure how countries comply with standards created from 1996 to 2006 to protect financial stability. The reviews are separate from FSB assessments started last month on how countries are implementing bonus and compensation rules.“The process is starting for real and countries who sense they might not match up know that it is coming and will catch up with them in due course,” said David W. Green, a former Bank of England official who now advises overseas regulators.The FSB wants regulatory standards to be consistent across its 24 member countries and territories, to prevent companies moving to places with the most favorable law and harming those nations that stick to the rules. The Basel-based organization is coordinating financial regulators and supervisors response to the global economic crisis.
The FSAP, a joint IMF and World Bank effort introduced in May 1999, aims to increase the effectiveness of efforts to promote the soundness of financial sytems in member countries. Supported by experts from a range of national agencies and standard-setting bodies, work under the program seeks to identify the strengths and vulnerabilities of a country's financial system; to determine how key sources of risk are being managed; to ascertain the sector's developmental and technical assistance needs; and to help prioritize policy responses.