In order to understand the current strategic role of the Financial Stability Board (FSB), a role which is growing in importance, one has to take note of the evolution of two organisations in particular, the G20 and the Financial Stability Forum (FSF).  The G20 constitutes the European Union (EU) and 19 countries (Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Republic of Korea, Russia, Saudi Arabia, South Africa, Turkey, United Kingdom and the United States).  As such it provides a forum that is still manageable (in terms of total number of members), but is more representative of the changing character of the global economy than either the G7 (Canada, France, Germany, Italy, Japan, United Kingdom and the United States), or the G8 (G7 plus Russia).  Arguably the G20 has superseded the G7 and the G8 as the most influential economic policy summit of the world’s largest and most powerful economies, precisely because of that more representative character.  The G20 attests that its members account for: 90% of global GDP; 80% of international global trade; and 64% of the world’s population.  The attendant assumption is that the G20’s policy statements, declarations and initiatives will gain more traction and application in the global economy, especially in international financial markets, than their equivalents emanating from the G7 or the G8.  For those who are interested in how multi-lateral financial regulation is evolving – which is a growing number, and those who are affected by how multi-lateral financial regulation is evolving – which is everybody, the G20 is a forum of which we should take note.  Finance and in particular, financial crisis, has been integral to the birth and activities of the G20.  Following a number of financial crises in the 1990s that were especially damaging to emerging economies, most notably in Asia, the Finance Ministers and Central Bank Governors of emerging and advanced economies deemed to be of “systemic importance”, (a key term in contemporary multi-lateral financial regulation discourse), met in December 1999 in Berlin to discuss key issues for global economic stability.  Since then the G20 Finance Ministers and Central Bank Governors have met annually in various member locations and there have been seven G20 Leaders’ Summits in: Washington DC, US (Nov 2008); London, UK (April 2009); Pittsburgh US (Sept 2009); Toronto, Canada (June 2010); Seoul, South Korea (Nov 2010); Cannes, France (Nov 2011); and Los Cabos, Mexico (June 2012).

The Financial Stability Forum (FSF) was established following the meetings in October 1998 in Washington DC and in Bonn in February 1999 of the Finance Ministers and Central Bank Governors of the G-7 which commissioned (in Washington), and later accepted (in Bonn), the recommendation of the Tietmeyer Report, on International Co-operation and Co-ordination in the Area of Financial Market Supervision and Surveillance to establish a Financial Stability Forum.  The FSF was convened on 14 April 1999 to promote international financial stability through international co-operation and information exchange in financial supervision and surveillance.  The FSF had a total of forty members comprising: Chairman (1), representatives of National Authorities (25), International Financial Institutions (6), International Regulatory and Supervisory Groupings (6) and Committees of Central Bank Experts (2).  Of the National Authority Representatives: the G-7 member countries each supplied three (from their treasury, central bank and financial supervisory agency); and Australia, Hong Kong, Netherlands and Singapore each supplied a single representative. Regarding the International Financial Institutions, representatives were drawn from: the International Monetary Fund (2); the World Bank (2); the Bank for International Settlements (1); and the OECD (1).  Representatives of the International Regulatory and Supervisory Groupings were: the Basel Committee of Banking Supervision - BCBS (2); the International Organisation of Securities Commissions - IOSCO (2); and the International Association of Insurance Supervisors - IAIS (2).  The Committee on the Global Payments System (1) and the Committee on Payment and Settlement Systems (1) represented the Committees of Central Bank Experts.  The FSF had a small Secretariat housed at the Bank for International Settlements (BIS) in Basel, Switzerland.  The BIS was established in 1930 and since then has been the principal conduit for international central bank cooperation.  The FSF facilitated dialogue and cooperation regarding international surveillance and supervision of financial institutions and markets, including specific initiatives such as: their listing of offshore finance centres in 2000, (categorising them into three groups based on the perceived quality of their financial supervision); and their 2006 report on macroeconomic and financial stability issues raised by the global influenza pandemic.  Given the product and impact of the FSF from 1999-2008, it is probably a reasonable comment to make that the FSF was not an especially dynamic player in how international financial regulation developed in that ten year period.

However, the Global Financial Crisis (GFC) and its repercussions catapulted the strategic importance of the G20 to a new level and led to significant change regarding the FSF.   At their first Summit in Washington DC in November 2008, G20 leaders agreed an Action Plan to counter the worst effects of the GFC.  That ongoing Action Plan has three main objectives: 1) Restoring global growth; 2) Strengthening the international financial system; and 3) Reforming international financial institutions.  It was probably only the sheer scale and depth of the crisis in an increasingly interdependent global economy that could have jump-started such a co-ordinated response, given the intensely competitive character of the global financial sector and the understandable desire of nation states to prioritise national self-interest in terms of market share.  Also, the fact that the G20 comprises a relatively small number of actors (nineteen nation states plus the EU), but still accounts for 90% of global GDP, meant that the nations involved felt not only that they stood a reasonable chance of reaching consensual positions on a substantial range of multi-lateral regulatory initiatives, but also that their strategic influence on market actors gave the agreements that they did reach a reasonable prospect of militating against the harmful effects of the GFC and building more systemic stability into global financial markets.  These were huge challenges that presented in 2008 and the G20 realised that they would need an institutional mechanism to carry their message and drive through the changes that they sought.  The vehicle that the G20 selected was the FSF, although the FSF morphed in April 2009 into the Financial Stability Board (FSB), an entity that reflected more accurately the composition of the G20 itself, whilst retaining some elements of the FSF’s previous membership as described above.

As the FSB reports on its website its mandate is to:

• assess vulnerabilities affecting the financial system and identify and oversee action needed to address them;
• promote co-ordination and information exchange among authorities responsible for financial stability;
• monitor and advise on market developments and their implications for regulatory policy;
• advise on and monitor best practice in meeting regulatory standards;
• 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;
• set guidelines for and support the establishment of supervisory colleges;
• manage contingency planning for cross-border crisis management, particularly with respect to systemically important firms; and
• collaborate with the IMF to conduct Early Warning Exercises.

As obligations of membership, members of the FSB commit to pursue the maintenance of financial stability, maintain the openness and transparency of the financial sector, implement international financial standards (including the 12 key International Standards and Codes), and agree to undergo periodic peer reviews, using among other evidence IMF/World Bank public Financial Sector Assessment Program reports.  In addition to commitment to this mandate Recommendation 46 of the Leaders Declaration at the conclusion of the most recent G20 Summit held at Los Cabos in Mexico on 18-19 June 2012 endorsed the revised FSB Charter.  This will: vest the FSB with legal personality, creating an association under Swiss law; provide the FSB with greater financial autonomy; and enhance its capacity to coordinate the development and implementation of financial regulatory policies.  The G20 Leaders expect full implementation of these initiatives before their next Summit.  The fact that so many of the world’s most significant national economies have consented to commit themselves to such review and entrusted the FSB with such significant responsibility for co-ordination and innovation in the regulatory evolution of the global financial sector makes the FSB a key player in how financial regulation is likely to develop in the future, both in national and international contexts, because of the inter-dependencies wrought by globalisation.    The next article in this series will review some of the FSB’s initiatives to date and consider what some of its future priorities may be.