Listening to Daniel Tarullo, Governor of the Federal Reserve system of the United States at the Bretton Woods Committee discuss the state of global financial reforms was a fascinating insight into the careful work before policymakers. What are the reflections of individuals in the rooms and corridors of vital regulatory organizations?
Tarullo reflected on the development of the Basel committee, from a small group of 13 to one of 20 today, and how this was an important step to broaden country representation. The US supported the expansion of this membership, but it had changed the dynamics of the committee from an informal group to a formal one. While its expansion was a global good and had a democratizing effect on global governance, there has been a cost in terms of efficacy and productivity in negotiations.
The Basel committee is now a big room filled by multiple agencies from many countries and this has complicated the dynamics of conversations and negotiations. The agenda has also expanded from focusing on Basel II for many years to now covering issues like shadow banking, co-ordination with the Financial Stability Board (FSB), and many more regulatory issues that need the attention of policymakers.
The effect of having more people involved in Basel committee conversations has been more formal conversations, says Tarullo, and that may come with its own challenges. Even though it is positive to have more members of the emerging market economies take on leadership positions in the committee, a small group format remains more effective for seeing real negotiation advancements on key issues. How to get small group dynamics back into a big room remains the challenge if effective change is to be achieved.
I also had the opportunity to ask him to reflect on the level of coordination between the Financial Stability Board (FSB), the Basel committee and the IMF. Specifically, I asked "What could be improved so that issues do not fall between the institutional cracks?"
Tarullo's comments were refreshing yet reassuring. He noted that when one enters the Basel Committee, it is easy to connect with representatives from IOSCO, IMF, OECD, and other key organizations. On the one hand you could say there's no problem of coordination because everyone is in the room. Yet, as he also pointed out, there is a natural worry that a multiplicity of organizations can produce overlap; Tarullo noted the example of financial stability monitoring – a task that many institutions are doing at the same time.
Another observation Tarullo shared was the sense of an organizational interest in being seen as ready to sound the alarm in the case of a financial crisis. While he likened this to watching five year olds play soccer – all running after the ball at the same time, only to achieve nothing -- Tarullo says, he's more sanguine about these issues as he's seen many standard setting bodies effectively work out some of their initial turf wars.
The FSB has now recognized that many of the individuals in the standard setting bodies are necessary in order to meet the challenges before them. Similarly, the IMF is able to carve itself a role as a universal organization with professional career staff who are able to work on issues more freely than other peer-like organizations. So Tarullo offered optimistic reflections on the governance mechanisms at work. This is not to say that more can't be done to improve coordination, but it is working.