The Financial Stability Board: The New Politics of International Financial Regulation

AbstractIn response to the 2007-08 financial crisis, the G20 forged the Financial Stability Board, a new international body dedicated to promoting regulatory standards that best ensure the stability and soundness of the financial system. The FSB is an umbrella organization; its membership includes representatives from international standard-setters like the Basel Committee and the International Accounting Standards Board, alongside domestic regulators, such as central banks and representatives from national finance ministries and treasury departments. This Article argues that the participation of political appointees in the FSB sets it apart from other international bodies in financial regulation. Through the FSB, elected politicians can shape international financial regulation in ways not available to them in the past. This Article has identified three ways in which the G20 governments intervene in international financial regulation: through promoting specific amendments in international rulemakers' existing standards, setting entirely new policymaking initiatives, and intensifying efforts to monitor compliance with international rules at the domestic level. The Article offers extensive evidence from the interaction between the G20, the FSB, other international bodies, and domestic authorities.SUMMARYINTRODUCTION 158I. INDEPENDENT INTERNATIONAL RULEMAKERS IN FINANCIAL REGULATION 161II. FSB: INSTITUTIONAL STRUCTURE 164III. FSB'S RELATIONSHIP WITH THE G20 169A. FSB Action Concerning Pre-existing Sets of Standards 170B. FSB Policymaking Initiatives at G20's Request 171C. FSB and Standard Implementation at the Domestic Level 173CONCLUSION 175INTRODUCTIONIn the ever-changing world of financial regulation, where new markets, new instruments, and new players continuously challenge established practices, few principles are as widely accepted as the need for independent regulators.1 The financial system is thought to be best served by highly sophisticated technocrats, protected from the distorting influence of politics.2 Yet, the 2007-08 financial crisis saw political leaders fighting to save fledgling financial institutions while burdening sovereign budgets with additional debt. When the crisis abated, legislative reforms around the world tightened banking supervision by creating many new regulatory powers. However, legislators granted these new powers not to independent agencies, as past regulatory paradigms would suggest, but to political leaders directly accountable to voters.1 Effectively, politicians are now responsible for some of the most momentous decisions in a financial institution's life, such as whether it is in default or whether to extend credit to it. As a result, these reforms mark a clear departure from the paradigm of regulatory independence and have strengthened politicians' influence over financial regulation.This Article claims that the growing influence of politicians over financial regulation characterizes not only domestic regulatory reforms, but international developments as well. In the midst of the 2007-08 financial crisis, as governments and central bankers were struggling to contain the turmoil, the Group of Twenty Finance Ministers and Central Bank Governors (G20) established a new entity, the Financial Stability Board (FSB). The FSB's core mission is to promote the regulatory standards that best ensure the stability and soundness of the financial system.4 To achieve this mission, the G20 asked various international rulemakers, such as the Basel Committee and International Organization of Securities Commissions (IOSCO), to participate in a single board, the FSB.5 Apart from international rulemakers, the FSB also includes domestic decision makers mostly from G20 countries: independent regulators, such as central bankers and securities commissioners, as well as representatives of elected politicians, such as finance ministers. …