The Financial Stability Board II: A Tale of Sherpas and Traffic Lights – An Uphill but Positive Track for the FSB?

A previous opinion piece in this series described how the Financial Stability Board (FSB) has evolved; this paper considers its possible future role.  In particular, the focus is on the Progress Reports by the FSB’s Secretariat on Implementing the G20 Recommendations on Financial Regulatory Reform.  The Sherpas in the title refers to the personal representatives of the Heads of State and Government of the members of the Group of Twenty who are responsible for the necessary work prior to the G20 Summits.  As such they coordinate the agendas for the Summits, negotiate and implement tasks, seek consensus at the highest political levels, help to negotiate the Leaders’ positions and prepare the final declaration statements and supporting documents.  However, it is important to note that these various work programs and responsibilities which the G20 refers to as The Sherpas’ Track focuses on political non-financial issues such as: agriculture; anti-corruption; development; employment; and energy.  The Sherpas delegate policy and technical analysis to working groups drawn from officials from each member country and international organisations, and also facilitate dialogue with a range of stakeholder groups including business groups and academic institutions.  The Sherpas perform a wide range of extremely useful and important activities, but their relative quarantining from the financial reform agenda of the G20 is testimony to the recognition by the G20 Leaders that a different approach is required to progress its financial reform mission, and it has labelled that mission The Finance Track.

The G20 Finance Track is composed of the G20 Finance Ministers and Central Bank Governors and focuses on: economic stabilisation and structural reform; correction of external fiscal and financial imbalances; crisis prevention; increasing global liquidity; and strengthening the international financial system.  In order to facilitate progress on these issues there is close and regular liaison with international organisations such as: the FSB; the IMF; the OECD; and the World Bank.  It is the FSB’s role on the Finance Track which is the focus of this discussion.  As part of its contributions to the Finance Track, the FSB engages in research and constructive dialogue with key public and private sector actors in both national and international financial environments, then produces a substantial number of publications across an extensive array of categories including: Addressing Systemically Important Financial Institutions (SIFIs); Adherence to Standards; Compensation Practices; Credit Risk Transfer (CRT); Crisis Resolution; Effective Resolution Regimes; Enhanced Disclosure; Enhancing Supervision; Global Systemically Important Banks (GSIB) Template; Highly Leveraged Institutions (HLIs); Implementation of Financial Reforms;  Legal Entity Identifier (LEI); Macroprudential Policy Tools and Frameworks; Market and Institutional Resilience; OTC Derivatives; Sound Financial Systems; and Shadow Banking.  These topics cover a bewildering array of complex global financial activities, and the associated regulatory infrastructures and technologies that are necessary for ongoing adequate regulatory oversight and strategic planning in a post-GFC environment.  Ascertaining progress across such a disparate range of activities is a significant challenge and helpfully the FSB has instituted recently its scoreboard status reports to facilitate evaluation.  These scoreboard status reports are the Traffic Lights of the title and they have been produced by the FSB Secretariat in response to a request from the G20 Sherpas to produce “a simple visual summary of the progress made in global policy development and implementation of financial reforms at the G20 level.”  The simple visual summary is in the form of tables which articulate: the responsible institutions; deadlines; and status of progress made for each G20 recommendation at both the Global Policy Development, and National/International Policy Implementation Levels.  For both these development and policy levels there is comment analysis and the four colour grades for assessing the status of progress which are the Traffic Lights.  The four colour grades are:

  1. Dark Green - signalling global policy is fully developed and/or agreed national/international policy has been fully implemented.
  2. Light Green – signalling global policy is on track to be developed or catch-up is possible without facing difficulties and/or agreed national/international policy is on track to be implemented or catch-up is possible without facing difficulties.
  3. Amber – signalling global policy development is in progress but facing some difficulties with corrective action taken or under consideration and/or national/international policy implementation is under progress but facing some difficulties.
  4. Red – signalling global policy development is not making adequate progress as serious problems exist and remedial action may be warranted and/or agreed national/international policy implementation is not making adequate progress as serious problems exist and remedial action may be warranted.

