The Financial Stability Forum (FSF) that was set up in 1998 in the aftermath of the Asian financial crisis in the late 1990s requires a major overhaul as recent events demonstrate, said Howard Davies, director, London School of Economics and Political Science, UK. At the three-day World Economic Forum's Summit on the Global Agenda that ended Sunday in Dubai, Davies said the FSF needs a thorough restructuring, first, because it is just a forum. It has no authority over any of the regulatory bodies, either national or international. It can suggest, cajole, even at times provoke, but it cannot instruct and has no significant staff of its own or ability to hold others to account. The separate regulatory bodies jealously guard their independence, and have been reluctant to allow the FSF to take the lead in coordinating its activities. Second, while the FSF does include many of those who are needed in the room in times of trouble, it certainly does not include all of them. Indeed, the G7 is increasingly irrelevant when it comes to financial markets. Is it rational that Italy and Canada are at the table, but not China? The FSF added a few additional members, including Hong Kong, Singapore and the Netherlands, but still the famous BRIC countries are excluded. This is in a sense a version of the UN Security Council problem. We are still working with institutions designed at a time when Europe and the US ruled the global economy unchallenged. Things are even worse when it comes to the Basel Committee, which sets the rules for international banks. There, eleven of the fourteen members are from Europe. Thus, global banking rules are directly influenced by Luxembourg but not by China. What is needed now is a significant strengthening of the Financial Stability Forum to be named as Financial Stability Council, at the very least. The new body should have some arms and legs in the form of a staffing complement which is up to the tasks it faces. Membership should be amended to bring in the new financial powers whose impact on the global system is now immense. A tighter linkage between its work and finance ministers on the one hand and the international financial institutions on the other is also necessary. In short, the FSF needs strengthened legitimacy and accountability, plus strengthened authority. However, architectural reform of this kind will solve all problems. There is a need for change, too, in the detailed rules which govern banks and securities markets. The regulation of bank capital has been found wanting in this crisis, and much more attention needs to be paid to liquidity, relatively neglected by Basel so far. But it would be much easier to agree on those other reforms and ensure their even coverage globally if there were one unchallenged authority at the centre of the system, where decisions can be taken and their implementation effectively monitored. FSF when set up in 1998 included the finance ministries, central banks and leading regulators of all G7 countries, plus the sectoral regulatory bodies like the Basel Committee and IOSCO, the international financial institutions, the World Bank and the IMF. As a result, the FSF includes most of the people who need to be involved when a financial crisis hits. Indeed, this time the G7 finance ministers quickly turned to the FSF for advice on what needed to be changed in light of the disasters we have experienced. They produced a good and comprehensive report in April – although it is fair to say that new and more serious issues have emerged since then.
