Why FSB issues are important
FSB embraces a number of issues that are directly relevant to LICs and their prospects for sustainable development and poverty reduction. They include tax justice, commodity and food markets, capital flows, global integration, and hence international as well as domestic financial stability. Unfortunately the needs of LICs and for that matter other developing and emerging countries are not mainstreamed into FSB work. This poses steep challenges for LICs and CSOs that seek to relate to the complex issues it covers.
Taking a step in the right direction, the G20 requested the FSB, IMF and World Bank to prepare a study identifying financial stability issues relevant for emerging and developing economies. The study will cover capital flows management and foreign exchange risks, domestic capital market development, prudential oversight of foreign financial institutions, and the application of international standards and policies. The Taskforce will be widened to non-members, although it is not currently known who is being invited, on what basis they are being chosen, and whether any LICs will be represented. Its recommendations will be discussed by the FSB Regional Consultative Groups link to page, and due for approval in October 2011
Follow the links below for more information on the detailed work conducted by FSB and its partners…
Stopping bank collapses
Banks were largely responsible for the global financial crisis and its aftermath. The crisis exposed glaring holes in financial regulation. LICs were affected, as many international banks have operations in LICs, and credit to both domestic and foreign banks dried up, which curtailed economic activity at all levels. The Basel III framework launched in December 2010 aims to tighten up bank regulation and reduce the risk of future collapses.
Dealing with "too big to fail"
Systemically important financial institutions (SIFI) are so important to a national economy (or the global economy) that preventing their collapse is deemed a necessary means of protecting the financial system. The dialogue at the moment is focussing on SIFIs in primarily advanced economies, and a group of even larger Global or G-SIFIs. As LICs are becoming increasing integrated into the global economy, this is therefore a critical issue that needs to be tracked. The present dialogue however misses the point that LICs too may have SIFIs of their own, whose failure could be disastrous to their economies and societies, and therefore the debate needs to be adapted to include LICs.
Containing hedge fund and NBFI risk
Hedge funds have been a destabilising influence, and their increasing importance along with other non-banks (the “Shadow Banking System”) and complexity and mutability of operations across borders means that they carry a greater threat to financial stability. Non-bank financial institutions are not covered by Basel III. This, in addition to the fact that a lot of transactions in LICs take place outside the banking system, means that this issue merits attention.
Regulating food and commodity markets
This relates closely to commodity speculation, and hence to food security, which impacts directly and strongly on the poorest. Many LICs also continue to be heavily dependent on a narrow range of commodities.
Ensuring overall stability
Tracking work on “macro-prudential policy” would be important to LICs, because it ties together most of the FSB focus areas but from a macro perspective. According to the IMF, the recent crisis exposed the absence of an overarching policy framework responsible for systemic financial stability.
Tax Justice
The work on strengthening and harmonising accounting standards is critical to the work on promoting tax justice, and therefore central to the interests of LICs in their efforts to raise budget revenue and reduce their dependency on external sources.
Peer review and compliance
This work on strengthening adherence to international supervisory and regulatory standards covers Peer Reviews, reform of compensation practices to support financial stability, the Co-operation and Information Exchange Initiative to identify non-cooperative and weak compliance jurisdictions, and the FSB Compendium of Standards.
References
FSB’s periodic reports on “Progress in the Implementation of the G20 Recommendations for Strengthening Financial Stability” summarise the progress and next steps on each issue, and as such are useful first points of reference for tracking FSB work.