 

These traffic lights are a daring initiative by the FSB, because historically international organisations have been reluctant to produce stark indicators on such complex issues with relation to global finance, effectively naming and shaming in certain contexts, precisely because many of these issues can be so politically charged domestically within a jurisdiction or across industry interest groups. There have been exceptions to this where international organisations have named and shamed, such as when the OECD, Financial Action Task Force (FATF) and the FSB’s predecessor the Financial Stability Forum published jurisdiction blacklists regarding tax havens, offshore finance centres, money laundering and the financing of terrorism. Nevertheless, these initiatives tended to be ring-fenced to specific activities whereas the FSB’s scorecards reach right across the landscape of global finance.

Inevitably it is the Red lights that grab the most attention.  In the most recent scorecard, (19 June 2012), there are two, both at the National/International policy implementation level:

“FSB to develop key attributes of effective resolution regimes…and countries to establish a legal framework for crisis intervention, recovery and resolution plans, and crisis management groups for major cross-border firms;” and

“Supervisors should have strong and unambiguous mandates, sufficient independence to act, appropriate resources, and a full suite of tools and powers to proactively identify and address risks”.

These two issues remain amongst the most difficult challenges for the FSB and are likely to be ongoing core priorities.  However, the FSB has had success in other areas.  For example, two issues that have made sufficient progress to be re-classified from Red in the November 2011 scorecard to Amber in the June 2012 scorecard are: first at the global policy development level: “Accounting standard setters to achieve a single set of high quality, global accounting standards, and complete their convergence project;” and second at the National/International policy implementation level: “All standardised OTC derivatives contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through CCPs.  All derivatives should be reported to trade repositories.  Non-centrally cleared contracts should be subject to higher capital requirements.”  These are not the only encouraging developments in the November 2011 – June 2012 period, others include: enhancement of international and peer assessment review processes (Amber to Green); developing recommendations to strengthen oversight of shadow banking (Green to Completed); and policy options to advance consumer finance protection (Green to Completed).

These FSB scorecard ratings are not a panacea, but such increased transparency and accountability is helpful in raising standards of stability and integrity in global financial contexts.  The scorecard system makes it harder for jurisdictions and interest groups to cloak those special vested interests behind policy positions and regulatory infrastructures and praxis that are ambiguous.  However, the more politically difficult challenges listed above such as legal frameworks for crisis intervention, recovery and resolution plans, plus sufficient independence, power and resources for regulators are sure to take longer, if they are achieved at all.

Nevertheless, the GFC and its subsequent global economic downturn, allied with the structural change permeating the global economy, especially the growing economic influence of China and other Asian economies, has created a space for more proactive multi-lateral regulatory innovation and the FSB is emerging as a key conduit for such activity.  The G20 2012 Los Cabos Mexico Leaders’ Declaration acknowledges this reality in the changed global economic paradigm: “Despite the challenges we all face domestically we have agreed that multilateralism is of even greater importance in the current climate, and remains our best asset to resolve the global economy’s difficulties” [Note 8] and later…”We welcome the publication of the traffic lights scoreboard to track progress in the implementation of all our financial reform recommendations and pledge to take all necessary actions to make progress in the areas where difficulties in policy development or implementation have been identified.” [Note 37].  So, at the very highest levels the FSB’s traffic lights approach have been endorsed strongly.  However as discussed above, the context of some of the issues involved, allied with the realpolitik pressures from both the finance industry itself and self-interested individual jurisdictions are likely to mean that parts of the Finance Track are very definitely uphill.  Nevertheless, substantial progress has been made in some areas of multi-lateral regulatory oversight and the FSB is likely to be in the vanguard of such initiatives on an ongoing basis.

FSB Scoreboard Status Reports:

Financial Stability Board, (2011) Progress in implementing the G20 Recommendations on Financial Regulatory Reform, Status report by the FSB Secretariat, 4 November 2011.

Financial Stability Board, (2012) Progress in implementing the G20 Recommendations on Financial Regulatory Reform, Status report by the FSB Secretariat, 19 June 2012

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