Los Cabos, Mexico, June 20 (Global Risk Regulator) – World leaders agreed plans at their summit this week to strengthen the role of their financial reform task force, the Financial Stability Board (FSB), as reports showed some backsliding in national implementation of key banking and derivatives reforms.
>“The FSB should, as needed to address regulatory gaps that pose risk to financial stability, develop or coordinate development of standards and principles,” the FSB said in a paper approved by leaders of the Group of Twenty (G20) biggest economies at their two-day summit, which ended yesterday, at the Mexican beach resort of Los Cabos. The G20 summit, like its recent predecessors, was otherwise dominated by the euro zone banking and sovereign debt crises.
The Basel, Switzerland-based FSB started life in 1999 as the Financial Stability Forum under the auspices of the Group of Seven richest nations to help foster international financial stability. It has since morphed into the body of national and international officials and regulators charged with coordinating the implementation of the financial reforms instigated by the G20 in the wake of the 2007-09 global financial crisis. But as yet the FSB has no institutional independence.
The broader remit will give it a license to be more pro-active in initiating and shaping regulation, drawing its authority from its direct accountability to the G20.
The G20 has backed a plan to turn the FSB into an independent association under Swiss law.
Initially it would still be based at the Bank for International Settlements (BIS) in Basel and rely entirely on the BIS, often dubbed central bankers’ bank, for funding and services.
However, the FSB will conduct a review after five years on whether it should cut links with the BIS and have its own headquarters and levy a membership fee.
Nicolas Veron, an expert on financial policy with Brussels think tank Bruegel, says the reform won’t necessarily mean a change to an already active FSB over the past three years.
“We are far from the FSB having enforcement powers and it remains fundamentally reliant on the cooperation of its members,” Veron told Reuters news agency.
“I don't expect major battles over this because I think there is a recognition the FSB is useful and has worked so far in a way that has not created major conflicts. It will remain evolutionary rather than revolutionary. The world is not ready for an all powerful watchdog,” Veron said.
FSB chairman Mark Carney told the G20 leaders in a letter that FSB member countries “have continued to make good progress on developing and implementing the broad programme of financial reforms mandated by the G20.”
Since the G20 summit in Cannes, France last year, the focus on timely, full and consistent implementation of major reforms has increased, Carney said.
But the FSB’s update of its colour-coded “traffic-light” status report on progress with the G20 reforms, which was first introduced at the Cannes summit, confirmed some countries were struggling to meet the deadline for implementing the Basel III bank capital and liquidity reforms and with the end-2012 deadline for improving regulation of the over-the-counter (OTC) derivatives markets.
An amber light signalling some difficulties in meeting objectives or timelines was assigned to the Basel III project with the warning that some jurisdictions have not made enough progress to meet the agreed January 1, 2013 start-date. And there is the possibility that national implementation of Basel III will be weaker than the globally-agreed standards in some key areas.
National implementation of G20 reforms of the privately traded, off-exchange OTC derivatives market also got an amber warning. Encouraging progress has been made by a number of jurisdictions, the FSB said, but considerable further work is needed in many countries to meet the G20 objectives fully.
The only red signal, warning of serious problems in meeting objectives or timelines, was assigned to the development of effective resolution regimes for systemically important financial institutions.
Meanwhile, under pressure from financial markets and other G20 leaders, Europe agreed at the summit to move towards a more integrated banking system to stem a debt crisis that threatens the survival of the euro.
Germany and its big euro zone partners took the unusual step at the summit of spelling out in detail measures to complete the economic and monetary union they launched to great fanfare 13 years ago.
Among the commitments in a the G20 communiqué was a pledge to consider concrete steps towards a “more integrated financial architecture” in Europe that would include common banking supervision and firm guarantees to repay bank depositors.
(G20 Los Cabos communiqué: www.g20.org and www.g7.utoronto.ca;
FSB summit documents: www.financialstabilityboard.org)
David Keefe (email@example.com)