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Monday, 27 January 2014 11:42

Assessing the Financial Stability Board

Written by Eric Helleiner and Lesley Wentworth

No country – advanced or developing – was completely excluded from the consequences and hardships caused by the 2007-2008 financial crisis. Nonetheless, the reforms, standards and rules for the global financial system are agreed upon in an exclusive institution: the Financial Stability Board.

This exclusion is justified by the fact that financial markets (and their regulators) are concentrated in the FSB countries, and the onus of implementing reforms is mostly theirs.

Although developing countries may seem to have lesser stake in the global financial system, they are more vulnerable to instability in the global economy – face disproportionate consequences when regulations fail to maintain stability.

What is the impact of FSB decisions for developing countries? Below is a brief assessment of the FSB’s work and how it impacts developing economies, as well as a score based on the “Impact Scorecard.”

This article forms a section from the Global Financial Governance Impact Report [PDF]

Why is this issue vital?

To date, the FSB’s bank regulatory agenda has focused primarily on Basel III. The third Basel Accord Framework sets out higher and better-quality capital requirements and a leverage ratio that should result in better risk coverage and reduce the probability and severity of future potential banking crises.

Unfortunately, Basel III only addresses financial institutions with which many people in poor countries have no relationship. Critics also argue that Basel III may have the effect of reducing international financial flows to emerging markets and developing economies (EMDEs), reinforcing the case to focus more on how local financial institutions can better serve local financial needs.

What should the FSB be doing?

In this context, the FSB should devote more attention to the financial inclusion agenda that has emerged as a central goal of many international and national development institutions, as well as the G-20. The exclusion of a significant section of the population in EMDEs from financial services represents a risk to the integrity of the financial system, with much higher potential for financial crimes. This raises a number of issues that are part of the FSB’s financial stability mandate.

As part of this mandate, the FSB should:

1) Improve its focus on regulation of financial institutions outside of traditional financial systems and distinguishing between ‘worthy’ community-centered institutions, like community banks vis-à-vis fraudulent and exploitative financial lenders. This is in line with the FSB’s efforts to strengthen oversight and regulation of the “shadow banking” sector.

2) Support regulators in discouraging banks from discriminatory practices and focusing on pro-poor inclusivity, such that access to both banking and non-banking financial services
is improved.

3) Continue to establish fair and equitable standards and foster best practices across this area of focus.

4) Encourage research cooperation in this area, especially across FSB Regional Consultative Groups.

Evaluating the FSB’s progress

These recommendations build on the FSB’s RCG for Sub-Saharan Africa meeting in February 2012, which identified the need to enhance financial inclusion. They are also in keeping with the FSB’s work on consumer finance protection and the efforts of FSB members to explore options for strengthening consumer protection through the establishment of consumer protection authorities and implementing responsible lending practices. 

 

Eric Helleiner is from the University of Waterloo and Lesley Wentworth is from the South African Institute for International Affairs. This article forms a section from the Global Financial Governance Impact Report [PDF] produced by New Rules for Global Finance (www.new-rules.org).

 

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