Reforming the Financial Stability Board

Today is my last day as a visiting researcher at the Bank of Japan’s Institute for Monetary and Economic Studies, where I have been working on global financial governance issues, particularly as concerns the Financial Stability Board. It has been a fantastic experience to have a chance to exchange ideas with the people responsible for making monetary and financial regulatory policy at all levels in Japan. What emerges most clearly for me is how provincial is the world view reflected in current international financial governance. I have taken to calling this world view the NAPL model–the North Atlantic Post-Lehman Model–to suggest that it has been made largely by regulators in North American countries, very much with their own experience of the Lehman crisis in mind. As one bank manager in Tokyo put it, “they caused the last financial crisis, we didn’t–so why do they get to write all the rules on how to fix things?”
As the Financial Stability Board grows more diverse and more global, the emerging conflicts between developed economies and emerging markets about what exactly are the key problems that global financial governance should be addressing should be watched closely. If global financial governance is to be truly global, at a minimum it needs to address the key challenges faced by most economies, and not just some economies. This could begin with the FSB expanding its focus from the Lehman crisis to the experience with other financial crises, such as the Asian Financial Crisis, in which the causes and consequences were somewhat different. Japan is sometimes on one side of these debates, sometimes on the other, and sometimes has other concerns altogether. For example, its problem is not banks that take too much risk; its problem is that banks sit on stockpiles of cash and refuse to take risk at all, and this too can be highly damaging to an economy.
Yesterday I gave a seminar to researchers and policy makers inside the Bank of Japan. We had a lively discussion about whether the fancy new tools of financial governance deployed by the FSB to create global consensus and ensure global compliance such as “supervisory colleges,” peer review and the like help to broaden the global agenda in practice or not. I think we need serious empirical research to help us understand better when exactly these new tools work to promote greater mutual understanding across jurisdictions and when they do not. We also had a good discussion of my proposal that we look to develop other regulatory tools, in particular, private international law doctrines and protocals, to supplement the weaknesses of the FSB in the short to medium-term.