26 October 2011

Olin L Wethington: Strengthening the stabilisers

The meeting is particularly timely, because the FSB will soon be under new leadership, as its current chairman, Mario Draghi, takes over in November as President of the European Central Bank.

Even as the G20 wrestles with the challenges of the global economic slowdown and the euro crisis, the mandate to the FSB remains central to a substantial financial-reform agenda – and to avoiding national and regional divergence in areas critical to the global financial system’s stability.

Pragmatic steps to clarify the FSB’s mandate and enhance its operational effectiveness can and should be taken. The FSB is uniquely positioned to set priorities on financial regulation, provide regulatory coherence across the financial sector, oversee consistent implementation, and, in conjunction with the International Monetary Fund, to assess systemic vulnerabilities. But, while it should identify regulatory gaps and encourage more proactive work by the various standard-setting bodies, it should not take on daily operational responsibilities. It should, however, foster a culture of consultation with industry as a necessary dimension of legitimacy, which implies more transparent approaches to considering the market impact of proposed standards.

Effective execution of such an ambitious mandate is particularly important in view of two emerging G20 priorities for the FSB: regulatory initiatives with respect to the functioning of markets, including so-called “shadow banking” (the less regulated forms of private financing); and new mechanisms to foster consistent implementation of standards.

The FSB, along with the Basel Committee on Banking Supervision, has been quietly considering new mechanisms for monitoring implementation of standards, particularly in the context of Basel III rules. FSB membership should imply accountability in implementation of standards. In the absence of formal enforcement powers, the pragmatic alternative is to develop mechanisms for monitoring implementation of standards on an ongoing basis, and to incorporate systematic, impartial peer reviews.

The Cannes Summit should articulate a renewed commitment to consistent implementation of agreed regulatory reforms, and to minimising divergence in national regulation that could create systemic risks or significant competitive advantage. The G20 should provide the political support to develop a framework that relies on monitoring, consultation, mutual oversight, reporting, and publication. It is in the financial industry’s interest to support the development of these mechanisms as a means to address the competitive implications of divergent national regulation.

Finally, the G20 should provide the FSB with adequate institutional capacity to address its tasks, but without creating a bureaucracy. The first order of business is to endorse a capable and dedicated new FSB chairman. Beyond that, the FSB should be given legal capacity through proper incorporation – an institutionally intermediate point between its purely political status now and the extreme of a treaty organisation. This would enable the FSB to hire the best possible talent, receive funding from governments, and enter into more formal arrangements with other international bodies in order to carry out its responsibilities more effectively.

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© Project Syndicate