24 October 2011

Nicolas Véron: Global financial authorities must adapt to a changed world

The next G20 summit in Cannes is set to be dominated by discussion of the policy chaos in Europe; financial regulatory matters will be little more than an afterthought. The world still needs a functioning international financial regulatory framework, however, if the vision of a globally integrated financial system is to be sustained.

The crisis has demonstrated the perils of unregulated or poorly regulated financial activities. Coordination among different jurisdictions does not happen spontaneously, and the technical nature of financial policy calls for specialised institutions. This is why global financial authorities are so important. These include the Financial Stability Board (FSB), an umbrella group of national and international organisations, and the ten FSB member organisations not attached to a country or region (BIS, BCBS, Committee on the Global Financial System, CPSS, IAIS, IASB, IOSCO, OECD, IMF and World Bank).

They are not a homogeneous group, and additional international bodies may be needed in the future to tackle specific worldwide financial challenges. But a more immediate challenge is whether the 11 above-listed institutions have kept pace with changes in the geography of global finance. All were created in the 20th century, when Europe and the US (and for a brief period, Japan) dominated the scene. We are in a different financial world now. Based on the Financial Times Global 500 rankings, emerging economies now weigh more than Europe in terms of large listed companies’ aggregate value. Three of the world’s top five banks by market capitalisation are Chinese, including the top two. Hong Kong and Singapore get closer to London and New York in financial centres’ league tables. The crisis has accelerated this shift, as the West enters a long cycle of deleveraging and slow growth, while emerging economies continue to catch up. At a less tangible level, the West’s model of financial development has lost much of its aura of superiority.

As the succession of Dominique Strauss-Kahn at the IMF has illustrated, emerging countries remain unwilling to seize the initiative and force a readjustment. But time is on their side. Westerners should acknowledge that it is in their enlightened self-interest to give up some positions unilaterally, instead of defensively claiming incumbency rights. This requires a monumental change in their mental map, especially for Europeans, who are more overrepresented in this system than Americans, and who still often feel entitled to being at the center of world affairs.

Concrete changes could include the relocation to Asia of, at least, the secretariats of some of the Basel-based committees, including the FSB, and of the IFRS Foundation, which hosts the IASB. This would be logistically easy to achieve. A more ambitious plan could include the move of the headquarters of either the World Bank or the IMF away from the US. At least for some transition time, non-Western candidates should be given priority as heads and chairs of global financial authorities. Certainly, France’s Christine Lagarde and Sweden’s Stefan Ingves, recently appointed at the IMF and BCBS respectively, are highly qualified. But a lot of talent lies elsewhere. The next prominent appointments – at the FSB next month, the IFRS Foundation in the next few weeks, and the World Bank in 2012 – should go to non-Westerners.

Even so, there will be no guarantee of success for global financial authorities. But without some serious such rebalancing, they are assured of fading into irrelevance, even as the world needs them more than ever.

© Nicolas Véron