Financial Stability Board Portends Economic Global Governance
Tuesday, April 21, 2009
On April 2nd, the world’s major economic powers met in London for the G-20 Summit to discuss possible solutions to the current global economic crisis. The meeting resulted in a Declaration entitled Strengthening the Financial System, which calls for the creation of a new global Financial Stability Board (FSB) to “identify problems in the financial system and oversee action to address them.” The establishment of the FSB would present significant threats to national sovereignty, as it gives the international community the authority to review and regulate the financial and operational structures of private enterprises, potentially bypassing the jurisdiction of national regulatory systems.
The FSB is designed to be the successor to the Financial Stability Forum (FSF), created in 1999 to facilitate financial information exchange and international cooperation in order to promote international financial stability. The FSB will build on the mandate of the FSF, but will have expanded authority and greater capacity to encourage global financial stability, with a stronger institutional basis. The membership of the FSB will include all G-20 countries, all former FSF members, Spain, and the European Commission.
The FSB’s primary task will be to “assess vulnerabilities affecting the financial system, [and] identify and oversee action needed to address them.” It will do this by working with the International Monetary Fund (IMF) to establish an “early warning” system to identify potential problems with the economic system and report these threats to central bank governors and the G-20 finance ministers. The FSB will also facilitate international economic coordination and information exchange in order to ensure effective oversight of “systemically important” institutions and companies, and will monitor and advise on various regulatory standards and best practices. In addition, the FSB will review the policies of international Standard Setting Bodies, foster contingency planning for transnational crisis management, and “implement the FSF’s tough new principles on pay and compensation and…support sustainable compensation schemes and the corporate social responsibility of all firms.” Finally, the FSB has been charged with setting guidelines for, and establishing the functioning of, supervisory colleges for all “systemically important cross-border firms.”
In addition to the oversight and regulatory functions of the FSB, all members must commit to pursuing financial stability within their jurisdictions, implementing international financial standards, and subjecting themselves to periodic peer reviews.
The FSB has been established as a global regulatory regime, and, as such, has significant global governance implications that could potentially limit the sovereignty of national governments. Most dangerous perhaps is the broad mandate given to the FSB to regulate the operations of all “systemically important” companies and institutions. No definition is given as to what makes an organization “systemically important,” essentially giving the FSB the authority to subjectively decide which firms fall under its mandate.
Further, the FSB’s task of encouraging contingency planning by major international financial institutions and firms could potentially give the FSB the authority to demand that these organizations carry out “stress tests” to determine their ability to weather significant economic recessions. The Obama administration has already implemented similar tests for the largest U.S. banks, the failure of which allows the U.S. government to become major shareholders in these institutions. If the FSB was to conduct similar tests, it could pose a major breach to national sovereignty by forcing domestic financial institutions to nationalize.
Additionally, the FSB’s broad order to support the corporate social responsibility (CSR) of firms opens the door for the international community to implement its interpretation of CSR, usurping national authority. This definition could encompass many of the “emerging” economic, social and cultural rights that are not currently recognized by all States.
Finally, the Declaration makes it obvious that the FSB’s oversight and regulatory authority will take primacy over any national regulatory agencies, thereby hampering the ability of State governments to determine their own economic policies. Rather, decisions on how to handle economic crises will be made at the international level, with each member of the FSB having one vote in the decision-making process, regardless of the size of each member’s economy. Such a system solidifies the global governance of financial and economic systems to the detriment of national self-determination.
Jim Kelly serves as Director of International Affairs for the Federalist Society for Law and Public Policy Studies and as Co-Director of Global Governance Watch. The opinions expressed herein are his own.
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