The Financial Stability Board’s Shaky Ground

A 25-member task force commissioned at the November 2010 G-20 meeting to survey developing and emerging economy issues under the auspices of the Financial Stability Board submitted its report in advance of the Cannes gathering, highlighting gaps in areas ranging from international banking standards adoption to non-bank and capital markets commercial and regulatory development. Their combined bank assets are almost one-third of the global system, but activity is typically less complex and diverse with limited oversight and infrastructure capacity measured against developed country parameters. Foreign currency and ownership are often pervasive, and the shallower local investor base affords lower liquidity and greater disruption risk when private lenders and fund managers abroad lose confidence. All regions subscribe to the BIS Core Principles, although few had fully incorporated the multi-pillar Basel II version before its 2009 effective date which has now been superseded by the post-crisis Basel III proposals setting capital adequacy and liquidity ratios over the next decade. Supervisors often lack corrective action tools and means to assess operational readiness, and securities market enforcement and surveillance is weak posing a threat in universal financial services groups, which may in turn be linked to industrial conglomerates. Cross-border networks are even harder to monitor, and home and host country communication and information-sharing has been uncertain despite the signature of cooperation agreements. The EU has its own accord and Asian, Latin American and African officials have bilateral and multilateral pacts on consolidated approaches with mixed results in practice. Only half of eligible members have ratified IOSCO’s collective memorandum of understanding, and the IAIS insurance body has just launched such an effort.

Non-bank licensing for institutions ranging from specialist consumer and mortgage lenders to microfinance, foreign exchange and mobile money houses has been uneven, although such sources may handle 15 percent of deposits and intermediary transactions in the aggregate, the World Bank estimates. Data collection and reporting lag on these industry segments targeted by the aid community for additional analysis and prudential rules. Foreign exchange mismatches remain a problem as hedging mechanisms and spot and forward trading have evolved slowly. Central bank restrictions on open positions can offer protection, but derivatives may fill an important need as part of money and debt market deepening. Expanding the domestic retail and institutional investor base, benchmark yield curve creation, market-maker designation, and clearing and settlement modernization are all elements, and the Asian Bond Market Initiative and recent integration of Andean Pact stock exchanges have extended these strategies regionally. The report criticizes the arbitrary nature of intervention by authorities which brought outright closures in the 2008-09 crisis period, and calls for a “structured, transparent” response to price volatility which to date has not been even-tempered.