Global Financial Reform in the Wake of the Financial Crisis of 2008

by: Anthony Elson 

            In the five-year period since the outbreak of the global financial crisis, much attention has been given to the financial reforms that are needed at the national and global levels to minimize the risks of such crises in the future.  The discussions on global financial reform have been coordinated mainly by the G20 major advanced and emerging market economies, and have focused on improvements in what is known as the international financial architecture (IFA).  The IFA represents the institutional and cooperative arrangements that governments have put in place, such as the International Monetary Fund (IMF) and the Financial Stability Board (FSB), to monitor and regulate global financial flows and to provide emergency financing for countries in times of financial crises.  A key aspect of this reform effort has been focused on the governance arrangements for the IFA.  Notwithstanding the extensive discussions that have taken place, the pace of reform has been very slow and much remains to be accomplished.

At the institutional level, the shift of discussions on global financial reform from the G7 to the G20 has been an important improvement, along with the establishment of regular semi-annual meetings of the G20 at the level of both national leaders and finance ministers/central bank governors. This change, however, still leaves open the question of what criteria determine membership in the G20, as distinct from the International Monetary and Financial Committee and the Development Committee that oversee the operations of the IMF and World Bank, respectively, which are grounded in the clearly specified membership criteria of these institutions. There is also a large amount of redundancy among these three committees at the ministerial level, which has not been addressed, and should be simplified. In addition, with the passage of time, the agenda of the G20 has become extremely diffuse, embracing a wide range of topics beyond global financial reform. As a result, the initiative adopted by the G20 at the London Summit of 2009 to establish specific targets for coordinating and monitoring macroeconomic policy adjustments subject to a strict peer review process among its members has been abandoned.  This failure means that there is lacking within both the G20 process of deliberation and the IMF surveillance exercises an effective enforcement mechanism, which would help to avoid problems such as the build-up of global payments imbalances that were a major contributing factor in the global financial crisis.

Another important governance reform promoted by the G20 that is yet to be implemented relates to an increase in the financial resources of the IMF and the distribution of quota shares in the institution. A proposal to double the financial resources of the IMF along with a significant shift of quota shares in favor of the major emerging market economies was adopted by the Fund’s Executive Board, but these changes have yet to be approved at the national level. Significantly, legislative approval by the United States, whose vote is required for any major change in IMF operations, is highly uncertain in the present political climate. In addition, no discussions have taken place on the process of leadership selection of the Bretton Woods institutions, which by an informal agreement has always called for a European to take the top position in the IMF and an American to lead the World Bank.  Another reform that should be taken up within the IMF is the means by which its resources could be temporarily augmented during a major financial crisis, including through an issue of SDRs that were intended to be a major form of international reserve currency, and coordinated within a network of central bank swap arrangements.

The governance arrangements of the IFA also need to be improved in regard to its regulatory focus, which is coordinated through the FSB. The role of the FSB is to coordinate international discussions on the regulatory and other infrastructural aspects of the global financial system as a twin pillar within the IFA along side the IMF with its financial and policy surveillance responsibilities. However, even though the FSB has been formally established as an international institution unlike its predecessor body (the Financial Stability Forum), it still only has a very limited secretariat (of around 25 people, some of whom are seconded from member countries), and a part-time chairman. Clearly, to be effective, the resources of the FSB need to be significantly expanded.

The FSB has coordinated some reforms of the Basel capital accord, involving a limited increase in capital requirements for banks and the introduction of a new, maximum (leverage) ratio for total assets to capital and minimum liquidity requirements. However, in the opinion of most experts, the new capital and leverage requirements are very weak, in part because of intense lobbying pressure by banks on the national regulators that participate in FSB discussions, and need to be strengthened.

Anthony Elson is a Visiting Lecturer at the Sanford School, and will be teaching a mini-seminar in the Spring 2014 term on the Global Financial Crisis and Reform of the International Architecture.

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