The global financial crisis that began in 2007 and deepened in 2008 exposed major weaknesses in financial and macroeconomic policy coordination, and profound flaws in financial risk management and regulation in a number of advanced countries. The severity of the crisis led global leaders to recognize that they must find a way to reform the global regulatory architecture to ensure that the financial system can absorb shocks while continuing to function efficiently.
In response to the crisis, the Group of Twenty (G20) met in November 2008, for the first time at the leaders level, to agree on a comprehensive strategy to restore trust in the financial system and to limit the fallout from the crisis on global output and employment. Currently, there is a complicated governance structure for the program to reform the global architecture of financial regulation that consists of three entities — one ad hoc and self-selected (G20), one treaty-based and systemic (International Monetary Fund [IMF]) and one a creation of the G20 (Financial Stability Board [FSB]). This paper undertakes an analysis of how cooperation takes place among these actors to implement the fundamental reforms needed to ensure that the global financial system is better able to withstand shocks than it was in 2007-2008.
The analysis suggests a number of actions that the IMF and FSB should take to strengthen their cooperation and effectiveness, and highlights some of the problems created when no single agency has overall responsibility for the regulatory oversight of the international financial system. More broadly, it concludes that an appropriate framework for the governance of macroeconomic and financial policy cooperation in an interconnected world is a bimodal structure which includes both a restricted executive group of leaders who can implement major changes in the strategic policy direction to meet unforeseen developments and a universal, treaty-based official international financial institution that provides regular, consistent policy advice to its members.
A more effective structure of governance over international economic policy cooperation would be possible if the countries and jurisdictions whose leaders made up the restricted executive group were to be selected by a more systematic and widely accepted process than at present. This raises the question, addressed at the conclusion of this paper, of what the appropriate relationship should be between the IMF’s key governing body — the International Monetary and Financial Committee — and an executive group such as the G20.