The Financial Stability Board:
International Cooperation to Promote Financial Stability
By Mario Draghi, chair, Financial Stability Board
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Promoting stability in a global, interconnected financial system requires coordination across jurisdictions and sectors. The enlarged FSB is well placed to facilitate this and move forward the regulatory reform agenda.
The international community has embarked on an ambitious agenda of reforms to build a stronger, less crisis-prone financial system. The April 2009 summit of G20 leaders gave the Financial Stability Board (FSB) a prominent role in taking forward this agenda and promoting financial stability. The FSB is uniquely placed to fulfil this role because it brings together the many national and international bodies and institutions that share responsibility for financial stability. Through the collective actions of its members, the FSB facilitates consistency in the development and implementation of regulatory, supervisory and other financial sector policies as well as cooperation in identifying and addressing vulnerabilities. The international community is committed to maintaining an open and integrated financial system. Therefore, consistency and cooperation are essential for the success of the reform agenda and the preservation of a level playing field across national financial systems.
The FSB is the successor to the Financial Stability Forum (FSF), which was established in 1999 by the G7 finance ministers and central bank governors. The FSF focused on assessing vulnerabilities affecting the financial system, overseeing actions needed to address these vulnerabilities and promoting coordination and information exchange among authorities responsible for financial stability.
To enhance its effectiveness, the FSF was relaunched as the FSB at the G20 London Summit in London with a broadened mandate and an expanded membership. A number of things were added to the FSF’s previous mandate: monitoring market developments and their implications for regulatory policy, advising on best practices in meeting regulatory standards, undertaking joint strategic reviews of the policy development work of the international standard-setting bodies, supporting the establishment of supervisory colleges for global banks, overseeing contingency planning for cross-border crisis management and collaborating with the International Monetary Fund (IMF) to conduct early-warning exercises.
Membership was extended in April to a total of 64 participants. The FSB now includes authorities from all G20 countries, plus Hong Kong SAR, the Netherlands, Singapore, Spain, Switzerland, the European Central Bank and the European Commission. Representation is at a very senior level: central bank governor or immediate deputy, head of the main supervisory or regulatory agency, and deputy finance minister. In addition, the FSB includes the chairs of the principal standard-setting bodies and committees of central bank experts, plus senior representatives of the Bank for International Settlements (BIS), the IMF, the Organisation for Economic Co-operation and Development and the World Bank.
To support its broadened mandate and membership, the FSB’s institutional structure has been strengthened. A steering committee has been established to guide the work of the FSB between plenary meetings, and three standing committees – on the assessment of vulnerabilities, regulatory and supervisory cooperation, and standards implementation – have been set up to take forward work in their respective areas. In addition, the secretariat, based at the BIS in Basel, Switzerland, has been enlarged.
The success of the FSB in fulfilling its mandate depends foremost on its members. Its composition ensures that, in the FSB’s deliberations, major economies and financial centres from around the world have a voice, and a broad range of perspectives are considered. Furthermore, membership comes with obligations to promote a sound, globally integrated financial system. Member authorities commit to pursuing the maintenance of financial stability, maintaining the openness and transparency of the financial sector, implementing internationally agreed standards of best practices and undergoing periodic peer reviews of adherence with these standards.
Cooperation and collaboration are integral to the work of the FSB. With financial markets and institutions being global, efforts to promote financial stability must also be global. There are many official institutions and bodies that have some degree of responsibility for financial stability. These are largely organised along national and functional lines. The FSB brings them together to promote consistency in the development and implementation of policies across jurisdictions and sectors. Through cooperation among its members, the FSB seeks to support a level playing field across countries and, in this way, to protect against adverse cross-border and cross-sector developments that might undermine international financial stability.
The broad aim of the reforms initiated by the international community in response to the crisis is to better mitigate system-wide risks to financial stability. This requires changes in many areas, at the domestic level as well as the international level. Work is underway to establish a stronger framework for capital, liquidity and risk management at financial institutions that pose risks to the system as a whole; to expand the regulatory perimeter to ensure that all systemically relevant institutions, entities and products are subject to appropriate oversight; to mitigate the procyclical tendencies of the financial system; and to overhaul incentives that in the past led to excessive risk taking. Incentives are being addressed through changes in compensation practices, valuation and disclosure regimes, the use and oversight of credit rating agencies and the infrastructure for over-the-counter derivatives markets. More effective arrangements are also being put in place for international coordination and cooperation in the oversight of large cross-border financial institutions, as well as for dealing with crises at these firms when they occur.
The April 2008 report of the Financial Stability Forum on Enhancing Market and Institutional Resilience identified reforms in these and other areas, many of which were later incorporated into the Washington Action Plan of the G20 leaders issued at their November 2008 summit. At that meeting as well as at the April 2009 summit, the G20 leaders asked the FSB to take forward and monitor implementation of the regulatory reform agenda. They also placed a renewed emphasis on the implementation of international standards.
The FSB, in conjunction with the standard-setting bodies, the IMF and the World Bank, is establishing processes to assess progress in implementation. The objective of these assessments is, first, to foster a race to the top in the adherence to international standards; second, to help identify jurisdictions that lag behind and provide incentives for greater implementation; and third, to support the peer reviews that FSB members will undertake as an obligation of membership.
Promoting stability in a global, interconnected financial system requires coordination across jurisdictions and sectors. The composition and functioning of the enlarged FSB make it well placed to facilitate this coordination and, thereby, to move forward the regulatory reform agenda.
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