The Financial Stability Board’s Exercise Flab

At the recent Bretton Woods institution gathering the Basel-based Financial Stability Board associated both with the BIS and IMF barely featured after prominent roles in trying to design and harmonize cross-border banking and derivatives regulation and a broader public and private sector early warning system on looming threats. A semi-annual exercise has been conducted since 2009 to identify and prioritize immediate risks but has suffered from numerous procedural and substantive “shortcomings” according to a paper by Canadian academics at the Center for International Governance Innovation who interviewed participants. The Fund’s Early Warning Group which draws on four departments compiles geographic and capital flow data internally and holds external consultations with economists and fund managers to prepare its contributions, while the FSB’s vulnerability analysis unit submits complementary findings under a much smaller staff. They each make a brief presentation to the policy-making IMFC at the spring and fall meetings intended to highlight immediate trouble spots as well as overlooked “tail risks” in the global system. Although conceived as a joint product, coordination has been “scarce” in part due to differences in organizational size and location, the study notes. It also criticizes the ad hoc nature of outside outreach and the absence of written documents and formal country response to findings. Recommendations include clarification of the review’s specific purpose and greater stakeholder diversity for input, along with a benchmark publication that could accompany the global stability report produced by the Fund’s Monetary Affairs specialists. The FSB’s resources should be increased as directed at the 2011 Cannes G-20 summit and it should maintain a Washington presence as with other Switzerland-based multilateral agencies. A consensus should not be the ultimate aim as “productive disagreement” between experts could better inform the debate and stimulate policymaker initiative, the authors conclude.

One area that received attention by African ministers at the April gathering was the rapid buildup of external commercial debt after previous official relief as current and potential sovereign issuers met with investors in separate sessions as Kenya slated a post-election debut and Zambia another $1 billion in government-linked offerings after last year’s pilot. In response the civil society group AFRODAD released a set of guidelines and principles to serve as a “borrowing charter.” It proclaims that obligations should be sustainable and have political and economic development support, and be transparent and within local contractual and monitoring capacity. A legal framework should be in place for authorization and limitation, and a discrete debt management office must be responsible under parliamentary oversight. The Finance Ministry and central bank can decide the scope but accounts and information should be subject to independent audit. Project financing should observe environmental and human rights, and both donors and private sources are to treat countries with mutual respect which leaves accountability for repayment and citizen approval during the extended exercise, the network advises.