Strengthening the International Financial Regulation Architecture

The process of building the International Financial Regulation Architecture (IFRA) started later than the other three pillars of the Global Economic Architecture (GEA), namely the monetary, trade and development pillars. The reason for this was that it was not until the 1970s that countries started to deregulate their capital markets and cross-border capital flows and financial globalisation took off. From the 1970s to the mid-1990s, a number of international Standard Setting Bodies (SSBs) were established beginning with the Basel Committee on Banking Supervision (BCBS) which is the premier standard setter for the international banking industry. Following the Asian Financial Crisis of 1997–1998, the G7 established the Financial Stability Forum (FSF) to coordinate SSB activities. Subsequently, after the Global Financial Crisis, a root cause of which was regulatory failure in the United States, the G20 upgraded the FSF to the Financial Stability Board (FSB) mainly by increasing its membership to all G20 members. The power and authority of the FSB were, however, not increased. The IFRA, therefore, remains a loose network of members and jurisdictions without any legal backing. Nevertheless, the IFRA differs from the other GEA pillars in several important ways. In particular, the IFRA is not decentralising because the non-G7 members of the G20 are not dissatisfied with its governance of the FSB and SSBs as they are enjoying the “club benefits” of membership. They are not trying to establish regional institutions. Further governance reforms of the FSB and SSBs are, however, still required. This chapter then assesses how the IFRA might evolve in the future: Will it become a rules-based pillar comprising institutions like the proposed World Finance Organisation (WFO) with power to sanction like the other GEA pillars or will it continue to be a loose network-based pillar? Presently, because of rising nationalism and populism in many parts of the world, it will not be possible to garner support for a rules-based IFRA. Hence, IFRA will likely continue as a loose network of institutions. Besides, the feasibility of the proposed WFO is also questionable for a number of reasons. First, in contrast with international trade, there is a notable lack of consensus on the benefits of financial globalisation and hence on setting up a rules-based WFO. Second, despite the interconnected nature of global finance, the costs borne to respond to financial crisis remain concentrated at the national level. Nation states are, therefore, unlikely to give up control to a supranational body.