Waterloo, Canada – July 16, 2012 – International regulators failed to keep pace with the globalization of the financial system in the run-up to the financial crisis in 2007 — a failing thathighlights the magnitude of the current challenges in managing the international financial system, says a new paper from The Centre for International Governance Innovation (CIGI).
In How Global Watchdogs Missed a World of Trouble, CIGI Senior Visiting Fellow Paul Blusteinprovides the first detailed look inside theoperations of the Financial Stability Forum FSF, from its creation in 1999 (after the emerging market crises) to itsreplacement by the Financial Stability Board (FSB), at the London G20 Summit. The paper is based on interviews with scores of policymakers who worked on the FSF in various capacities,and on thousands of pages of previously undiscloseddocuments and confidentialsummaries of the FSF’s meetings.
Blustein documents FSF regulators’ “inability to understand the transmission of risk across borders and oceans, and theirlack of planning for the coordinated measures that wouldbe necessary to deal with a global crisis.”
In noting that these failings“underscore the magnitude of the challenges facing theinternational community today, as it struggles to create rules and apparatuses for managing a system that hasshown itself capable of massively destructive instability,” Blustein offers policy recommendations to help the FSB avoid a similar fate:
- The FSB should drastically change its procedures for assessing members’ financial systems, to avoid the “excessive defensiveness and great politeness” that FSF participants say characterized many of their meetings. To ensure that the assessments are as close to “ruthless truth-telling” as possible, the FSB should convene panels of independent experts (like those used by the World Trade Organization) to identify and highlight significant areas of vulnerability — and if those panels give a country’s financial system a low grade, the imposition of sanctions may be in order, in the form of higher capital requirements for banks.
- Second, the FSB should shift to a system in which each member country sends just one representative, who would work on a full-time basis on FSB matters. This would help avoid the sort of situation that arose at an FSF meeting in late September 2008, when many participants failed to show up because of pressing business in their own capitals during the height of the financial crisis.
For more information on How Global Watchdogs Missed a World of Troubleand to download a free PDF, visit http://www.cigionline.org/publications/2012/7/how-global-watchdogs-missed-world-of-trouble.
ABOUT THE AUTHOR:
Paul Blustein, senior visiting fellow at CIGI, is aneconomic journalist who covered the IMF duringhis career as a newspaper reporter and has writtentwo books that focus heavily on theFund. The first,which chronicled the emerging markets crises ofthe late 1990s, was The Chastening: Inside the Crisisthat Rocked the Global Financial System and Humbledthe IMF (PublicAffairs, 2001); the second was Andthe Money Kept Rolling In (And Out): Wall Street, theIMF, and the Bankrupting of Argentina (PublicAffairs,2005). Blustein spent much of his careeras a staff writer for The Washington Post, includingfive years as a correspondent in Tokyo, and beforethat he worked at The Wall Street Journal and ForbesMagazine. He lives in Kamakura, Japan, and in addition tohis CIGI affiliation he is a nonresident fellow inthe Global Economy and Development Programat the Brookings Institution.
Declan Kelly, Communications Specialist, CIGI
Tel: 519.885.2444, ext. 7356, Email: [email protected]
The Centre for International Governance Innovation (CIGI) is an independent, non-partisan think tank on international governance. Led by experienced practitioners and distinguished academics, CIGI supports research, forms networks, advances policy debate and generates ideas for multilateral governance improvements. Conducting an active agenda of research, events and publications, CIGI’s interdisciplinary work includes collaboration with policy, business and academic communities around the world. CIGI was founded in 2001 by Jim Balsillie, then co-CEO of Research In Motion (RIM), and collaborates with and gratefully acknowledges support from a number of strategic partners, in particular the Government of Canada and the Government of Ontario. For more information, please visit www.cigionline.org.